5th August 2013

Antecedent Transactions in Corporate Insolvency: Casa Estates and commercial decision-making in the wake of Eurosail

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5th August 2013

Antecedent Transactions in Corporate Insolvency: Casa Estates and commercial decision-making in the wake of Eurosail


Whilst wading through my inbox on return from holiday I discovered a link to a quite extraordinary High Court judgment handed down on 31 July.  It was flagged as the first reported decision applying the Supreme Court’s Eurosail analysis (see our insolvency blog dated 14 May) in an antecedent transaction case.  Undervalue and preference claims are part of the bread and butter of an insolvency practice, and we will typically be running several at once, both for applicant IPs and respondent individuals and companies so – as it is generally a defence to such claims if the circumstances at the time do not qualify the company to be deemed “unable to pay its debts” – such a case could not be overlooked.  I was expecting this latest case – Casa Estates UK Ltd [2013] EWHC 2371 (Ch) (click here for judgment) – being only at first appeal level, to defer greatly to the Supreme Court and thus to be quite a quick read.

What I found instead was that I was swept along with this massive 131 paragraph analysis of what really amounted to little more than a successful first appeal by a liquidator against the earlier dismissal of his (c£100k) undervalue (and initially preference) claims on the grounds the company was not insolvent at the time.  The sums the liquidator was pursuing were not unusually high, the circumstances not horrendously complex (although there had been at least two experts before the County Court below), and the facts not uncommon.  There were all the usual suspects; the loan asset of dubious value, the recipient claiming entitlement to remuneration or dividends or both, the failure to segregate client deposits and (my particular favourite) the liability to repay directors loans which (it was suggested) might never have been called in.

The chief premise for the appeal was that the Judge had erred in law by applying (through no fault of his own of course) the “point of no return” test, which was later found to be flawed and rejected by the Supreme Court in Eurosail.  The main question in the case was whether, on the proper analysis which confirmed that a company could be balance sheet insolvent despite being cash flow solvent, the company in question was or was not in fact insolvent at the time of the antecedent transactions of which the liquidator complained.  Much play was made by Mr Justice Warren in the judgment of the fact that the receiving party here (Mrs Bucci) was a connected party and that the law accordingly shifted the burden of proof onto her to discharge, by her evidence, a statutory presumption that the company was unable to pay its debts at the time of the transactions, or as a result of them.

So what was so extraordinary about the judgment? Well, it was inevitably fact based and the facts were actually quite interesting, but I do not propose to dwell on them here.  No, the chief reason I find this case noteworthy is that it demonstrates how a quite normal insolvency application with a relatively narrow field of dispute can give rise to what has now become a really heavyweight – and doubtless now very expensive – case.

I do not know from reading the appeal judgment alone what efforts were made by the parties to settle this particular case before issue or after first instance judgment, whether there is a prospect of a further appeal, whether the judgment debtor has the means to pay, or what net benefit there will be to the estate after unrecoverable costs are deducted. Clearly the parties will not have gone before the County Court expecting the Supreme Court to reinterpret the existing law shortly after the County Court Judge had decided the case in the recipient’s favour, but anyone involved in the application of insolvency law knows it is – compared with some at least – a pretty organic instrument.  Quite apart from the regular risk of judicial reinterpretation, UK governments, European institutions and others seem continually determined to change the shape of the relevant laws and policy considerations.  The insolvency profession works very hard to keep up, but tensions of rights and responsibilities are inherent to any regime where there is simply not enough money to go around.

At the end of the day, we are all about recycling and returning to creditors as much value as we can, as quickly as we can and getting tied up in the courts unnecessarily is often counter-productive.  We must of course examine potential claims assets thoroughly and consider all appropriate claims and defences, but we must do so not only well but wisely.  It is no more in the creditors’ interests to pursue claims for the sake of form over substance and obtain a Pyrrhic victory than it is in the respondents’ interests to bury their heads or resist serious and reasoned insolvency claims tooth and nail and obtain a hefty adverse costs bill.  Insolvency practitioners are highly trained in seeking commercial solutions to insolvency problems, and those skills should be applied equally to actual and contemplated litigation, analysing the strength of the claim with an appropriate legal team in the same manner as one would engage an agent to market other property and front-loading the evidence process so as to avoid so far as possible any unwelcome surprises down the road.  From the prospective respondent’s point of view, unnecessary costs following an insolvency procedure can often be avoided by ensuring the adequacy of company records and decision-making beforehand, and by seeking to establish a meaningful dialogue with the relevant insolvency practitioner early on (protected as appropriate with qualified legal input to preserve confidentiality).  Both sides of the equation are likely to benefit from engaging in principled, genuine overtures towards compromise as early as possible in the process before the prospects of settlement become hampered by the costs of contested first instance and appeal hearings.

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