Company – Liquidator – Legal charge — Respondent making loan to company towards purchase of property — Respondent requiring second charge over property as security for loan – Creditors winding up company – Applicant liquidator seeking declaration that second charge constituting preference in respondent’s favour — Whether arrangement creating equitable interest in or charge over property — Whether desire to make preference in respondent’s favour influencing decision to grant second charge — Applications granted
The company was incorporated in 2007 to purchase, redevelop and sell or let luxury residential properties; the respondent’s sister was one of its two directors and equal shareholder. The respondent agreed to lend it £300,000 for a term of one year, charging interest of 15% payable at six-month intervals. As security for the loan, the respondent required a second charge over the property for which the moneys were required.
In October 2008, the respondent discovered that the company was in financial difficulty and would be unable to pay the sums due. The respondent also became aware that the second charge in her favour had not been granted. However, in December 2008, with the consent of the bank, which had a first charge over the property, a second charge was granted in her favour.
The company was wound up in 2009 and the bank appointed receivers of the properties charged to it. The bank was repaid in full and the net surplus of £130,414.09 in respect of the property over which the respondent had a second charge was paid to her.
The applicant liquidator of the company applied to the court for a declaration that the grant of the second charge was a preference under section 239 of the Insolvency Act 1986. He also sought orders for the charge to be set aside and for the respondent to repay the sum paid to her so as to restore the position to what it would have been had the company not given that preference.
The questions for the court were whether: (i) the arrangement between the parties created binding obligations or created an equitable interest in, or charge over, the property; and (ii) the grant of the legal charge had been influenced by a desire to put the respondent in a better position in an insolvency liquidation within section 239(4)(b).
Held: The applications were granted.
(1) An exchange of e-mails between the respondent and her sister concerning the loan did not constitute or contain a contract but, at best, evidenced in part an oral agreement. In any event, the e-mails did not incorporate all the terms expressly agreed by the parties, as required by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, but stated that a further document would be drafted. Furthermore, no case had been made that, following the making of her loan, the respondent had any enforceable right to the grant of a security over the property or any equitable interest in the property following the completion of its purchase: North Eastern Properties Ltd v Coleman [2010] EWCA Civ 277; [2010] 2 EGLR 161 applied.
(2) The test of a preference under section 239(4)(b) was whether the act in question had the effect of putting a party into a better position, in the event of a company going into solvent liquidation, than it would otherwise have been. In the light of the decision that the respondent had acquired no security rights before the grant of the charge in December 2008, it followed that the test for a preference was satisfied; the respondent had thereby become a secured creditor. Further, even if the company had previously created an equitable charge, it would have been void for non-registration as against a liquidator or any creditor.
It was the decision to give a preference, rather than the giving of the preference, that had to be influenced by the desire to produce the effect set out in section 239(4)(b). Therefore, the “relevant time” for the purposes of section 239 was the date of that decision, not the date of the giving of the preference. The question of when the decision was made was a question of fact to be determined in each case. An existing contractual obligation was neither necessary nor sufficient: Re MC Bacon Ltd (No 1) [1990] BCC 78; Re Fairway Magazines Ltd [1992] BCC 924; and Wills v Corfe Joinery Ltd (in liquidation) [1997] BCC 511 considered.
Most preferences involved the payment of some debts in preference to others. All debts stemmed from an enforceable obligation to make the payment. If the decision to incur the debt, rather than the later decision to pay it, was the relevant time at which the company’s desire was to be judged, the payment of debts would rarely constitute a preference under section 239. There was no reason in principle why there should be a distinction between the payment of debts, on the one hand, and other obligations, such as granting a security, on the other. The same considerations applied. The position was stronger in the instant case, where the company was not subject to any enforceable obligation to grant the charge.
In the instant case, there was no evidence as to what discussions or decisions had taken place between October and December 2008, except that solicitors were instructed to prepare the charge during that period. That provided evidence that the decision had then been taken to grant the charge. In circumstances where there had been a delay of more than a year and where the company was under no obligation to grant the charge, and where the charge was granted only because the respondent had raised the issue, the reasonable inference was that the respondent’s sister, whether on her own or with her co-director, had decided that the company should grant the charge to the respondent.
The time for judging whether the company was influenced by a desire to improve the respondent’s position was therefore November 2008. Objectively it appeared likely that the sister wanted to improve the position of the respondent, but without calling the directors to give evidence, the respondent was unable to rebut the presumption created by section 239(6).
James Morgan (instructed by Freeth Cartwright LLP) appeared for the applicant; John Pennie (of Dickinson Dees LLP) appeared for the respondent.
Eileen O’Grady, barrister
