Ecology Support Services Ltd v Hellard & Anor (As Joint Liquidators of Saff One LLP)

A circular movement of money does not, without more, mean that a loan transaction is fictitious. The court must examine the contractual obligations and the composite transaction. A loan will generally create a debt where the documentation imposes an obligation to repay, including where repayment is linked to future revenues but remains due if those revenues do not arise. Tax-avoidance authorities may provide an analytical approach, but their statutory tests cannot simply be transplanted into an insolvency proof-of-debt dispute. A claimed repayment through misapplied trust property requires proof of misapplication, traceable beneficial receipt, causation, and knowledge making retention unconscionable.

Ecology Support Services Ltd appealed the joint liquidators’ rejection of its proof of debt against Saff One LLP under the Insolvency Rules 1986. The alleged debt arose from a loan made by AIK Credit plc to the LLP, paid directly to CRD under an agency arrangement and later assigned to ESS. The liquidators contended that the circular transactions were fictitious, that no genuine investment had occurred, or alternatively that the loan had been repaid through a misapplication of trust property.

The central questions were whether the facility constituted a repayable loan and debt, and whether the alternative trust-based repayment case was established.

1. Application granted. The proof of debt should have been accepted. The joint liquidators were directed to admit it and call a meeting of creditors.
2. The court distinguished the tax-avoidance context in Commissioners for Her Majesty’s Revenue and Customs v Tower MCashback LLP 1 [2011] UKSC 19. Circularity alone does not establish a no-transaction. The court must examine the whole transaction, but the present issue was whether the facility agreement was truly a loan, determined principally by the contractual obligations between AIK and the LLP.
3. The facility documentation created a repayable loan. It provided for interest, default interest, repayment, application of revenues, a defined loan term, events of default and repayment in full at the final repayment date. The obligation survived even if the specified revenues were never received. The payment to CRD therefore gave rise to a debt owed by the LLP.
4. The alternative submission that the debt had been repaid through misdirected trust property failed. The liquidators had to establish misapplication of trust or fiduciary property, receipt of the property or traceable proceeds, beneficial receipt, causation, and knowledge making retention unconscionable. The evidence did not establish a breach of trust or that AIK’s knowledge made retention of the receipt unconscionable.
5. The court noted that the LLP might have a claim against CRD, but that issue was not before it.