570 gathering and distributing the assets

honest and independent liquidator just because he had fallen short of the ideal in one or two respects.222 It has been questioned, however, whether this approach meets Article 6 requirements.223 Suggested areas where liquidators may face HRA attack have included: preventing trading by presenting a winding-up petition;224 exercising investigative powers;225 and using confidential statements.226 The potential impact of the HRA should not, however, be exaggerated since the concept of ‘justifiable interference’ will shield the decisions of many office holders, as will the usual array of informational, evidential and resource restraints that limit challenges through court action.

If Wheeler’s portrait of the creditors’ meeting rings true and there is less to creditor scrutiny than meets the eye, what is to be done? Here it could be argued that the answer is not to increase levels of judicial oversight: that would do little for the less well-informed and less wellpositioned creditors and might do much to increase costs and delays. The appropriate response may be for the IP profession to police its professional standards more rigorously so that greater attention is paid to informing creditors and listening to them rather than holding them at a distance by conducting an arcane ‘players’ dialogue’.

Fairness

Avoidance of transactions

Fairness in liquidation demands that the general body of creditors be protected from dispositions of the company’s assets in the period leading up to liquidation which confer improper advantages on certain creditors or other parties. It demands that the collective nature of the insolvency process be protected.227 The law on the avoidance of transactions,

222See AMP Enterprises Ltd v. Hoffman (The Times, 13 August 2002). For an instance of the court’s ordering the removal of a liquidator in the absence of evidence of misconduct – but on grounds that it was unlikely that the liquidator would pursue the directors with sufficient rigour – see the Court of Appeal in Re Keypack Homecare Ltd [1987] BCLC 409.

223See Simmons and Smith, ‘Human Rights Act 1998’, p. 170.

224Insolvency Act 1986 s. 127.

225Ibid., ss. 235–6; see Re Esal Commodities Ltd [1988] PCC 443 at 457–8.

226Insolvency Act 1986 s. 236. See Simmons and Smith, ‘Human Rights Act 1998’, p. 170.

227For an example of a court preferring a petition to wind up rather than one for an administration order because the former brought the independence and objectivity of the Official Receiver and more collective control over choice of any liquidator in succession see El-Ajou v. Dollar Land (Manhattan) Ltd [2007] BCC 953.

gathering the assets: the role of liquidation 571

accordingly, seeks to protect collectivity and the principle of pari passu distribution and to deal with the unjust enrichment of a particular party at the expense of the general body of creditors.228 This section of the chapter discusses the major avoidance provisions that are found in the Insolvency Act 1986, namely: preferences (sections 239–41); transactions at undervalue and transactions defrauding creditors (sections 238, 240–1, 423); and avoidance of floating charges (section 245).

Preferences

A preference occurs when a creditor – to the detriment of other creditors – receives more from a company before it goes into liquidation than he or she would have obtained in a formal distribution in liquidation. The broad aim of preference law is to ensure the fair treatment of creditors in a liquidation, but it can also be claimed that preference laws increase the assets available for distribution to creditors by protecting the collective nature of the liquidation process.229 Preference laws may thus be thought to discourage the piecemeal dismembering of the estate in the lead up to liquidation and thus to maximise its value. As Prentice points out, however,230 preference law claws back transactions only where there is a desire to prefer and this means that the law will only deter such dismembering if the parties involved are aware of the impending insolvency of the company.231

pp. 16–17. On different bases for the preference provisions see McCormack, ‘Swelling Corporate Assets’, who suggests three possibilities: ensuring fairness between creditors; preventing premature collapse of the company; and protecting the collective nature of liquidation proceedings. A fourth potential ground might be ‘preserving commercial morality and the prevention of fraud’: see Lord Mansfield in Alderson v. Temple (1768) 98 ER 1277, 1279, discussed in McCormack ‘Swelling Corporate Assets’, p. 44.

230Prentice, ‘Some Observations’, p. 443.

