Putting assets out of reach of creditors—Re Barons Finance Ltd (in liquidation)

What happens when the directors of a company in liquidation refuse to cooperate with the liquidator and/or a company—prior to liquidation—seek to put assets out of reach of the company’s creditors? Felicia Davy, a barrister at Thomas Bingham Chambers, advises that provisions of the Insolvency Act 1986 (IA 1986) provide a useful mechanism by which to defeat such conduct and should be readily deployed.

Original news

Re Barons Finance Ltd (in liquidation) [2015] EWHC 2007 (Ch), [2015] All ER (D) 126 (Jul)

A company had assigned its book debts and gone into liquidation. The liquidator applied to have the assignment set aside. The Chancery Division allowed the application as, on the evidence, the assignment had been fraudulently backdated and was automatically avoided under IA 1986, s 127 as having occurred after the winding-up petition had been presented against the company.

What was the background to this case?

The case involved a company in liquidation (BFL) that had been in the business of money lending. Many of the loans made by the company prior to liquidation were subject to the requirements of the Consumer Credit Act 1974 (CCA 1974) meaning that if the loans failed to comply with CCA 1974, the loans would be unenforceable without retrospective validation by the Financial Conduct Authority. This has been the subject of numerous linked cases.

In this case, following a winding-up order made against BFL, the liquidator sought information from the third respondent (G) as to the value of all debts owed to the company, whereupon he was told that the entirety of the company’s book debts had been assigned to the first and second respondents six months prior to the winding-up order having been made and before the winding-up petition had been presented. Consideration for the assignment was the payment of a debt owed by BFL to a third party. On the face of if, notwithstanding any potential issues as to enforceability of some of the loans, the assignment of the book debts had been at a significant undervalue. Given the timing of the purported assignment in relation to the winding-up order, the liquidator also maintained that the assignment had been fraudulently backdated and had in fact occurred after the presentation of the winding-up petition and was therefore void under IA 1986, s 127. Alternatively, if not so backdated, that the assignment should in any event be set aside under IA 1986, ss 238, 239 and 423.

What were the legal issues that the judge had to decide in this application?

The legal issues were:

• whether the assignment of BFL’s book debts was void and/or liable to be set aside by IA 1986, ss 127, 238, 239 and 423

• whether any adverse inference could be drawn from the fact that the third respondent failed to give evidence when he might reasonably be expected to

• whether the respondents could rely upon the potential unenforceability of the loans in relation to the application under IA 1986, s 238 while at the same time continuing to seek to enforce the loans

Why did these issues arise?

Because of the circumstances in which the book debts had purportedly been assigned, the fact that the assignment had the effect of putting out of reach any assets which could be realised for the benefit of the company’s creditors and on the face of the transaction it fell foul of various of the provisions of IA 1986 as identified above.

What were the main legal arguments put forward?

The main legal arguments are referred to above. In addition, the submissions made in para [3] of the judgment, were as follows:

3.1 That the assignment was made after the presentation of the petition and has been fraudulently backdated. It is therefore void under s 127 of the Insolvency Act 1986.

3.2 Alternatively: That it should be set aside under s 238 as a transaction at an undervalue.

3.3 That it be set aside under s 239 as a voidable preference.

3.4 That it be set aside under s 423 as a transaction to defraud creditors.

What did the judge decide, and why?

On the evidence and directing himself in accordance with the criminal standard of proof given the allegation of fraud, as a matter of fact the judge found that the assignment had been fraudulently backdated. It followed therefore that the transaction was void under IA 1986, s 127. However, the learned judge went on to find that the transaction was also caught by IA 1986, ss 238 and 423 and was therefore liable to be set aside in any event. In relation to IA 1986, s 239, the learned judge made no finding, it being unnecessary to do so in the circumstances.

What practical lessons can those advising take away from the case?

The judgment serves as a useful reminder of the options open to a liquidator (and an administrator except in relation to claims under IA 1986, s 127) in seeking to challenge transactions which would otherwise have the effect of putting a company’s assets out of reach when seeking to realise assets for the benefit of the company’s creditors.

Where the directors of a company in liquidation refuse to cooperate with the liquidator and/or a company—prior to liquidation—seeks to put assets out of reach of the company’s creditors, the above provisions of IA 1986 provide a useful mechanism by which to defeat such conduct and should be readily deployed. At the same time it may be possible to obtain an order from the court which will ensure the liquidator is provided with the necessary information and/or documentation to ensure compliance by companies in liquidation and their directors.

Felicia Davy specialises in complex fraud (criminal and civil), financial crime and regulatory offences. She is frequently instructed in high profile cases, including actions brought by the Serious Fraud Office, Serious Organised Crime Agency, Financial Conduct Authority, HMRC and the Assets Recovery Agency. In addition, Felicia often advises regulated individuals and corporate clients in respect of pending investigations and/or proceedings in which parallel regulatory and criminal proceedings may be brought. She also appears before the Companies Court on behalf of liquidators in cases where suspected fraudulent conduct and/or breaches of IA 1986 are alleged.

In Barons Finance, Felicia was counsel for the liquidator.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

Restrictions on dispositions of property once a winding-up or bankruptcy petition has been presented

Validation orders

Witness statement in support of an application by a liquidator for a declaration that a transaction has breached the Insolvency Act 1986, section 127

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency