Breese (Liquidator of Flexi Containers Ltd) v Hiley & Ors

A company transaction may be both a preference and a transaction at an undervalue. The court must identify when the decision to confer the benefit was made, rather than looking only at the date when the transaction was completed. A person remains connected with the company while still a director, even if a later resignation is expressed to have retrospective effect. A floating charge granted to a connected person within the statutory period is ineffective to secure pre-existing indebtedness, subject to the value of qualifying consideration. A transfer of company assets to discharge a creditor’s debt is a preference where it improves that creditor’s position on an insolvent liquidation and the statutory desire requirement is satisfied. It is also an undervalue where the assets transferred materially exceed the debt discharged.

The liquidator of Flexi Containers Limited applied for relief under sections 238, 239 and 241 of the Insolvency Act 1986. The principal transaction was the transfer of trading stock, vehicles and parts to Alison Hiley, ostensibly in exchange for a reduction of her director’s loan account by £620,834.07.

The respondents disputed when Mrs Hiley ceased to be a director, whether she remained connected with the company, whether the debt was secured, whether the company was insolvent, and whether the transfer constituted a preference or an undervalue. The court also considered the evidential significance of Mr Bailey’s failure to give evidence.

1. Outcome. The liquidator established that the stock transfer was both a preference under section 239 and a transaction at an undervalue under section 238 of the Insolvency Act 1986. The parties were invited to agree the consequential order.
2. Connection and timing. The relevant arrangements were agreed and implemented before Mrs Hiley’s effective resignation. She therefore remained a director and a connected person when the decision was made to transfer the stock. A resignation treated as retrospective did not retrospectively remove her connected status.
3. Preference. The statutory conditions were satisfied: the company subsequently entered liquidation; Mrs Hiley was a creditor; the transfer improved her position compared with an insolvent liquidation; the transaction occurred within the applicable period; and the company was insolvent. The presumption of the requisite desire applied because Mrs Hiley was connected, and the evidence independently showed that improving her position was an object of the transaction.
4. The December 2013 debenture was vulnerable under section 245 and did not secure the pre-existing debt. It also did not extend to the later £11,000 advances. The March 2014 debenture could not retrospectively secure the debt at the earlier date of the stock transfer.
5. Undervalue. The debt owed to Mrs Hiley on 10 January 2014 was £600,286.23. The stock was transferred for £620,834.07, producing an undervalue of £20,547.84. After credit for a subsequent £8,000 payment, the effective undervalue was treated as £12,547.84. The statutory defence was not established because the transfer was not shown to have been in the company’s best interests or reasonably expected to benefit it.
6. The court rejected reliance on BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc because the company was net-asset insolvent and its debts were clear.