In a ruling that helps to define the concept of balance sheet insolvency, the High Court has upheld a liquidator’s plea that payments made to a property company director were made at a time when the company was unable to pay its debts and were thus recoverable by creditors.
The company was hit hard by the crash in the Dubai property market in 2008 and was wound up on its own petition with a deficit of more than £1.2 million.
In the two years preceding the company’s collapse, dividends and payments in respect of remuneration and pension contributions had been made to one of the company’s directors. The liquidator sought recovery of those payments on the basis that, when they were made, the company was already insolvent.
The liquidator’s arguments failed at the County Court, which found that the company had been trading profitably prior to the unforeseen crash in land values. In the judge’s view, when the payments were made to the director, the company had not reached ‘the point of no return’ in that it was not experiencing cash flow difficulties and could not be said to have been balance sheet insolvent.
Allowing the liquidator’s appeal against that decision, the High Court found that, on a correct analysis of the relevant accounts, the company’s assets were exceeded by its liabilities at the time that the payments were made to the director. The company was therefore ‘unable to pay its debts’ within the meaning of Section 123 of the Insolvency Act 1986 and the payments were recoverable by the liquidator under Section 238 of the Act.
Although not specifically deciding the point, the Court also inclined to the view that deposits and other clients’ monies held by the company at the relevant time were held on trust on the basis that they would be applied for authorised purposes only and were therefore not available to the company in shoring up its balance sheet. There would therefore have been a strong basis for a finding that the company was also cash flow insolvent at all relevant times.
If you are concerned about your company’s ability to meet its debts as they fall due or the behaviour of fellow directors is causing you disquiet, contact our dispute resolution team for advice on 0121 698 2200 or fill in our online enquiry form.
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