Ross & Anor v Gaffney & Anor

The Administrators of Cosy Seal Insulation Limited established that the company was insolvent on a cash-flow basis throughout the period from 7 March 2014 to 27 May 2014. Transactions during that period were assessed under the Insolvency Act 1986: the court found that repayments and transfers to connected parties were either preferences within s 239 or transactions at an undervalue within s 238. The presumption in s 239(6) applied to payments to connected persons and was not rebutted. The court also found breaches of directors' duties (ss 171, 172 and 174 Companies Act 2006) and refused relief under s 1157 of the Companies Act 2006.

Key legal principles:

• The cash-flow test in s 123 is flexible and fact-sensitive and may be applied across a relevant period to determine insolvency.
• Preferences to connected persons invoke the statutory presumption in s 239(6); the defendant must prove absence of the requisite desire to prefer.
• Transactions at an undervalue under s 238 require proof that the consideration received was significantly less than the value given.
• Directors of companies that are insolvent or at real risk of insolvency must have regard to creditors' interests; objective review may be applied where there is no evidence of proper consideration of creditors.

This is a first instance insolvency judgment arising from the administration of Cosy Seal Insulation Limited (CSIL). The joint administrators brought claims against the company's sole director and shareholder, Mr Paul Gaffney, and against Cosy Seal Insulation (UK) Limited (CSIL(UK)). The Administrators sought recovery of sums paid by CSIL to Mr Gaffney and to CSIL(UK), alleging preferences, transactions at undervalue and breaches of directors' duties.

Background and procedural posture:

• CSIL entered administration on 4 July 2014. The Administrators pursued claims relating to (i) repayments to Mr Gaffney in March, May and late May 2014; (ii) payments to CSIL(UK) under a January 2013 consultancy agreement and a March 2014 carbon-credit transfer; and (iii) payments to third parties (including sums debited to Mr Gaffney's loan account).
• The principal statutory provisions considered were ss 238, 239 and 240 of the Insolvency Act 1986 (transactions at undervalue and preferences) and ss 171, 172 and 174 and s 1157 of the Companies Act 2006 (directors' duties and possible relief).

Issues framed by the court:

1. Whether CSIL was insolvent at the time of each challenged transaction (cash-flow and, secondarily, balance-sheet tests under s 123).
2. For preference allegations, whether CSIL was influenced by a desire to put the connected recipients in a better position than they would have been in an insolvent liquidation (s 239(5)–(6)).
3. For the March 2014 carbon-credit transfer, whether the consideration given by CSIL(UK) was significantly less than the consideration provided by CSIL (s 238).
4. Whether Mr Gaffney breached duties under ss 171, 172 and 174 CA 2006 and, if so, whether he should be excused under s 1157 CA 2006.

Evidence and findings:

• The judge heard factual evidence from the administrators and from Mr Gaffney and his accountant, and expert evidence about carbon-credit valuation. The judge found Mr Gaffney an unreliable witness except where corroborated by documents.
• On the central insolvency question, the judge applied the cash-flow test over the period 7 March to 27 May 2014 and concluded CSIL was unable to pay its debts as they fell due. The judge also concluded, on the balance-sheet material and applying sensible discounts for risk of non-recovery, that CSIL would have been balance-sheet insolvent.
• The statutory presumption under s 239(6) applied to payments to connected parties. The court was not satisfied that Mr Gaffney rebutted that presumption: several repayments to Mr Gaffney and payments to CSIL(UK) were made while CSIL faced undisputed, large creditor demands and were therefore preferences.
• The March 2014 sale of 40,000 carbon tonnes to CSIL(UK) for £100,000 (deferred and subject to set-off) was held to be a transaction at an undervalue; the proper comparator was the price later obtained by CSIL(UK) when it sold part of the credits, and the court assessed the loss accordingly.
• The court held breaches of directors' duties, refused to grant relief under s 1157 CA 2006, and ordered repayment and equitable compensation as appropriate.

Outcome: the administrators' claims succeeded in part: preference and misfeasance claims and the transaction-at-undervalue claim were made out; Mr Gaffney and CSIL(UK) were ordered to make repayments or equitable compensation and relief under s 1157 CA 2006 was refused.

First instance: The Administrators' claims succeeded in part. The court held that CSIL was insolvent on a cash-flow basis through the period 7 March to 27 May 2014. Payments by CSIL to its sole director and to CSIL(UK) were either voidable preferences under s 239 or transactions at an undervalue under s 238 (within the relevant two-year period) and must be repaid; the March 2014 carbon-credit transfer was a transaction at an undervalue and CSIL(UK) was ordered to account for the shortfall. The court also found breaches of directors' duties (ss 171, 172 and 174 Companies Act 2006) and declined to excuse the director under s 1157 Companies Act 2006, ordering repayment and equitable compensation with interest.