Geldards has acted for a successful appellant liquidator in the first case interpreting a landmark decision of the Supreme Court. The case goes to a question at the very heart of insolvency law, namely, when is a company deemed to be insolvent?
The case of Carman v Bucci  relates to a company called Casa Estates (UK) Limited (“Casa”), an estate agency for property in Dubai that enabled investors to buy “off plan” with the promise of significant returns.
This came to a halt with the financial crash of 2008 and it transpired that some of the investors’ money had not gone anywhere near Dubai but had benefitted the director’s wife instead.
The liquidator based his claims upon section 238 of the Insolvency Act 1986 (“IA 1986”), arguing that the director’s wife had done nothing to justify the payments made to her. The legislation provides that under-value payments or gifts made in the period of 2 years before the commencement of the insolvent liquidation of a company can be challenged if it can be shown that the company was insolvent at the time a payment was made, or that it became insolvent as a result of making it (section 240 IA 1986). Where the recipient is a connected party insolvency is presumed, unless solvency can be demonstrated by the recipient.
In his judgment following trial dated 17 December 2012, HHJ Purle QC found that the payments were all gratuitous and that nothing of value had been provided to Casa to justify the payments. However he also concluded (having rejected the evidence of both expert accountants) that Casa was not insolvent at the relevant times. Consequently the liquidator’s claim failed initially.
"Point of no Return"
HHJ Purle QC based his treatment of the test for insolvency upon the decision of the Court of Appeal in BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL PLC and others ("Eurosail").
The leading judgment in that case, by Lord Neuberger, had given rise to a "point of no return" test for balance sheet insolvency, a phrase which HHJ Purle QC used no less than 12 times in his judgment.
Prior to the Court of Appeal’s decision in Eurosail it was generally accepted that insolvency for unlawful payments could be demonstrated through evidence of creditor pressure (“cash-flow insolvency”) or a deficiency of assets over liabilities (“balance sheet insolvency”) at the time of or immediately after the relevant payment. Either would do. Evidence of creditor pressure tends to occur nearer the point of formal insolvency, but for more historic payments balance sheet insolvency was often easier to demonstrate.
The “point of no return" test in Eurosail (which HHJ Purle QC arguably misapplied in any event) threw into doubt not only what should be included on the hypothetical balance sheet (in terms of future or contingent liabilities) but also just how to show that the “point of no return” had indeed been reached, especially where the company only entered into formal insolvency many months later.
However, in May of this year the Supreme Court effectively discredited the "point of no return" test as it decided a final appeal in the Eurosail case.
On 31 July 2013, after hearing the appeal of Casa's liquidator, Warren J. gave a judgment (read here) in which he found that Casa had been insolvent at the relevant times when the test laid down by the Supreme Court and the statutory presumption of insolvency were properly applied. Consequently the liquidator was entitled to the relief sought from the director’s wife.
Carman v Bucci is the first interpretation of the Supreme Court’s decision as it applies in the context of section 240 of IA 1986 to claims by liquidators or administrators.
As such Warren J. went to great lengths to set out his reasoning and thought processes in applying what the Supreme Court had decided. Along the way he commented that “Moreover, Lord Neuberger’s practical concerns were an important element in driving him to the conclusion that the “point of no return” was the correct test. With that test having been rejected, the consequence may be that what Lord Neuberger regarded as an extraordinary result will be commonplace.”
As a result of Carman v Bucci the law in this area has been clarified (having previously been in a state of uncertainty as a result of the Eurosail case) which should make it easier for liquidators to overturn unlawful payments made by insolvent companies in the future. It should, however, be noted that Mrs Bucci has applied for permission to appeal to the Court of Appeal, although it is thought likely that permission will not be given.
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