Carton-Kelly v Darty
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Falk |
| Judgment Date | 17 November 2022 |
| Neutral Citation | [2022] EWHC 2873 (Ch) |
| Docket Number | Case No: CR-2012-007914 |
| Court | Chancery Division |
[2022] EWHC 2873 (Ch)
Mrs Justice Falk DBE
Case No: CR-2012-007914
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
Rolls Building, Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
Andreas Gledhill KC & Tiran Nersessian (instructed by Jones Day) for the Applicant
Tom Smith KC & Henry Phillips (instructed by Sidley Austin LLP) for the Respondent
Hearing dates: 11–14, 17, 18, 20 & 21 October 2022
APPROVED JUDGMENT
This judgment was handed down remotely at 16.45 on 17 November 2022 by circulation to the parties or their representatives by email and by release to The National Archives.
INTRODUCTION
On 2 November 2012 Comet Group plc, now known as CGL Realisations Limited (“Comet”), entered administration. The administration was converted to a creditors' voluntary liquidation on 3 October 2013, with the same individuals who had acted as administrators, three partners of Deloitte LLP, being the initial liquidators.
The insolvency attracted scrutiny, including an investigation by the Insolvency Service and a disciplinary investigation by the Institute of Chartered Accountants in England and Wales (“ICAEW”) related to concerns about the impartiality of Deloitte. The ICAEW's actions led to an application by the liquidators for directions, the outcome of which was that Mr Carton-Kelly, the Applicant in these proceedings, was appointed as an additional liquidator: see the judgment of Sir Nicholas Warren in Kahn v ICAEW [2018] EWHC 1378 (Ch). For convenience, I will refer to Mr Carton-Kelly as the “Liquidator” and the proceedings involving the ICAEW as the “ICAEW proceedings”.
On 3 February 2012, around nine months before it collapsed, Comet had been sold by a listed group headed by Kesa Electricals plc (the “Kesa” group and “KEP” respectively) to vehicles established by OpCapita LLP (“OpCapita”), a private investment partnership specialising in distressed retail sector opportunities (the “Disposal”). The Liquidator's role was to investigate, and if appropriate, pursue claims connected with the Disposal and the associated arrangements in respect of Comet's debt.
These proceedings were issued on 26 October 2018. They seek relief under s.239 Insolvency Act 1986 (“IA 1986”) in respect of what is alleged to have been a preference given by Comet when it repaid approximately £115.4m of intra-group debt to Kesa International Limited (“KIL”) as part of the completion arrangements for the Disposal. The Respondent (“Darty”) is the successor to KIL, following a cross-border merger in early 2018.
Darty's initial defence raised a preliminary issue, namely whether KIL was connected with Comet at the time of the Disposal. If it was not, as Darty then alleged, then it was clear that the claim would fail because the alleged preference occurred more than six months before the administration, as compared to the two year period that applies to transactions between connected parties (see s. 240(1)(a) and (b) IA 1986). This point was concluded in favour of the Liquidator by Deputy ICC Judge Agnello, whose decision was upheld by Miles J on appeal ( Darty v Carton-Kelly [2021] EWHC 1018 (Ch)).
The structure of this judgment is as follows:
a) I first set out the factual background and the structure and terms of the Disposal, at [7] to [59].
b) I then comment on the evidence and witnesses, at [60] to [91].
c) There follows summaries of applicable legal principles and the areas of dispute, at [92] to [131].
d) I then determine whether Comet was insolvent on 3 February 2012, at [132] to [188].
e) At [189] to [200] I consider whether there was a preference in fact, and its extent.
f) The issue of desire to prefer is considered at [201] to [274].
g) Finally, the question of remedy is considered at [275] to [293].
THE FACTUAL BACKGROUND AND DISPOSAL TERMS
Kesa, Comet and the decision to sell
Comet was founded in 1933. By 2011 it had 249 stores and was one of the UK's largest electrical retailers. It was part of the Kesa group. Kesa had been formed following a demerger from Kingfisher plc in June 2003. KEP's shares were listed on the London Stock Exchange, with a secondary listing in Paris. The bulk of Kesa's profits were generated from businesses in continental Europe, in particular the French electrical retailer Darty.
At material times prior to the Disposal, the relevant corporate structure was as follows. Comet was owned by KEP through an intermediate holding company, Kesa Holdings Limited (“KHL”). KHL additionally owned Triptych Insurance NV (“Triptych”), a Curacao incorporated but UK tax resident captive insurer. Triptych provided extended warranties to Comet customers.
