Darty Holdings SAS v Geoffrey Carton-Kelly (as additional liquidator of CGL Realisations Ltd)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Newey,Lady Justice Elisabeth Laing |
| Judgment Date | 09 October 2023 |
| Neutral Citation | [2023] EWCA Civ 1135 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CA-2023-000062 |
[2023] EWCA Civ 1135
Lord Justice Lewison
Lord Justice Newey
and
Lady Justice Elisabeth Laing
Case No: CA-2023-000062
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
MRS JUSTICE FALK DBE
Royal Courts of Justice
Strand, London, WC2A 2LL
Tom Smith KC and Henry Phillips (instructed by Sidley Austin LLP) for the Appellant
Andreas Gledhill KC and Tiran Neressian (instructed by Jones Day) for the Respondent
Hearing dates: 26–27/09/2023
Approved Judgment
This judgment was handed down remotely at 4.45pm on 09/10/2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction
The issue on this appeal is whether the repayment by Comet Group plc (“Comet”) of £115.4 million of unsecured intra-group debt to Kesa International Ltd (“KIL”) on the occasion of the disposal of Comet to companies controlled by OpCapita amounted to a preference within the meaning of section 239 of the Insolvency Act 1986. The application under section 239 was brought by the liquidator of Comet (under its new name). In a judgment handed down on 17 November 2022, Falk J decided that it did. Her judgment is at [2022] EWHC 2873 (Ch), [2023] BPIR 305. The repayment took place pursuant to a sale and purchase agreement (“the SPA”) dated 9 November 2011; and repayment of the debt was formally approved by the board of Comet on 3 February 2012. The transaction was completed on the same day. As part of the completion arrangements Comet agreed to repay the KIL debt. Comet entered administration on 2 November 2012, which was converted into a creditors' voluntary liquidation on 3 October 2013.
This appeal is brought by Darty Holdings SAS, as successor to KIL, with the permission of Falk J. Darty sought permission to appeal on additional grounds, which I refused.
The background facts
The judge set out the narrative extensively; but for the purposes of this appeal the following summary will suffice. At the relevant time, Comet was owned by Kesa Electricals plc (“Kesa” or “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. KIL was the group treasury company. Comet was financed through the provision by KIL of a £300m revolving capital facility (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 £70 million. Both loans were repayable on demand.
Comet ran into financial difficulties with increased competition and declining footfall. It made a £3.8 million loss on ordinary activities in the year to April 2010 (FY2010), rising to £31.8 million in the year to April 2011 (FY2011). A concern developed that Comet was becoming a “drag” on KEP's earnings and share price, and an activist shareholder started agitating for Comet to be demerged. At the same time Comet's defined benefit pension scheme (the “DB Scheme”) was in financial difficulty. As at 31 March 2010 the DB Scheme had an estimated deficit of around £307 million. In early 2011 a recovery plan had been agreed to address the deficit, under which Comet had agreed to contribute £6.1 million per annum.
The upshot was that Kesa began looking for ways to dispose of Comet. A number of offers were made by various potential buyers; but in the end the Kesa board decided to proceed with OpCapita. Comet's prospects had worsened since 2011, with tougher market conditions and an increased concern that it would not achieve sustainable profitability. The board minutes for 14 September 2011 also refer to an adverse change in management's view about the longer term sustainability of Comet, in part driven by the deteriorating economic environment.
Heads of terms were agreed with OpCapita on 13 October 2011. In summary, these envisaged a sale of Comet and Triptych for £1. OpCapita would ensure that the purchasing vehicle (Newco) was capitalised with at least £30 million of share capital and a committed £40 million ABL facility. Kesa would retain the DB Scheme and provide £50 million of share capital to Newco. A form of “locked box” mechanism was envisaged by reference to the 30 April 2011 balance sheet, with forecast net debt owed by Comet of £26.9 million, the calculation of which included £42.5 million owed to Kesa. The target date for completion was 3 February 2012. The debt figures in the heads of terms reflected the way in which Comet's figures were presented internally, namely on a consolidated basis with its sister entity Triptych.
The judge explained the structure of the transaction at [37]. She dealt first with OpCapita's structure. A three tier structure was established to make the acquisition. At the top was a limited partnership, Hailey 2 LP (“H2L”). H2L owned Hailey Holdings Limited (“HHL”), and HHL in turn owned Hailey Acquisitions Limited (“HAL”). Kesa's investment was to be at the top of the structure, in H2L, alongside OpCapita, or more accurately an investor or investors procured by it.
