Evans and another v Jones and another
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Christopher Clarke,Lord Justice Laws |
| Judgment Date | 07 July 2016 |
| Neutral Citation | [2016] EWCA Civ 660 |
| Docket Number | Case No: A2/2014/1805 |
| Court | Court of Appeal (Civil Division) |
| Date | 07 July 2016 |
[2016] EWCA Civ 660
Lord Justice Laws
Lord Justice Lewison
and
Lord Justice Christopher Clarke
Case No: A2/2014/1805
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
CARDIFF DISTRICT REGISTRY
HIS HONOUR JUDGE MILWYN JARMAN QC
392OF2012
Royal Courts of Justice
Strand, London, WC2A 2LL
George Bompas QC and Angharad Davies (instructed by W Parry & Co) for the Appellants
Hugh Sims QC and Simon Passfield (instructed by MLM Cartwright Solicitors) for the Respondents
Hearing dates: 23/06/2016
Approved Judgment
Rococo Developments Ltd ("the company") was a property development company until it went into creditors' voluntary liquidation on 21 April 201Mr and Mrs Jones were its two directors and own all the company's issued share capital. In carrying out its development projects the company was reliant on borrowings, both from the banks and also from Mr and Mrs Jones.
One of the sites that the company wished to develop was at Llanunwas, Solva. It entered into a building contract with a company called WJG Evans Ltd ("Evans"). In the latter stages of the project Mr Jones himself acted as the contract administrator. As completed units were sold, both at Solva and at another site in Sennybridge Brecon, the company repaid out of the sale proceeds the various loans made to it by Mr and Mrs Jones. There were four such payments made in 2010 namely £97,272.73 made on 3 June, £10,000 and £90,000 both made on 4 October, £175,400 made on 27 October; and a fifth one (£76,000) made on 18 March 2011, just over a month before the company went into liquidation. These payments amount in total to £448,672.73. In addition on 1 June 2010 the company paid a dividend to its shareholders (Mr and Mrs Jones) of £75,000.
It is now accepted that each of the five payments counts as a "preference" for the purposes of sections 239 to 241 of the Insolvency Act 1986. It is also clear that each of the payments was made within the period of two years ending with the onset of the company's insolvency. The liquidators of the company thus claim repayment of the five payments under section 239. Prima facie the giving of a preference to a person connected with the company (such as Mr and Mrs Jones) within the period of two years ending with the onset of the company's insolvency is given at a "relevant time" for the purposes of those sections. But section 240 (2) provides:
"(2) Where a company enters into a transaction at an undervalue or gives a preference at a time mentioned in subsection (1)(a) or (b), that time is not a relevant time for the purposes of section 238 or 239 unless the company—
(a) is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of Part IV, or
(b) becomes unable to pay its debts within the meaning of that section in consequence of the transaction or preference;
but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a company with a person who is connected with the company."
Section 123 (1) (e) provides that a company is deemed to be insolvent if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. Section 123 (2) provides that a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
The immediate cause of the company's entry into insolvent liquidation was an adjudication award made on 27 March 2011 by an adjudicator following a claim by Evans. However, that claim had something of a history. On 28 May 2010 Evans presented a final account stating that the total amount due for building works was £561,000-odd and that taking into account sums already paid there was a balance in their favour of £191,487-odd. This was far in excess of the amounts which Mr Jones, as the self-appointed contract administrator, had certified. The parties did not narrow their differences, and by notice dated 18 February 2011 Evans referred the dispute to adjudication. The dispute referred to adjudication at this stage was limited to what were referred to as "headline items" for inclusion in the final account. The items included utility supplies, additional roof works, external works and a claim by Evans in respect of an extended contract period. A chartered surveyor was appointed as adjudicator. The parties made written submissions to him (which included disputes about his jurisdiction). Although Evans suggested widening the scope of the adjudication to include the assessment of the whole of the final amount, the company refused to do so. The company took legal advice from counsel, which the judge described in the following terms at [22]:
"The company took legal advice from counsel, who gave what was described as a very provisional view on 8 March 2011 that there was a 60–65% chance of success in arguing that Evans had lost the right to dispute the appointment of the contract administrator and that the certificates accordingly should be valid. He further thought that there was a strong case for saying that the adjudicator was not being asked to direct payment to be made, and he anticipated that what would be decided was simply a calculation rather than a direction that those sums be paid. His "best guess" on the anticipated outcome in respect of such a calculation was that £55,241.66 would be found due to Evans on the items in the reference, not including interest or adjudicator's fees. He ended on this note: "I am concerned that our case on the quantum of the valuations is difficult to follow. What are we saying is wrong about the contractor's figures? Why are our figures lower? Are these contractual arguments or what?"
The outcome of the adjudication was the award of 27 March 2011. The adjudicator rejected Evans' claim to an extended contract period, and also decided that the certificates issued by Mr Jones were invalid, because he was not entitled to appoint himself as contract adjudicator. He also decided that the company had no claim for delay. The overall result, therefore, was that he decided that a total principal sum of £66,881.80 for the headline items should be in the final account. The company was also liable to pay, in addition to that sum, legal and other fees amounting to £16,000. The company had made no provision in its accounts for payment of anything to Evans and therefore could not pay. It was that total liability that triggered the decision to enter insolvent liquidation. The decision to that effect was made on 1 April 2011. According to the Statement of Affairs the company had no funds to proceed with the matter or to contest any further referral. The deficiency as regards unsecured creditors was £52,479. Apart from a relatively small sum of £3,939 all the directors' loans had been repaid.
Two weeks later Evans referred another dispute to adjudication. That dispute related to the failure to agree the final account, and by a second award dated 15 May 2011 the same adjudicator awarded Evans a total sum of £122,670.15.
The current joint liquidators were appointed on 20 June 2011 replacing earlier liquidators. In the course of his investigations into the company one of the joint liquidators became concerned that the dividend of £75,000 that the company had paid to Mr and Mrs Jones on 1 June 2010 had been unlawful. There were two reasons for his concern. First, the company's statutory accounts showed an available distributable profit of £57,934 as at 31 May 2010. Second, the company's accounts made no provision for any possible liability in the face of Evans' claim for £191,487-odd. When the allegation that the dividend had been unlawful was put to Mr Jones he denied it, first in correspondence from his solicitors, and then in his witness statement of 22 August 2013. It was not until shortly before trial that on 6 March 2014 Mr and Mrs Jones accepted that the dividend had indeed been unlawful.
In preparation for the trial the parties instructed a single joint expert, Mr Roger Isaacs to prepare a report on the solvency of the company at the various dates in play. Mr Isaacs is an accountant and licensed insolvency practitioner, and he made it clear that his report was confined to matters of accountancy and the preparation of accounts. In effect the exercise that he carried out was to reconstruct the company's accounts to determine what they would have shown if they had been prepared in accordance with UK Generally Accepted Accounting Practice ("UK GAAP"). As I have said the company's accounts made no provision for any liability to Evans. Mr Isaac considered that this aspect of the accounts failed to comply with Financial Reporting Standard 12 ("FRS 12"). Although FRS 12 did not apply directly to the company, equivalent provisions did. Mr Isaac's view was that whether to make a provision for a debt to Evans would have been a matter of judgment, but that in order to comply with UK GAAP that judgment had to be made on a reasonable basis. Having considered the material before him he took the view that it was unreasonable to have made no provision at all. The level of provision that should have been made would have depended on the advice that the company received about the claim. It could have been perhaps £50,000 or even £100,000; but it would have been difficult to have justified making a provision of less than £20,000. He went on to consider a number of other accounting issues which have played no part in the argument. Based on his overall...
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