Preferences—rebuttable presumption fails to save the day (Re O’Shaughnessy (Deceased); Abdulali (trustee in bankruptcy) v Finnegan)

Preferences—rebuttable presumption fails to save the day (Re O’Shaughnessy (Deceased); Abdulali (trustee in bankruptcy) v Finnegan)

Preferences—the rebuttable presumption does not lead to easy victories, even when a key witness is missing. A businessman juggling the many (and perhaps usual) pressures of an insolvent business he is seeking to save is perfectly possible to have no regard to preferring anyone, even an associate. A judgment based on sound findings of fact and a fair analysis of the relevant statute and case law is unlikely to be appealable. Written by Mark Sands, personal insolvency partner at Quantuma LLP.

Re O’Shaughnessy (Deceased); Abdulali (trustee in bankruptcy) v Finnegan and another [2018] EWHC 1806 (Ch), [2018] All ER (D) 133 (Jul)

What are the practical implications of this case?

It is tempting to see a case where a rebuttable assumption works in your favour as a strong case, especially where a key witness is expected to fail to give evidence. This case is a reminder that a rebuttable presumption is but one side of the coin. Insolvency practitioners and their legal teams need to gather and consider all the (perhaps limited) evidence before deciding whether to issue proceedings and not simply rely on a rebuttable presumption. When you weigh up what the court may decide, if the rebuttable presumption is needed to tip the prospects of success in your favour then you may not have a strong case and so it may in effect be decided on the toss of a coin.

The district judge at first instance, approved by Birss J on appeal, almost used the ‘sunshine test’ (see Re White & Osmond (Parkstone) Ltd (unreported, 30 June 1960)). Practitioners should bear that in mind when debating which desire most influenced a debtor (or company). A debtor busy trying to save his business is often influenced by those desires rather than worrying about what may happen to one or other creditor if his business fails.

I suggest there is nothing wrong for a debtor ‘who genuinely believe that the clouds will roll away and the sunshine of prosperity will shine upon them again and disperse the fog of their depression are not entitled to incur credit [or repay credit?] to help them get over the bad time’ (as per Buckley J in Re White & Osmond (Parkstone) Ltd).

What was the background?

Birss J was asked to consider whether the district judge at first instance was right to decide that the debtor was not influenced by a desire to prefer the respondent, despite the respondent being an associate of the debtor and thus the rebuttable presumption applied, that the debtor was indeed so influenced.

The payment of the debt (so a preference in fact) arose from a new loan brokered by the respondent from a company he controlled at a time when the debtor was insolvent and seeking to keep his business interests afloat and his creditors at bay. While it was not a term of the new loan that the loan to the respondent was repaid, the two events were so closely connected as to bring into play the question of which element or elements of the transactions influenced the debtor the most in his deciding to pay the respondent.

Unfortunately, by the time of the trial the debtor had passed away. As he had not been questioned on this matter prior to his passing, no evidence was able to be considered from the debtor, who would usually be the key witness, as it is the question of how his decision to pay the respondent was influenced, which is the key in such cases.

What did the court decide?

The district judge at first instance had decided that the debtor was influenced by the desire to pay his creditors and ‘keep the ship afloat’, rather than by the desire to prefer the respondent. The judge did not even consider it to be one of the factors which influenced the debtor.

Birss J was asked to consider whether the district judge, in finding that the debtor was influenced by a desire to obtain the new loan, was justified in finding that the debtor was not also influenced by a desire to prefer the respondent, and that the desire to prefer was outside a range of proper considerations by which the debtor may have been actuated.

The appeal failed and the decision of the district judge at first instance was upheld. The findings of fact and the manner in which the district judge applied those to the relevant law was sound. Birss J explored the way in which a court should review the various competing desires which may be present, and found there was nothing inconsistent with the judge’s findings, which included that the debtor was influenced by a desire to keep his business afloat.

Case details

Court: High Court (Chancery Division)

Judge: Birss J

Date of judgment: 17 July 2018

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.