She went on to set out a summary of the terms of the SPA. So far as relevant they were as follows. The parties to the SPA were KHL as seller of the shares, KEP, and HHL and HAL as the purchasing entities. Comet was not a party to the SPA.
The SPA provided for the sale of the shares of Comet to HAL and Triptych to HHL, in each case for £1, subject to the satisfaction of certain conditions, the major ones being KEP shareholder approval and the removal of Comet from exposure to the pension scheme.
Clauses 7 and 8 dealt with the arrangements for payment of inter-company loans. Clause 8 dealt with setting up the machinery for making the payments, and clause 7 dealt with the payments themselves. In other words, the chronology of events covered by clauses 7 and 8 work in reverse order. I therefore deal with them in reverse order.
Under clause 8, Kesa was required to capitalise debt owed by Comet insofar as net debt would otherwise exceed £32.275 million, being the target of £26.9 million plus an additional amount to which the purchasing group agreed to be exposed. In the event the amount owing to KIL was approximately £129 million, and just under £13.6 million was capitalised, leaving £115,415,524 owed by Comet to KIL. It is the latter sum that the liquidator says was a preference.
There was specific provision for Kesa to procure that a board meeting of Comet would be held at which all directors other than Mr Darke would resign and the purchasers' nominees would be appointed. Clause 8.3 provided that the newly constituted board “shall review the financial position of the Company” [i.e. Comet] in the light of a business plan for a minimum of 18 months, the ABL facility and the availability terms and conditions of the revolving credit facility to be provided by HAL (the “HAL RCF”).
The KIL RCF was dealt with in three tranches, Tranche A, Tranche B and Tranche C, representing three tranches of the proposed HAL RCF. Tranche A of the HAL RCF was £35 million, corresponding to capital injections of that amount by the investors into H2L, and then via HHL to HAL. Tranche B was equal to the amount owed by KIL to Triptych (the “Triptych Amount”). Tranche C covered the balancing amount owed by Comet to KIL plus additional headroom.
Clauses 8.9 and 8.10 provided for the Tranche A element of £35 million to be drawn down by Comet under the HAL RCF (i.e. Tranche A) and a corresponding amount being demanded by the Kesa group (in practice KIL), whereupon Comet “shall agree to repay such amount”. Prior to completion, therefore, the SPA envisaged a draw down, a demand, and an agreement to pay; but not an actual payment. The remainder of the clause dealt with Tranche B and Tranche C in a broadly similar way.
Clauses 8.11–8.15 contemplated Triptych being repaid the Triptych Amount by KIL, Triptych lending the same amount to HHL and HHL lending it on to HAL. Comet would then draw an amount equal to the Triptych Amount under the HAL RCF (Tranche B), with a further demand from the Kesa group in that amount and Comet again agreeing to repay it.
Clauses 8.16–8.21 dealt with Tranche C. It provided for KIL to make a £50 million capital contribution to H2L, together with an agreed additional amount of £22.66 million plus a further pensions related amount of £5.8 million, a total of £78.46 million. This amount would be passed down to HAL via HHL. There would then be a further demand for the balance owed to Kesa, with Comet again agreeing to repay it, using funds drawn from Tranche C.
Thus, in relation to each tranche, the position immediately before completion would be that the money would be demanded and available, but not actually paid. Clauses 7.5 and 7.6 then dealt with the actual payments.
Clause 7.5 provided that the purchasers (HAL and HHL) would procure that intercompany balances owed by Comet and Triptych, as determined as at 20 April 2011, would be repaid at completion, and the seller (KHL) would procure that intercompany balances owed by the retained Kesa group would be paid to Comet and Triptych.
Clause 9 provided for completion. Clause 9.2 required the seller and purchaser respectively to do the things listed in Schedule 2. Among the seller's obligations under that Schedule were an obligation to procure a board meeting of Comet at which it would be resolved that the transfers...
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When Does A Company Decide To Give A Preference?
...background The case in question - Darty Holdings SAS v Geoffrey Carton-Kelly (As Additional Liquidator of CGL Realisations Limited) [2023] EWCA Civ 1135 - concerned a transaction by which the former electronics retailer Comet repaid '115 million of intra-group debt. It entered administratio......