231Directors may, however, fear that if they grant a preference they may be vulnerable to a disqualification order under the Company Directors’ Disqualification Act 1986 Sch. 1, Part 2, para. 8 which makes preferences relevant in assessing unfitness to take part in the management of the company: see ch. 16 below.

572 gathering and distributing the assets

Under the terms of the Insolvency Act 1986 sections 239–41, a liquidator can successfully challenge a transaction as a preference by showing that: the transaction was entered into within six months of insolvency,232 or within two years if the defendant is a person ‘connected with a company’;233 the recipient is a creditor, surety or guarantor of any of the company’s debts; the company does anything which places the recipient in a position that, in the event of the liquidation, will be better than the position he would have been in had the thing not been done; the company was influenced in deciding to enter into the impugned transaction by a desire to make a preference; and at the time of, or as a result of, the preference the company was unable to pay its debts and was insolvent within the meaning of the Insolvency Act 1986 section 123.

A controversial aspect of the law here is its subjective basis, as seen in the need for the liquidator to show that the company was ‘influenced’ by a ‘desire’ to prefer. On this point, Cork examined the case for objectivity but concluded that proof of intention to prefer should be retained in the law and that ‘genuine pressure by a creditor should continue to afford a defence’.234 The law, said Cork, should be reluctant to allow the recovery of payments made to discharge lawful debts due and Cork considered that recovery was only justifiable if the payment was ‘really improper’. As critics have suggested, however,235 this misses the point since it may well be thought to be improper to subvert pari passu by preferring one creditor to another in the lead up to insolvency. What is clear is that the liquidator’s task in protecting both the estate and the principle of equal distribution is made harder by the need to show the influence of a

desire to prefer. On how dominant the section 235(5) desire to prefer must be, the case of Re M. C. Bacon Ltd236 casts some light. Millett J, in an

influential judgment, stated that it was not necessary to adduce direct evidence of the desire – which could be inferred from the circumstances of the case – but the desire must have influenced the decision or the transaction being attacked by the liquidator. It was not necessary to show that the desire was the only or the decisive factor behind the preference: it

232The onset of insolvency is defined in the Insolvency Act 1986 s. 240(3) as the date of the commencement of the winding up (at the time of presentation of the petition for winding up per s. 129(2) or the passing of the resolution for winding up in a voluntary winding up per s. 86). Administrators can also challenge preferences: s. 239(1) and (2).

233Insolvency Act 1986 s. 240(1)(a). 234 Cork Report, para. 1256.

235Prentice, ‘Some Observations’; Keay, ‘Preferences in Liquidation Law’.

236[1990] BCLC 324.

gathering the assets: the role of liquidation 573

might only be one of the influencing factors. In the case of preferences to persons connected with the company, there is some assistance for the liquidator in section 239(6) of the Insolvency Act 1986 which creates a (rebuttable) presumption of a section 239(5) desire to prefer.237

The use of a subjective test here has been dubbed ‘unrealistic and unreasonable’.238 It is always difficult for a court to ascertain subjective motive239 and especially problematic in the case of a corporate body with no easily identifiable mind.240 The courts have proved reluctant to make inferences concerning the mind of the debtor company241 and, in many cases, troubled companies make payments to creditors not in order to execute a preference but in order to ease creditor pressure or to ensure continuity of business activity.242 If, accordingly, the creditor is not a ‘connected’ person, the liquidator faces an uphill task in establishing the desire to prefer as well as the company’s insolvency.243

A further difficulty for the liquidator is that a payment to a creditor may be made when a company is acting in a disorganised fashion. In this confusion it may be especially difficult to show the influence of a desire to prefer and it can be argued that fairness – through protection of pari passu distribution – is as deserving of protection from transfers that are unthinking as from those that are designed to prefer.244 The argument for a subjective approach is weak if couched simply in terms of Cork’s desire to see companies pay ‘lawful debts properly due’.245 Cork also argued that the diligent creditor ‘might in principle be allowed to retain

237See e.g. Re Cityspan Ltd; Brown (Liquidator of Cityspan Ltd) v. Clark [2008] BCC 60 where the liquidator’s claim was successful and the director was ordered to pay a sum to the liquidator, with interest at base rate plus 1 per cent; Weisgard v. Pilkington [1995] BCC 1108 where directors failed to rebut the presumption of a desire to prefer. In Re 38 Building Ltd [1999] BCC 260 the family beneficiaries of a trust executed by a troubled family company were held not to be preferred connected persons since the trustees of the fund were collectively to be treated as creditors for the purposes of s. 239.

