In the complex landscape of insolvency proceedings, one of the key concepts that frequently arises is that of preference transactions. Preference transactions, in the context of insolvency, refer to specific payments or transfers made by a distressed debtor to a particular creditor or creditors before entering into a formal insolvency process.

The underlying principle behind addressing preference transactions is to ensure fairness among creditors such that the “pari passu” principle is not offended. This ensures unsecured creditors receive distributions on a pro rata basis. Whether a transaction amounts to a preference always hinges on whether the operative decision, to repay a specific creditor, was influenced by a “desire to prefer”. The relevant statutory provision for this is Section 239(5) of the Insolvency Act 1986 – “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 a desire to produce in relation to that person the effect mentioned in subsection (4)(b).”

In a recent Court of Appeal case, Darty Holdings SAS v Carton-Kelly [2023] EWCA Civ 1135, the court overturned the High Court’s £115 million judgment against Darty Holdings (Darty). The Court of Appeal ruled that the operative decision, to repay an intra-group debt, was made on the board’s approval of the transaction and was not influenced by a desire to prefer.

Darty Holdings SAS v Carton Kelly

Context

Comet Group Plc (Comet) was part of a group of companies known as the Kesa group (Kesa Group). Kesa International Ltd (Kesa) was the group treasury company for the Kesa Group and financed Comet through a revolving credit facility. Comet was wholly owned by Kesa Electricals Limited (KE). As a result of a cross-border merger in 2018 Darty became the successor of Kesa.

Background

Comet ran into financial difficulties which were affecting the share price of KE. Acting on financial advice from Lazard and Merrill Lynch, KE decided that the best solution, both commercially and financially, was to sell Comet.

On 9 November 2011, KE entered into a sale and purchase agreement to sell Comet to OpCapita. Pursuant to the sale and purchase agreement, completion of the transaction (in effect, a condition subsequent of the 9 November 2011 agreement) was to take place on 9 February 2012. On completion of the transaction, the sale and purchase agreement required Comet’s board to enter into a completion agreement. The completion agreement, envisaged by the sale and purchase agreement, required Comet to repay the £115 million intra-group debt owed to Kesa.

Subsequently, Comet, who are now known as CGL Realisations Limited, entered into administration on 2 November 2012. On 3 October 2013, the administration converted to a creditors’ voluntary liquidation. As a result, Comet’s liquidator brought an application for relief against Darty in respect of the aforementioned preference.

Decision

The High Court originally concluded that under section 239(5) of the Insolvency Act 1986 the decision to enter into the sale and purchase agreement was influenced by a desire to prefer. On 9 October 2023, the Court of Appeal overturned the High Court judgment.

Discussion

The High Court judge had focused on the fact that the sale and purchase agreement was drafted in a certain way to facilitate the repayment of the intra-group debt. Therefore, the judge inferred that KE had contemplated the possibility of Comet’s insolvent liquidation by negotiating the repayment into the sale and purchase agreement.

The High Court had concluded that the operative decision was entering into the sale and purchase agreement on 9 November 2011. However, the Court of Appeal had found the operative decision was made on 9 February 2012 board meeting (with an almost entirely new board of directors by this time). The Court of Appeal had concluded that the decision to enter into the completion agreement was not influenced by a desire to prefer but solely to action the completion conditions in the sale and purchase agreement.

It is worth nothing that no breach of duty or misfeasance claims were brought against the directors in respect of the actual making of the payment, triggered by completing the agreement on 9 February 2012 (as required by the 9 November 2011 agreement).

Conclusions

The question of when and whether a decision to prefer was made is a question of fact to be determined in the particular circumstances of each case. When there are several decisions (and/or more than one potential trigger point) involved in the particular case, it is crucial to identify the operative decision.

Insolvency and Restructuring Partners Alejandro Worthington and Imran Aslam would be happy to assist if you have any questions.