Court of Appeal unanimously upholds appeal from GBP115 million preference judgment arising from the Comet insolvency

Last week marked another instalment in the notorious insolvency of Comet Group plc (Comet) when the Court of Appeal unanimously set aside the decision of the High Court at first instance which, at the time, was claimed to be the largest successful preference claim in value, resulting in Darty Holdings SAS (successor to Kesa International Ltd (KIL)) being ordered to pay approximately GBP90 million to the liquidators of Comet.

In November 2022 Falk J held that a repayment of an unsecured debt to a connected party nine months before it entered administration amounted to a preference pursuant to section 239 of the Insolvency Act 1986 (Act). The connected party being its sister company KIL and the unsecured debt being an intra-group debt which was repayable by Comet pursuant to the terms of a sale and purchase agreement dated 9 November 2011 (SPA). Notably, however, Comet was not a party to the SPA and as such, it was not contractually obliged to make the repayment. Rather, Kesa Holdings Ltd had agreed to procure that Comet would make the said repayment; and repayment of the debt was formally approved by Comet’s board on 3 February 2012.

In accordance with section 239 of the Act, a company is said to give a preference where it does something or allows something to be done which puts a creditor, surety or guarantor in a better position than they would be if the company went into an insolvent liquidation and the following criteria applies:

• Relevant Time: The preference must have been given within six months of the commencement of administration or liquidation (and this is extended to two years if the parties are connected – as was found to be the case with KIL and Comet in a preliminary hearing);
• Insolvency: At the time of the alleged preference, the company must have been insolvent or it must have become insolvent as a result of the preference; and
• Desire to Prefer: Crucially, a company must have been influenced by a desire to put the recipient of the preference in a better position than would otherwise have been the case in the company’s liquidation and where parties are connected (as was the case in this instance), the desire to prefer is presumed but may be rebutted by evidence to the contrary.

In terms of the latter, the statutory question is therefore whether an “operative” decision was influenced by a desire to prefer. It follows that when assessing whether a desire to prefer is present, determining when the operative decision was made is paramount and this will be determined by the facts in each case.

At first instance, Falk J determined that (1) a decision to repay the intra-group debt owed to KIL had been made at the time of entry into the SPA and not when repayment of the intra-group debt was formally approved by Comet’s board, (2) Comet was perceived to have “no separate interest” to that of the Kesa group which had been driven entirely by “a desire for a clean break” and as such, it had a desire to ensure repayment of the intra-group debt and (3) the decision to repay had therefore been made on behalf of Comet at the time the SPA was entered into.

To the contrary, the Court of Appeal held that (1) there was no basis in the evidence for the judge’s “inferential finding” that a director acting for the Kesa group in negotiations (who was clearly motivated by a desire to prefer) made a decision on behalf of Comet, (2) the only operative decision in respect of the repayment of the intra-group debt was that which was made at Comet’s board meeting in 2012 when it formally approved the repayment and (3) it was accepted that the decision made on that date had not been influenced by a desire to prefer and as such, there could be no preference in accordance with section 239 of the Act. The Court of Appeal did acknowledge, however, that an operative decision can be conditional but a decision which is subject to board approval or subject to contracts being exchanged would not amount to an operative decision.

Conclusion

GRR has reported that the liquidator tasked with investigating potential preference claims on behalf of Comet’s creditors had earlier this year obtained a court order to release GBP32.8 million of the original award to pay litigation funders and meet legal costs. To that end, it is no surprise that the liquidator is also reported to be seriously considering seeking permission to appeal to the Supreme Court.

The decision of the Court of Appeal, whilst offering clarification in terms of what constitutes an “operative” decision for the purposes of section 239 of the Act, seems to validate and some might go as far to say “rubber stamp” the actions of parties who carefully choregraph transactions to avoid future preference claims. Such actions being contrary to the sanctity of the pari passu rule in a company’s winding up. Therefore, to the extent that the liquidator does seek permission to appeal to the Supreme Court, it will be interesting to see what approach it takes – Watch this space!

The Judgment is available at: [2023] EWCA Civ 1135