Preference Law in insolvency, liquidation and administration

What is a Preference for Insolvency Act purposes?

The folowing case involves an action for preference and misfeasance and illustrates the law in action in relation to a preference claim in a liquidation.



Chancery Division (Bristol District Registry)

Judge Weeks QC
(sitting as a judge of the High Court) 

Judgment delivered 26 October 1999

Winding up - Creditors' voluntary winding up - Withdrawal from company's bank account by director - Whether moneys held on trust by company for director - Conflicting evidence - Application for summary judgment by liquidator - Civil Procedure Rules 1998 (SI 1998/3132), r. 24.2

This was an application by the liquidator (Ray Purnell) of a public limited company for summary judgment under the Civil Procedure Rules 1998 ('CPR'), r 24.2 against a director of the company that the director should repay a sum withdrawn by him without consideration from the company's bank account a month before the company went into insolvent winding up.

The company, Close Encounters of the Best Kind plc, was incorporated as a public company on 28 July, and began trading in August 1995, providing a dating agency service by licensing franchisees to carry out that activity. It had a short life and never produced any audited accounts. The company's controller, the first respondent, 'C', held all but one of the 50,000 issued £1 shares and was a director of the company. The initial capital was only paid as to the quarter of the authorised minimum of £50,000. The company sold a number of franchises but disputes arose with one or more of the franchisees and on 10 June 1997 C caused the company to cease trading and sold all its assets, except a credit balance at the bank, to a company owned and run by his wife, the second respondent. On 17 June C withdrew £200,568 from the company's bank account. The company went into creditors' voluntary winding up on 21 July 1997. The liquidator attempted correspondence with C but found him uncooperative and received few replies. He did receive some replies from the company secretary and its solicitors, but these gave inconsistent and conflicting information.

The liquidator applied for summary judgment to recover the £200,568 plus appropriate interest, C's only defence could be that the money in the bank account was not the company's but was his money in the first place. C claimed in his witness statement shortly before the trial that the company had granted him a debenture in the sum of £470,000 for a deposit into the company's bank account on 12 December 1995, which debenture was later cancelled. He further claimed that by a trust deed dated 11 January 1996 the sum deposited into the account was held on trust for himself. The trust deed was purportedly signed, sealed and delivered by C in the presence of a party who could not be traced, and signed also by another director of the company and C's wife. The company's solicitor's correspondence to the liquidator did not mention the rescission or withdrawal of the debenture, made no reference to the trust deed and asserted that the debenture was outstanding and that unpaid interest on it had accrued and was used to pay the unpaid amount on the shares up to the authorised minimum capital.

Held, ordering summary judgment against C for £200,568 plus interest:

1. The court had to decide whether C's defence to the application for summary judgment coupled with the evidence adduced showed under CPR, r. 24.2, 'a real prospect of successfully defending the claim or issue'. The test was no higher than that for summary judgment under the Rules of the Supreme Court, O, 14. It was a severe matter to order summary judgment against a defendant who had not had his day in court with all the paraphernalia of a full trial. On the other hand the court should not be gullible and take patently incredible assertions as justifying the conclusion that there was a real defence to the action.

2. Following C's failure to respond to the liquidator's 23 letters to C and his advisors, C's witness statement was served just within the period allowed and for the first time referred to the rescission of the debenture and produced for the first time a copy of the trust deed of January 1996. No explanation had been given as to why C had not produced this vital document in response to any of the liquidator's repeated requests, where it had been in the interim and why there had been no reference to it on any previous occasion.

3. The defence as filed made no reference to the trust deed at all. The deed was apparently dated 11 January 1996 but here appeared no reason for a deed to have been executed at that time when, according to C's other evidence, the money was in his personal bank account and there was no occasion to have a trust deed. It was even more curious in that if C was correct about the validity of the trust deed, it provided a complete defence to the liquidator's claim to the moneys advanced two years before C's witness statement first mentioned a trust deed.

4. The other director of the company at a late stage verified his signature on the trust deed, but he had signed a witness statement at an earlier stage in which no mention was made to the meeting at which he was supposed to have attended rescinding the debenture and no mention made of any trust deed, C's explanation now for withdrawing the money was at odds with the company secretary's explanation to the liquidator's questions, which relied entirely on the debenture.

5. Again and again C had been given the opportunity to give an explanation of the withdrawal from the company's bank account and to produce all relevant documents. The trust deed was produced at the last minute out of C's hat with no explanation as to why he had not produced it before. C's evidence as to the trust deed was incredible. The court did not have to be gullible in these matters and there was no real prospect of C's defence succeeding. Summary judgment was ordered for the liquidator for the sum claimed of £200,568 with interest at the appropriate rate from 17 June 1997.

Stephen Davies (instructed by Meade-King, Bristol) for the liquidator Ray Purnell
Jane Giret (instructed by Trethowans, Southampton) for the first defendant. 
Tina Kyrakides (instructed by Hugh James, Cardiff) for the second defendant.

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