Evans & Anor v Jones & Anor

For the balance-sheet test of insolvency under the Insolvency Act 1986, only present assets are valued. A contingent or prospective asset cannot cure a deficiency, although a present chose in action may be valued.

Hindsight may assist a retrospective inquiry but cannot rewrite the facts at the material time. A claim to recover an unlawful dividend was not a present asset where it was unknown, depended on discovery and pursuit, and was realistically unlikely to be pursued while the recipients controlled the company. The test must also accord with commercial reality. Excluding that contingent claim, the company was balance-sheet insolvent when the preference payments were made.

Rococo Developments Ltd made five repayments of directors’ loans to Mr and Mrs Jones before entering creditors’ voluntary liquidation. The payments were accepted to be preferences. The appellants, the company’s joint liquidators, sought recovery under section 239 of the Insolvency Act 1986.

The judge held that an earlier unlawful dividend of £75,000, paid to Mr and Mrs Jones, was an asset of the company because they held it on constructive trust and were liable to repay it. Its inclusion made the company balance-sheet solvent at the dates of the preferences.

The liquidators appealed. The central issue was whether the potential claim to recover the unlawful dividend was a present asset for the balance-sheet insolvency test, and whether hindsight could be used to value it.

1. Appeal allowed. The judge erred in treating the company’s potential claim to recover the £75,000 unlawful dividend as a present asset. Without that sum, the company was balance-sheet insolvent on each date of the five preference payments. The condition in section 240(2)(a) of the Insolvency Act 1986 was therefore met.

2. Section 123(2) requires the valuation of the company’s present assets, while expressly requiring account to be taken of contingent and prospective liabilities. A present chose in action may be valued, including by reference to its market value. However, contingent or prospective assets are excluded. This construction was consistent with the analysis in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2010] EWHC 2005 (Ch) and its subsequent appellate consideration.

3. On these unusual facts, the restitutionary claim against Mr and Mrs Jones was contingent. At the material dates they believed the dividend lawful, no corresponding asset appeared in the accounts, and there was no reason to investigate or pursue a claim. Any pursuit was unlikely while they controlled the company, and in practical terms depended on the company’s later insolvency.

4. Hindsight could not be used to rewrite history. Treating the claim as a £75,000 asset assumed, contrary to the facts then existing, discovery of the unlawfulness, pursuit of the claim, an undisputed and cost-free recovery, and funds with which to litigate. That approach also failed to give the statutory test the required commercial reality.

5. The court refused permission to advance a late new ground that the Evans debt should be valued at the full sum later awarded in adjudication. The respondents’ position could not fairly be safeguarded because relevant first-instance material was not before the court.

• Court of Appeal (Civil Division) Allowed the joint liquidators’ appeal and held that the unlawful-dividend claim was not a present asset for the balance-sheet insolvency assessment: [2016] EWCA Civ 660.
• High Court of Justice, Chancery Division, Cardiff District Registry His Honour Judge Milwyn Jarman QC treated the unlawful dividend as an asset of the company and consequently treated the company as solvent at the relevant dates. No citation for that judgment was stated.