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

The court considered claims under ss238, 239 and 241 of the Insolvency Act 1986 to set aside a transfer of trading stock from the company to a director, Mrs Hiley, purportedly by way of set-off against a director's loan account. The judge found that the relevant transactions occurred while Mrs Hiley remained a connected person (a director in the extended sense) and within the relevant statutory periods, that the company was insolvent, and that the transfer both amounted to a preference under s239 and a transaction at an undervalue under s238. The court held that various charges relied upon by Mrs Hiley were ineffective as security (s245) and that contemporaneous documents and witnesses supported a finding that the stock transfer took place on or about 10 January 2014 and set off more value than the debt extinguished.

Material subsidiary findings included that key documents contained forged signatures (for which the court accepted evidence that some were later corrected), that Mrs Hiley did not effectively resign as director until protective formalities were in place (so she was connected at the relevant time), and that the undervalue was quantified (nominally £20,547.84, reduced to £12,547.84 when account is taken of a later £8,000 payment).

Background and parties. This first-instance High Court (Chancery, Leeds) judgment arises from an application by the liquidator of Flexi Containers Limited under ss238, 239 and 241 Insolvency Act 1986. The applicant sought orders to set aside transactions involving transfer of trading stock to the first respondent, Mrs Alison Hiley, in purported satisfaction of a director's loan account. Mrs Hiley was represented by a litigation friend; the liquidator alleged the transfers were unlawful preferences and transactions at an undervalue and that related charges were ineffective.

Nature of the application and issues framed. The liquidator sought relief under ss238 and 239 (transactions at an undervalue and preferences) and orders under s241 to restore the company to the position it would have been in but for those transactions. The principal issues were: (i) whether Mrs Hiley was a connected person (director or de facto/shadow director) at the relevant time; (ii) the correct chronology and authenticity of key documents (including allegedly forged charges and the timing of resignation/share transfer); (iii) the company’s solvency at the relevant time; (iv) whether the stock transfer put Mrs Hiley in a better position on an insolvent liquidation (preference) and/or constituted a transaction at an undervalue; and (v) whether any charges purportedly securing her loan were effective or caught by s245.

Facts and evidence. The judge summarised a contested factual matrix: transfers and alleged resignations occurred in early 2014, with some core witnesses unavailable or giving inconsistent evidence and some documents later admitted as forged and replaced. The company had a substantial director's loan shown at £527,463 at 31 January 2013, further payments into the company were made by Mrs Hiley in January 2014, and an invoice dated 10 January 2014 purported to record stock sold to her with a loan offset of £620,834.07. The company entered liquidation following a winding-up order of 14 October 2014.

Court reasoning and findings. The judge accepted the liquidator’s account of the chronology in substance: the arrangements to transfer stock and secure the loan were agreed while Mrs Hiley remained effectively connected to the company, the stock transfer took place on or about 10 January 2014, and the company was insolvent. The December 2013 and March 2014 charges could not be relied upon to negate the preference because (inter alia) the earlier charge was not registrable as effective security against the liquidator and the later charge could not retrospectively secure a debt already extinguished. On valuation the court found the stock exceeded the loan by approximately £20,547.84, and, allowing credit for a subsequent £8,000 payment, treated the undervalue as £12,547.84. The court therefore concluded the transfer was both a preference and a transaction at an undervalue and that relief under the insolvency sections was available.

Procedure and remedy. The judge invited the parties to agree an appropriate form of order in light of these findings and indicated directions for any consequential applications or appeals.

This first-instance court found for the liquidator. The transfer of stock to Mrs Hiley was declared to have been both a preference under s239 and a transaction at an undervalue under s238 Insolvency Act 1986. The rationale was that Mrs Hiley was a connected person (a director in the extended sense) when the arrangements were agreed and the stock was transferred (on or about 10 January 2014), the company was insolvent at the relevant time, the purported charges did not afford effective security (s245) and the transfer reduced or extinguished the loan in a manner that put Mrs Hiley in a better position on liquidation and involved a quantifiable undervalue (net c. £12,547.84 after credit for a later payment). The judge directed the parties to agree the form of orders under s241.