Ross & Anor v Gaffney & Anor

Cash-flow insolvency is assessed flexibly and by reference to the reasonably near future. An endemic shortage of working capital may establish insolvency even where substantial payments continue. The inquiry is not confined to debts due on the relevant date.

For a preference to a connected creditor, the relevant subjective desire need only have influenced the decision. Directors must consider creditors’ interests where there is a real and non-remote risk of insolvency. Failure to do so may require an objective assessment of the transaction.

The joint administrators of Cosy Seal Insulation Ltd brought claims against its former director and a connected company concerning pre-administration payments and transactions.

The claims alleged preferences under the Insolvency Act 1986, a transaction at an undervalue, breaches of directors’ duties under the Companies Act 2006, and liability notwithstanding the proposed relief under section 1157.

1. The company was unable to pay its debts as they fell due throughout the period from 7 March to 27 May 2014. Its persistent late payment, non-payment of substantial debts and endemic shortage of working capital showed more than temporary illiquidity.
2. Although unnecessary to decide, the company was also balance-sheet insolvent. The court could discount uncertain work in progress and debts carrying substantial recovery risks.
3. The repayments to Mr Gaffney and CSIL(UK) were preferences. The connected-person presumption under section 239(6) was not rebutted. The payments to JJ Quinn did not amount to preferences because the requisite desire was not proved.
4. The transfer of carbon credits for £100,000 was at a significant undervalue. The deferred payment and set-off arrangement were relevant, and the subsequent resale price supported a valuation of £684,442. Repayment of £584,442 was ordered.
5. Creditors’ interests were engaged because there was a real risk of insolvency. The payments were objectively not in creditors’ interests and breached sections 171, 172 and 174 of the Companies Act 2006. Relief under section 1157 was refused. Mr Gaffney was liable with CSIL(UK) for equitable compensation and liable to repay the £31,284 paid to JJ Quinn.