Katz and Others v McNally and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE PETER GIBSON,LORD JUSTICE PILL,LORD JUSTICE WARD |
| Judgment Date | 24 March 1998 |
| Judgment citation (vLex) | [1998] EWCA Civ J0324-10 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | No CHANF 96/1162/ CMS4 |
| Date | 24 March 1998 |
[1998] EWCA Civ J0324-10
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF MR JUSTICE RATTEE
Royal Courts of Justice
Strand
London WC2
Lord Justice Peter Gibson
Lord Justice Pill
Lord Justice Ward
No CHANF 96/1162/ CMS4
MR S COGLEY (Instructed by Cobbetts of Manchester) appeared on behalf of the Appellant
MR L KOSMIN QC and MR P GILLYON (Instructed by Booth & Co of Leeds) appeared on behalf of the Respondent
We have before us an appeal by the First Respondent, Gordon McNally, and his wife the Second Respondent, Sylvia McNally, from those parts of the order made by Rattee J. on 9 July 1996 whereby he ordered that a payment of £73,393.92 made by Exchange Travel (Holdings) Ltd. ("Holdings") to Gordon McNally and a payment of £127,031.44 made by Holdings to Sylvia McNally, in each case shortly before an administration order was made in respect of Holdings, constituted preferences within s.239 Insolvency Act 1986. There is also a cross-appeal by the Applicants, Alan Katz, David Lovett and John Talbot ("the Liquidators"), who were the joint administrators of Holdings and became the joint liquidators when it was wound up. The cross-appeal relates to that part of the judge's judgment whereby he held that the application on 4 July 1990 of £61,607.08, part of what Holdings owed Gordon McNally, in discharge of indebtedness to Holdings of the Third Respondent, Ross McNally, did not constitute a preference.
The judge's judgment is now reported (see [1996] 2 B.C.L.C. 524). As he carefully set out the background facts, it is unnecessary to rehearse the relevant history at any length.
Holdings is a company which with its 15 subsidiaries was previously engaged in the travel business, though one of its principal subsidiaries, Exchange Travel Agency Ltd. ("Agency"), was also involved in property development. All the shares in Holdings were held at all material times by members of the McNally family. Gordon McNally was the Chairman. His son, Ross McNally, was the Managing Director and Gordon and Sylvia McNally and another son, Graham McNally, and two daughters were also directors. The Finance Director was Michael Jefferies.
Both Agency and Holdings incurred substantial losses on their travel business in each year from 1985 onwards. Agency in December 1985 sold what Mr. Jefferies in a memorandum of 17 January 1990 described as the profitable parts of the company, 39 travel agency branches, to Hogg Robinson to enable Agency to continue trading. By September 1990 it still had 128 branches, of which 64 were operated by Agency and 64 by franchisees. In the course of 1989 and 1990 the group's financial position deteriorated. Holdings' accounts for the year ended 31 October 1989, which were approved by the Board in June 1990, showed an excess of liabilities over assets as amounting to £6.26 million while the consolidated balance sheet for the group showed net assets of £1.2 million but net current liabilities of £4.5 million.
At an Extraordinary General Meeting on 23 April 1990 which was attended by all the members of Holdings, a recommendation by Ross McNally that the Group should sell its travel business was unanimously approved. But despite strenuous efforts to sell the business—60 potential purchasers were approached—the business was not sold.
On 3 July 1990 Holdings paid Sylvia McNally £127,031.44 in discharge of the amount standing to her credit in an account which she kept with Holdings. Gordon McNally had £135,001 standing to his credit in an account which he kept with Holdings. In contrast Ross McNally owed Holdings £61,607,08. On 4 July 1990 Holdings paid Gordon McNally £73,393.92 and the balance of the sum standing to his credit was applied in discharge of Ross McNally's indebtedness.
