Carton-Kelly v Darty Holdings SAS

The Liquidator applied under section 239 of the Insolvency Act 1986 to set aside a repayment by Comet of approximately £115.4m of intra-group debt to Kesa International Limited (KIL) made as part of the 3 February 2012 disposal of Comet to OpCapita. The court held that the repayment was a voidable preference because Comet was balance-sheet insolvent immediately before the Disposal and the repayment put KIL in a better position in the event of an insolvent liquidation. The court rejected the inclusion of the deferred tax asset in assessing balance-sheet solvency and treated the Triptych element as part of the repayment.
Key legal points:

• The statutory test for a preference under s.239 IA 1986 requires a desire to prefer that influenced the decision; Re MC Bacon was applied.
• The presumption in s.239(6) (connected parties) is relevant and may be rebutted by evidence; the court examined whether Kesa officers’ desire could be imputed to Comet.
• A decision taken on a company’s behalf when transactional documents are agreed (the SPA dated 9 November 2011) can be the relevant decision for s.239, not only formal board resolutions at completion.

The court concluded that Kesa’s advisers and officers (including Mr Enoch) desired repayment of the KIL facility and that desire influenced Comet’s decision (the SPA mechanics) so as to constitute a preference. Relief was ordered restoring the position by reference to the difference between the £115.4m repaid and the counterfactual dividend, the court adopting the Liquidator’s low case dividend of 11.4p/£ (£14.7m) but adjusting for the transfer of the defined benefit pension liability which altered the counterfactual dividend (the judge calculated an adjusted counterfactual of about 20p/£ or £25.8m on the material before the court).

This is a first instance insolvency judgment concerning a claim under section 239 of the Insolvency Act 1986. The Liquidator, Mr Carton-Kelly, sought to set aside as a preference the repayment by Comet Group plc of substantial intra-group indebtedness to Kesa International Limited (KIL) in connection with the sale of Comet to OpCapita, completed on 3 February 2012. The Respondent is Darty Holdings SAS, successor to KIL.

Background and parties:

• Comet entered administration on 2 November 2012 and thereafter into creditors’ voluntary liquidation. The Liquidator investigated the 2012 Disposal under which Comet repaid about £115.4m of intra-group debt to KIL as completion mechanics were implemented.
• The SPA was signed on 9 November 2011 and completion occurred on 3 February 2012. The completion mechanics involved a multi-tranche HAL RCF and contemporaneous set-offs and payment directions, including a Triptych-related element.

Nature of the proceedings: The Liquidator’s proceedings (issued 26 October 2018) alleged a preference under s.239 IA 1986 for repayments to a connected creditor. The Respondent earlier contested the connection point (decided for the Liquidator on earlier interlocutory proceedings) and defended on substantive grounds including absence of preference, absence of the requisite subjective desire to prefer, solvency at the time, and discretionary relief.

Issues framed by the court:

• Whether Comet was insolvent immediately prior to, or as a consequence of, the Disposal (cash flow and balance-sheet insolvency under s.123 IA 1986).
• Whether the repayment constituted a preference in fact (would KIL have obtained a larger counterfactual dividend in a hypothetical liquidation?).
• Whether the company was influenced by a subjective desire to put KIL in a better position in the event of insolvent liquidation (the s.239(5) test and the s.239(6) presumption for connected persons), and whose desire is relevant.
• When the decisive company-level decision was made (the SPA date or the New Board’s completion resolutions) and whether a desire held by Kesa personnel could be treated as operating on Comet’s decision-making.
• Remedy: whether the court should exercise discretion to decline relief because of the wider context or exceptional circumstances.

Reasoning and findings:

• Balance-sheet insolvency: the judge preferred the liquidator’s expert on key points and rejected recognition of the deferred tax asset (DTA) as recoverable for present-value balance-sheet purposes; on the evidence Comet was balance-sheet insolvent immediately before the Disposal. The judge emphasised Eurosail and related authorities on s.123 tests and the need for realistic assessment of assets and contingent/prospective liabilities.
• Preference in fact: the repayment (including the Triptych/Tranche B element effected via set-off and directions) effectively left Comet with a secured borrowing to HAL and removed value from unsecured creditors; the Triptych element could not be ignored as merely intra-group shifting.
• Desire to prefer and whose desire counts: applying Re MC Bacon and Re Drabble, the judge found that Kesa’s core deal team (notably Mr Enoch and other officers) positively desired repayment of KIL and that the SPA mechanics implemented that desire; that desire influenced the decision taken on Comet’s behalf when the SPA was agreed on 9 November 2011, so the requisite desire was attributable for s.239 purposes. The judge rejected the contention that the only relevant decision was the New Board’s formal approval on 3 February 2012.
• Remedy: the court should restore the company’s position. The judge accepted the Liquidator’s approach to the counterfactual dividend (preferencing the low-case estimate, 11.4p/£), but adjusted the counterfactual to reflect the transfer of the pension liability (reduction in unsecured liabilities), producing a materially increased counterfactual dividend (judge quantified this at about 20p/£ or £25.8m on the evidence before him). The court rejected the argument that exceptional circumstances required no order.

Procedural posture: First instance determination by Falk J after a multi-day trial with oral evidence and expert accounting reports. The judge gave detailed factual findings on the negotiation, documentary mechanics, and witness reliability and assessed experts’ evidence on solvency and valuation.

The court granted the Liquidator’s claim under section 239 IA 1986. The court found that Comet was balance-sheet insolvent before the Disposal; that the repayment of c.£115.4m (including the Triptych element) was a preference; and that Kesa officers (including Mr Enoch) positively desired repayment in circumstances where an insolvent liquidation was contemplated and that desire influenced the decision taken on Comet’s behalf (the SPA dated 9 November 2011). The judge ordered relief restoring the company’s position by reference to the difference between the £115.4m repaid and the counterfactual dividend, adopting the Liquidator’s low-case dividend adjusted to reflect the transfer of the defined benefit pension liability (raising the counterfactual dividend to about 20p/£ on the material before the court).