238Keay, ‘Preferences in Liquidation Law’.

239As recognised by the Cork Report at para. 1253.

240See Keay, ‘Preferences in Liquidation Law’, pp. 206–7; and more generally J. Coffee, ‘“No Soul to Damn: No Body to Kick”: An Unscandalized Inquiry into the Problem of Corporate Punishment’ (1981) 79 Mich. L Rev. 386.

241Re Beacon Leisure Ltd [1991] BCC 213; Re Fairway Magazines Ltd [1992] BCC 924; but see Re Agriplant Services Ltd [1997] BCC 842.

242Keay, ‘Preferences in Liquidation Law’, p. 207.

243See K. Offer, ‘Influential Desire and Dominant Intention’ (1990) 3 Insolvency Intelligence 42.

244On the centrality of protecting pari passu in preference law, see the Privy Council in Lewis v. Hyde [1997] BCC 976, 979. On pari passu see ch. 14 below.

245Cork Report, para. 1256(a).

574 gathering and distributing the assets

the fruits of his diligence’246 but this contention has limited force in the period leading to a liquidation: if accepted it gives the green light to a creditors’ race to collect. It encourages precipitous actions and it undermines the collective approach to liquidation with all its advantages of efficiency and fairness.

Cork also favoured adherence to the established legal rule that transfers made under pressure from creditors could be defended as there was no free intention to prefer in such circumstances.247 Again, however, the position is difficult to sustain as it undermines collectivity by rewarding those who indulge in a race to collect. The position invites creditors to apply pressure (again precipitately) and it favours more powerful creditors who are given an incentive to collude with companies to give the appearance of pressure.248

What, though, of the argument that an objective ‘effects-based’ approach to preferences is undesirable as it would make creditors nervous of having any dealings with the troubled company; that it would chill commercial activity in a generally undesirable way? In response, it can be said that financing for companies is not likely to be less forthcoming (or less continuing) under an effects rule than under a subjective rule that positively encourages them to demand repayment of their loan at the first sniff of trouble. Should the contrary prove to be the case, a ‘creditor’s defence’ rule could be introduced to protect transactions that are made in good faith as part of the ordinary course of business (a defence seen in some jurisdictions249 that adopt effects-based preference rules). This kind of rule should, however, not be endorsed without good cause since it makes the liquidator’s task of protecting pari passu distribution more difficult and, again, favours the powerful creditor.

246Ibid., para. 1256(b).

247Ibid., para. 1256. See Alderson v. Temple (1768) 6 Burr. 2235; 98 ER 1277; Scott v. Thomas (1834) 6 C&P 661; Re Liebert (1873) 8 Ch App 283; Smith v. Pilgrim (1876) 2 Ch D 127; Re FLE Holdings [1967] 1 WLR 140 (where it was indicated by the court that if the company mistakenly believed it had to pay because of the pressure its intention was not to grant a preference but to save itself).

248Keay, ‘Preferences in Liquidation Law’, pp. 211–12; I. F. Fletcher, ‘Voidable Transactions in Bankruptcy Law: British Law Perspectives’ in J. Ziegel (ed.), Current Developments in International and Comparative Corporate Insolvency Law (Clarendon Press, Oxford, 1994) pp. 307, 309.

249See New Zealand Companies Act 1955 s. 266(2); Countrywide Banking Corporation Ltd v. Dean [1998] BCC 105 (PC) (payment not in course of business but part of disposition of business).