Re Cosy Seal Insulation Ltd ((in Administration)); Ross and another v Gaffney and another
| Jurisdiction | England & Wales |
| Judge | Judge Behrens |
| Judgment Date | 02 June 2016 |
| Neutral Citation | [2016] EWHC 1255 (Ch) |
| Docket Number | Case No: 685 OF 2014 |
| Court | Chancery Division |
| Date | 02 June 2016 |
[2016] EWHC 1255 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY
IN THE MATTER OF COSY SEAL INSULATION LIMITED (IN ADMINISTRATION)
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
The Court House
Oxford Row
Leeds LS1 3BG
His Honour Judge Behrens sitting as a Judge of the High Court in Leeds
Case No: 685 OF 2014
James Morgan (instructed by Freeths LLP) for the Applicants
Richard Stubbs (instructed by The EndeavourPartnership LLP) for the Respondents
Hearing dates: 4 – 6, 9 – 10 May 2016
Judge Behrens:
In this judgment I shall adopt the following abbreviations.
| Entity | Abbreviation |
| Cosy Seal Insulation Ltd | CSIL |
| Cosy Seal Insulation (UK) Ltd | CSIL(UK) |
| Cavity wall insulation | CWI |
| E.ON Energy Solutions Ltd | E.ON |
| External Wall Insulation | EWI |
| Gateshead Housing Company | Gateshead |
| Hamilton (Building Contractors) Ltd | Hamilton |
| Home Group Limited | Home Group |
| JJ Quinn Racing Ltd | JJ Quinn |
| Loft Insulation | LOFT |
| Mitie Group Ltd | Mitie |
| Paul George James Gaffney | Mr Gaffney |
| Stephen Wainwright | Mr Wainwright |
| Joanne Gaffney | Mrs Gaffney |
| Npower Northern Ltd | Npower |
| Tadea Limited | Tadea |
| The Applicants | The Administrators |
| Agreement dated 2/ 1/2013 between CSIL and CSIL(UK) | The Jan 2013 Agreement |
| Wetherby Building Supplies Ltd | Wetherby |
This application arises out of the insolvency of CSIL which entered into administration on 4 July 2014. In it the Administrators are making a number of claims against Mr Gaffney and CSIL(UK). At all material times Mr Gaffney was the sole shareholder and sole director of CSIL and Mrs Gaffney the sole director and shareholder of CSIL(UK).
The claims made by the Administrators were originally broken down into 4 separate categories. However the joint claims against Mr and Mrs Gaffney have been compromised in a Tomlin order dated 25 June 2015 and it is not necessary to refer to them further.
The remaining three categories may be summarised in this way:
Payments made by CSIL to Mr Gaffney between March and May 2014.
On 28 March 2014 CSIL paid Mr Gaffney £181,000 by way of repayment of a loan made by Mr Gaffney to CSIL on 7 January 2014. The Administrators contend that this repayment was a preference to a connected person within s 239 of the 1986 Act and a breach of his duties as a director of CSIL.
Mr Gaffney contends that CSIL was not insolvent at the time of the repayment and that CSIL was not "influenced by a desire to put himself in a better position than other creditors". Very substantial payments were being made to creditors at the time. Mr Gaffney does not accept that he acted in breach of his duties as a director. He had advice from CSIL's accountant in the difficult circumstances that CSIL found itself. If he was acting in breach of duty he should be excused under s 1157 of the Companies Act 2006.
On 15 May 2014 CSIL paid Mr Gaffney £150,000 in repayment of loans of £50,000 and £100,000 he had made to CSIL in February 2014. The Administrators contend that this repayment was a preference and a breach of duty. Mr Gaffney relies on the same defences.
On 27 May 2014, Mr Gaffney caused CSIL to pay him £200,000 – at one time analysed as a salary of £53,100 plus a further £146,900 by way of reduction of his loan account. That was the same day that he chaired a meeting which passed a resolution that the Company was insolvent and filed a notice of intention to appoint administrators and the same day as Wetherby presented a winding up petition against CSIL
The claim that the £53.100 was a valid payment of salary was not pursued following the evidence of Mr McKenna. In any event the Administrators challenged the salary on the ground that it was not subject to a resolution as required under Art 82 of Table A and/or was a preference, and the value of Mr Gaffney's services cannot be justified. The Administrators claim that the payment of £200,000 was an obvious preference and breach of duty by Mr Gaffney. Mr Gaffney relies on the same defences.
