Matthew Dix & Anor (as joint liquidators of Max 99p Ltd) v Venkata Sudheer Kumar Reddy Chigili

A preference may arise where an insolvent company repays a creditor under an arrangement whose purpose is to place that creditor ahead of others. A pre-existing obligation to repay a loan does not, without more, make the transaction a proper commercial arrangement. The relevant desire is established if improving the creditor’s position was one factor influencing the company’s decision; it need not be the sole or decisive factor. Where the preferred creditor was connected with the company, the statutory presumption applies. The court retains a discretion as to the order to be made, but the creditor’s earlier loans, alleged lack of knowledge, possible future dividend and delay will not justify withholding relief without supporting evidence of a relevant prejudice or commercial justification.

The joint liquidators of Max 99p Ltd brought a claim under section 239 of the Insolvency Act 1986 concerning repayments totalling £147,659.44 made to the respondent between April and July 2018. The respondent had lent approximately £199,000 to the company and contended that the repayments were made pursuant to a legitimate pre-existing arrangement, without knowledge of the company’s insolvency.

The court considered whether the payments were preferences, whether the respondent’s connection with the company attracted the statutory presumption of a desire to prefer, and whether discretion should be exercised under section 239(3) to make no order.

1. Preference established. The respondent was a creditor, the payments were made within the relevant period, and the company was both balance-sheet and cash-flow insolvent when they were made. The payments placed him in a better position than other creditors in a subsequent insolvent liquidation.
2. Desire to prefer. The court applied the principles in Re MC Bacon Ltd. The agreement to repay the respondent’s loans was not comparable to the commercial arrangement in that case, where security enabled continued trading and avoided an immediate liquidation. Here, no further lending was being provided, the company was insolvent, and repayment had no commercial utility for the company. The only sensible conclusion was that the arrangement was designed to repay the respondent before other creditors.
3. Statutory presumption. Because the respondent was connected with the company as a director when the repayment agreement was made, section 239(5) applied. In any event, the evidence independently established the requisite desire. The respondent’s evidence was rejected as unreliable, and his knowledge of the company’s financial difficulties and the effect of the arrangement was sufficient.
4. Discretion and order. The court rejected the arguments that the respondent’s loans had benefited creditors, that he was an innocent victim, that he might otherwise have received a dividend, or that delay had caused material prejudice. The company’s position had deteriorated during continued trading, no likely dividend was shown, and the alleged evidential prejudice was unsupported. The preference claim succeeded and the order sought was made.

First-instance decision. No prior decision in the same proceedings is stated in the judgment.