Evans v Jones

Corporate insolvency – unlawful dividends – preferences – inability to pay debts – s. 123 and s. 240(2) Insolvency Act 1986.

Mr and Mrs Jones ran a property development company, R Ltd. As developments were sold off R repaid to them loans they had made to the company. It also paid them an unlawful dividend of £75,000. R Ltd entered insolvent liquidation. All payments were made shortly before the onset of insolvency.

Mr and Mrs Jones accepted that the payments, including belatedly the dividend, were preferences but argued that at none of the relevant dates was the company insolvent. The trial judge agreed. He held that at all times Mr and Mrs Jones held the unlawful dividend on trust for the company. Therefore, it was an asset of the company which, when taken into account, meant that R Ltd’s assets exceeded its liabilities on all the relevant dates.

The Court of Appeal disagreed.  The claim for repayment of the dividend was a contingent asset, depending on matters like whether the company became insolvent and who was in charge of it. Mr and Mrs Jones were not aware the dividend was unlawful and would not have caused the company to recover it. The court held contingent assets are not to be taken into account in assessing solvency for the purposes of section 123 of the Insolvency Act 1986, applying BNY Corporate Trustee Services Ltd v Eurosail-UK [2013] 1 WLR 1408 (SC),  particularly at first instance per Sir Andrew Morritt C [2011] 1 WLR 1200 at [30]).

Further, however liberal an approach to the use of hindsight is permissible, it is not permissible to rewrite history. The judge’s approach in regarding the claim for repayment of the dividend involved a number of counter-factual assumptions: that the unlawfulness of the dividend was known at the time; that someone would have pursued the claim prior to liquidation; that the Jones would not have disputed the claim; and that the money would be recovered from them without cost. None of these were the case.

The Court of Appeal’s judgment makes clear that judges must not approach the statutory test in section 123 mechanistically, but instead in a way that has regard to common sense and the commercial reality of the company’s position.