On 3 occasions between 20 March 2014 and 20 May 2014 Mr Gaffney caused payments totalling £31,284 to be made to JJ Quinn. These sums were debited from Mr Gaffney's loan account. The Administrators contend that they were acts of misfeasance and/or preferences. Mr Gaffney contends that these payments were part of the amounts due for sponsorship of Cosy Seal Racing which generated publicity and customers for CSIL.
Payments to CSIL(UK)
On 2 January 2013, CSIL entered into written agreement with CSIL(UK) under which CSIL promised to pay £15,000 per month to CSIL(UK).
On 12 and 23 May 2014 CSIL paid £2,000 and £9,000 to CSIL(UK) in repayment of loans that had been made in mid March 2014. More importantly on 23 May 2014 Mr Gaffney caused CSIL to pay CSIL(UK) £252,000 in respect of liabilities under the Jan 2013 Agreement.
The Administrators contend that at the very least these were preferences and/or acts of misfeasance by Mr Gaffney. In addition to the defences in relation to the preference claims Mr Gaffney makes the point that Mrs Gaffney devoted her time to working for the Company and all of the profit of CSIL(UK) was effectively diverted into CSIL as all its work was done through CSIL. He contends that the Jan 2013 Agreement was entered into in good faith with the expectation of it being of genuine benefit to CSIL.
The March 2014 agreement with CSIL(UK)
On 7 March 2014 CSIL entered into a written agreement with CSIL(UK) for the transfer to CSIL(UK) of 40,000 carbon tonnes of credit for £100,000, giving a price of £2.50 per carbon tonne. Payment was to be made by CSIL(UK) in January 2015 on condition that none of the credits had been rejected by OFGEM.
No payment has been made by CSIL(UK). The Administrators challenge this on two grounds. It is contended that a price of £2.50 per carbon tonne is a significant undervalue and that this was a transaction at an undervalue within s 238 of the 1986 Act. The Administrators also contend that it was a breach of Mr Gaffney's duties as a director to enter into this agreement which was plainly not in the best interests of CSIL. Mr Gaffney contends that the figure of £2.50 per tonne was for a variety of reasons a fair figure and that the agreement was in the best interests of CSIL.
The issues
Although it will be necessary to consider each of the challenged transactions separately there are four main issues to be determined:
Whether CSIL was insolvent at the time of each of the challenged transactions. [Curiously the burden of proof is different on this issue depending on whether the allegation relates to a preference or a transaction at an undervalue. However neither Counsel suggests that this is a case which will be decided on the basis of the burden of proof.]
[In relation to the preference allegations] whether CSIL was influenced by a desire to put Mr Gaffney and/or CSIL(UK) in a better position than he/it would have been in an insolvent liquidation.
[In relation to transfer of the carbon credits in March 2014] whether the value of the consideration provided by CSIL(UK) was significantly less than the value of the consideration provided by CSIL.
Whether Mr Gaffney's conduct in entering into the transactions amounted to a breach of the duties owed to CSIL under ss 171, 172 and 174 of the Companies Act 2006. If so, whether he ought to be excused under s 1157.
Evidence
As with many insolvency applications this case is document heavy with over 1,000 pages of documents.
In addition to the documents I heard evidence from four witnesses of fact. On behalf of the Administrators evidence was given by Mr Wainwright, one of the joint administrators, and Mr Green, a director of Home Group, one of CSIL's principal creditors. On behalf of Mr Gaffney and CSIL(UK) evidence was given by Mr Gaffney and Mr McKenna. Mr McKenna is a Chartered Accountant who was closely involved in the affairs of CSIL, CSIL(UK) and Mr Gaffney. He acted as accountant to each of them, prepared the VAT returns, the annual accounts. He also prepared the cash flow forecasts, the management accounts and the aged debtor analysis to which I was referred during the course of the case.
In addition the Administrators called Mr Kimber as an expert in relation to the value of the carbon credits sold in March 2014. Mr Kimber worked for British Gas for 31 years. He has over 15 years experience in the low carbon/energy company obligation sector. Since March 2013 he has been a partner in AgilityECO. A major part of its business is the supply of ECO credits to energy companies.
Gratitude
Before dealing with the judgment in more detail it is right that I should acknowledge with gratitude the very considerable assistance I have had from the Counsel and solicitors involved in this case. In a document heavy and factually detailed case such as this I was guided through the detailed facts with considerable skill by each Counsel. Furthermore I received detailed skeleton arguments and written closing submissions which have been of considerable assistance in the preparation of this judgment. I also acknowledge with gratitude the provision at short notice of electronic copies of all the relevant documents in...
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