Malcolm Cohen & Anor v Co-Operative Group Limited & Ors

A withdrawal of withdrawable share capital by a registered society may be a transaction for the purposes of Insolvency Act 1986, but it is not necessarily a transaction for no consideration. Where the society’s rules confer an entitlement to withdraw shares, the original subscription may constitute consideration for the repayment of that capital, even if approval depends on an apparently absolute directors’ discretion.

The statutory defence under section 238(5) is cumulative. The company must have acted in good faith for the purpose of carrying on its business and have had reasonable grounds for believing that the transaction would benefit it. A connected creditor’s preference may be established in fact, but the statutory presumption of a desire to prefer can be rebutted by credible evidence of the directors’ actual state of mind.

The joint liquidators of The Food Retailer Operations Limited, formerly Somerfield Stores Limited, sought relief under sections 238 and 239 of the Insolvency Act 1986 concerning Project Chicago, a restructuring carried out in November 2015.

The restructuring transferred properties and other assets from SSL to group entities, funded substantially by withdrawals of share capital and an intersociety loan set-off. SSL later entered administration and liquidation. The liquidators alleged transactions at an undervalue and preferences benefiting connected group companies.

The principal issues were the scope of the relevant transaction, whether the share-capital withdrawals were supported by consideration, whether SSL became insolvent in consequence of the transaction, and whether the statutory preference and undervalue provisions applied.

1. Transaction and consideration. The relevant transaction comprised the interlinked elements of Project Chicago, rather than the withdrawals of share capital viewed in isolation. The court adopted a commonsense approach, having regard to the contractual structure, the circular funds flow and the intrinsic connection between the asset transfers, pension reorganisation, releases and share-capital withdrawals.
2. SSL’s withdrawal rules gave shareholders an entitlement to withdraw their shares, subject to the directors’ power to approve or suspend withdrawals. When the directors approved the withdrawals, they gave effect to the existing rights attached to the shares. The original subscriptions therefore supplied consideration for the repayments. The transaction-at-an-undervalue claim consequently failed.
3. Insolvency. Applying the balance-sheet test in section 123(2) of the Insolvency Act 1986, present assets had to be compared with liabilities, including properly discounted prospective and contingent liabilities. SSL had no present enforceable indemnity asset against the group for the onerous leases. In the commercial circumstances, it could not reasonably expect those liabilities to be met indefinitely after Project Chicago. SSL therefore became balance-sheet insolvent in consequence of the transaction.
4. Had the consideration issue been decided differently, the transaction would have been at a substantial undervalue. The court valued the consideration received by SSL at approximately £21.5 million and the consideration provided at approximately £251.5 million, subject to the creditor cap.
5. Section 238(5) defence. The directors genuinely believed that they faced a binary choice between Project Chicago and an insolvency process, and acted subjectively in good faith for the purpose of continuing SSL’s business. However, given their conflicts of interest and the absence of independent restructuring or financial advice, there were no reasonable grounds for believing objectively that the transaction would benefit SSL. The defence therefore failed.
6. Preference. The share-capital withdrawals constituted a preference in fact because CGF, as a member, would have ranked behind ordinary unsecured creditors in a winding up. The repayment of the intersociety balance could not itself have caused insolvency. The respondents nevertheless rebutted the presumption under section 239(6): the directors did not desire to improve the position of CGF or CGL in an insolvent liquidation.
7. The transaction-at-undervalue and preference claims were dismissed.