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Preference Transactions in Insolvency Disputes: Insights from Darty Holdings SAS v Carton-Kelly

Challenging Preference Transactions in Insolvency

Problem: The central issue in Darty Holdings SAS v Carton-Kelly was determining if the repayment of a £115.4 million unsecured intra-group debt by Comet Group plc to Kesa International Ltd, coinciding with Comet’s sale, constituted an unlawful preference under section 239 of the Insolvency Act 1986​​.

Outcome: The High Court initially held that the repayment was an unlawful preference, influenced by a desire to prefer Kesa International Ltd. This decision was based on the negotiation and stipulations of the sale and purchase agreement, as orchestrated by Kesa Group’s general counsel, a director of Comet at the time​​. However, the Court of Appeal overturned this decision, focusing instead on the absence of preferential intent in the repayment decision made by Comet’s new board in February 2012​.

What is a Preference Transaction in Insolvency?

A preference transaction in the context of insolvency refers to payments or transfers made by a company to a specific creditor, or creditors, shortly before entering formal insolvency proceedings. The essence of these transactions is to repay certain creditors in preference to others. This practice can upset the “pari passu” principle, which seeks to ensure that unsecured creditors receive distributions on a pro-rata basis.

The primary legislation governing preference transactions is Section 239 of the Insolvency Act 1986. Under this section, a transaction is considered a preference if it meets several criteria:

  1. the company must have been influenced by a desire to prefer the creditor
  2. the transaction must occur within six months (or two years if the creditor is connected to the company) before the onset of insolvency proceedings, and
  3. the company must be unable to pay its debts at the time of the transaction​​​​.

This legal framework is designed to promote fairness among creditors and prevent insolvency processes from being undermined by preferential payments. It ensures that all creditors are treated equally and no single creditor is unduly favoured at the expense of others in the event of a company’s insolvency.

The Liquidator’s Claim for Preference Transaction

Darty Holdings SAS v Carton-Kelly [2023] EWCA Civ 1135

The case revolves around the repayment of a £115.4 million unsecured intra-group debt by Comet Group plc to Kesa International Ltd (KIL) during the sale of Comet on 3 February 2012. Comet went into administration on 2 November 2012, and then subsequently creditors’ voluntary liquidation on 3 October 2013. The intra-group transaction then became a point of contention under the suspicion of being an unlawful preference, as outlined in Section 239 of the Insolvency Act 1986.

The High Court’s Decision

The liquidator brought a claim against Darty Holdings alleging that the payment was a preference transaction. High Court concluded that the decision to enter into the sale and purchase agreement (SPA) was influenced by a desire to prefer KIL over other creditors. This inference was drawn from the SPA structure, which required the repayment of the intra-group debt. The High Court focused on the fact that the SPA was negotiated in such a way to facilitate this repayment, and hence, interpreted Comet’s actions as preferential treatment towards KIL.

The Court of Appeal’s Reversal

The Court of Appeal overturned the decision of the High Court, focussing on the operative decision made at a board meeting on 9 February 2012. Contrary to the High Court’s interpretation, the Court of Appeal found that the decision at this meeting was not influenced by a desire to prefer KIL. It was determined that the operative decision was made at this board meeting, where an almost entirely new board of directors was in place, and the decision was solely to action the completion conditions in the SPA.

There are several key aspects of the appeal which are noteworthy for the interpretation and application of claims for preference claims in insolvency disputes:

  1. Operative Decision: The Court of Appeal’s judgment focussed on identifying the exact moment that the decision to repay was made. Unlike the High Court, which considered the signing of the SPA as the operative decision, the Court of Appeal found it to be the board meeting in February 2012.
  1. Intent to Prefer: The Court of Appeal evaluated whether there was an actual intention to prefer KIL at the time of the board meeting. It was established that there was no such intention, thus failing one of the key tests for an unlawful preference.
  1. Factual Determination: This case underscores the importance of factual determination in preference transaction cases. The Court of Appeal’s decision hinged on the specific circumstances and timing of the decisions leading to the repayment which suggested there was not intention to prefer.

Implications of the Judgment on Preference Transaction Claims

This judgment has significant implications for how preference transactions are viewed in insolvency proceedings. This case demonstrates that the determination of whether a transaction constitutes an unlawful preference depends heavily on the specific circumstances and timing of decisions. It highlights the necessity for a careful and detailed examination of the timing and intent behind financial decisions particularly when such decisions are made in the lead-up to insolvency.  Parties involved in pre-insolvency deals and payments must show decisions do not favour specific creditors.

Furthermore, the case underscores the critical role of directors’ actions leading up to insolvency. While the directors in this instance faced no claims of breach of duty or misfeasance, the outcome could have been different with a less transparent decision-making process.

Companies facing financial distress must exercise increased diligence in documenting and justifying their financial decisions, especially when these involve repayments to certain creditors.

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We provide flexible funding options including fixed fees and ‘no win no fee’ arrangements. If you have any concerns about your company, or have received a claim from a liquidator alleging a preference transaction please do not hesitate to contact our expert insolvency lawyers today for a Free Consultation on 0207 459 4037.

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