In mid-July 1990 Ross McNally had a discussion with Holdings' auditors as to the possible need to seek an administration order in the near future. On 5 September Barclays Bank wrote to Ross McNally to inform him that it would not provide the further support which he had sought from the Bank, and gave notice of the cancellation of the group's overdraft facility. Shortly thereafter, Arthur Andersen were instructed by the directors of Holdings to advise on the implications of the group'sfinancial position. On 18 September 1990 the directors of Holdings, Agency and another principal subsidiary of Holdings respectively presented petitions seeking administration orders under s.8 Insolvency Act 1986. Ross McNally in his supporting affidavit swore that all the companies in the group were insolvent in that they were unable to pay their debts as they fell due, and this was the opinion of Arthur Andersen in their report under r.2.2 of the Insolvency Rules 1986. The deficit of liabilities over assets on a forced sale basis of the group was £22.4 million. Administration orders were made that day and the Liquidators, who are partners in Arthur Andersen, were appointed joint administrators. A statement of affairs sworn to by, among others, Gordon McNally showed that on 18 September 1990 Holdings had a deficit of £8.82 million. On 28 July 1992 the administration orders were replaced by winding-up orders and the Liquidators were appointed joint liquidators of the three companies.
In the meantime on 9 August 1991 the Liquidators commenced proceedings under s.239 against Gordon, Sylvia and Ross McNally. The proceedings eventually came before the judge on 7 May 1996. The trial lasted 9 days during which the judge heard evidence from 3 expert witnesses and 11 other witnesses. In his judgment of 9 July 1996 the judge found that, contrary to the assertions of Gordon and Sylvia McNally that they thought that Holdings held moneys as trustee for them, each of them knew that they were simply creditors of Holdings in respect of the sums paid to them in July 1990 or applied in discharge of the debt of Ross McNally. He also found that the debt owed by Ross McNally was owed not to Gordon or Sylvia McNally, as they had claimed, but to Holdings.
The judge then considered the statutory provisions. By the combined effect of s.238(1) and s.239(1) Insolvency Act 1986 s.239 applies in the case of a company where an administration order is made in relation to the company or it goes into liquidation. By s.239(2):
"Where the company has at a relevant time …. given a preference to any person the officer holder may apply to the court for an order under this section".
"Office holder" means the administrator or liquidator. By s.240(1) subject to subs.(2) the time at which a company gives a preference is a relevant time if the preference is given to a person connected with the company (otherwise than by reason only of being its employee) at a time in the period of 2 years ending with the date of presentation of the administration petition. But by s.240(2) that time is not to be a relevant time for the purposes of s.239:
"unless the company-
(a) is at that time unable to pay its debts within the meaning of s.123 …., or
(b) becomes unable to pay its debts within the meaning of that section in consequence of the …. preference".
Of the ways in which a company is deemed to be unable to pay its debts under s.123, that relied on by the Liquidators is contained in s.123(2):
"A company is also deemed to be 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 that the amount of its liabilities, taking into account its contingent and prospective liabilities".
By s.249 a person is connected with a company if he is a director of the company. On an application under s.239(2) the court is to make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference (s.239( 3)). S.239(4) defines what is meant by a company giving a preference to a person. So far as relevant, the company does so:
"if-
(a) that person is one of the company's creditors …. and
(b) the company does anything …. which … has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done."
I should read subsections (5) and (6):
"(5) the court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by adesire to produce in relation to that person the effect mentioned in subsection (4)(b).
(6) A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5)."
The judge identified 5 issues:
(i) Was each of Gordon and Sylvia McNally a creditor of Holdings?
(ii) On 3 and 4 July 1990 was the value of Holdings' assets less than the amount of its liabilities?
(iii) Did the payments by Holdings to Graham and Sylvia McNally have the effect of putting them into a position which, in the event of Holdings going into insolvent liquidation, would be better than the position they would have been in if the payments had not taken place?
(iv) Did Gordon and Sylvia McNally rebut the presumption applied by s.239(6) by showing that Holdings in making payment was not influenced by a desire to produce the effect described in issue(iii)?
(v) If Gordon McNally received a preference, did it comprise only the payment to him or did it also...
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