Comet's Board comprised Thierry Falque-Pierrotin, Dominic Platt, Simon Enoch, Patrick Terrier and Robert Darke. Mr Falque-Pierrotin was Kesa's CEO. Mr Platt was Kesa's CFO. Mr Enoch was Kesa's General Counsel and the company secretary of each of KEP, KHL and KIL. Mr Terrier was an employee of Kesa's French business. Mr Darke had joined Comet in 2000 and became its CEO in May 2011. Comet's own Head of Finance, Michael Walters, was not a Comet Board member. Mr Darke was therefore the only member of the Comet Board whose executive role was confined to Comet rather than the wider Kesa group.
KIL was Kesa's group treasury company. It was an indirect subsidiary of KHL. Comet was financed through the provision by KIL of a £300m revolving capital facility, which had been entered into at around the time of the demerger from Kingfisher (the “KIL RCF”). The interest rate on the KIL RCF was equal to KIL's costs of funds plus 1.27%. Conversely, at a similar time the cash-rich Triptych had entered into an intra-group loan facility with KIL, agreeing to lend it up to £70m. Both loans were repayable on demand.
Comet started to run into difficulties, with increased competition and declining footfall. It made a £3.8m loss on ordinary activities in the year to April 2010 (FY2010), rising to £31.8m in the year to April 2011 (FY2011). (In the rest of this judgment I will refer to financial years in the manner just shown, meaning the financial year ended in the April of the year stated.) Although a turnaround plan was devised with a view to streamlining the product range and improving productivity and efficiency, a concern developed that Comet was becoming a “drag” on KEP's earnings and share price, and an activist shareholder (Knight Vinke Asset Management) started agitating for Comet to be demerged.
OpCapita first expressed interest in purchasing Comet in around April 2011, when Henry Jackson, its managing partner, contacted Mr Enoch. OpCapita was known to Kesa from a previous transaction when it had acquired the French furniture retailer BUT from Kesa and subsequently sold it at a profit. A formal expression of interest was sent on 15 April 2011, in which OpCapita stressed its “experience in operationally driven turnarounds”.
After initially taking strategic advice from Lazard, Kesa then turned to Bank of America Merrill Lynch (“BAML”), who by June 2011 were recommending a sale as the best option. Kesa announced on 22 June 2011 that it was examining strategic alternatives for Comet. Shortly thereafter an information memorandum was issued to interested parties, with first round offers being invited for Comet and Triptych by 20 July 2011, on a “debt-free cash-free basis”. I pause here to note that all this means is that pricing should be on a basis that ignores existing debt and/or cash in the business: the idea is to obtain an “enterprise value” for the business. It says nothing about what the financial structure will actually be.
Also during this period, steps were taken to provide assurances to Comet Trustee Company Limited (“CTCL”), the trustee of Comet's defined benefit pension scheme (the “DB Scheme”). As at 31 March 2010 the DB Scheme had an estimated deficit of around £307m. In early 2011 a recovery plan had been agreed to address the deficit, under which Comet had agreed to contribute £6.1m per annum. In June 2011 KEP entered into a formal deed of support in favour of CTCL, replacing an earlier letter of support. The deed effectively guaranteed the funding of any deficit derived from the original transfer in to the DB Scheme at the time of the demerger. I understand that this covered around 80% of the total exposure. The chairman of CTCL, Ian Edwards, also received an assurance from Kesa that “a closure of the business is not on the agenda”.
Kesa's announcement that it was exploring options for Comet also raised concerns with credit insurers. These are entities that provide insurance to manufacturers in respect of credit they supply to customers. Although the insurers' legal relationship would be with the manufacturer, their willingness to provide cover was commercially important not only to Comet but to Kesa's wider business, because without it manufacturers would not offer credit, or at least not on such favourable terms. The absence of such credit had a material effect on working capital requirements. It was clear from Mr Platt's evidence that he spent a lot of time both in the ordinary course of business, and in particular during the negotiations for the Disposal, working closely with credit insurers.
The evidence shows that, in the aftermath of the announcement in June 2011, Kesa provided direct assurances to Samsung's insurer Atradius, and to another insurer, that while it remained in Kesa's ownership Kesa would ensure that Comet would be financially supported to pay trade suppliers in full.
On 26 July 2011 KEP also provided a letter of support to Comet. It read:
“We are pleased to...
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