Court Of Appeal Considers The Treatment Of Contingent Assets In Balance Sheet Test

Evans v Jones [2016] EWCA Civ 660

Executive Summary

The Court of Appeal recently considered an appeal from the liquidators of a property development company which went into creditors' voluntary liquidation. The company had made an unlawful dividend to its shareholders and the Court of Appeal considered whether the unlawful dividend should be treated as an asset of the company (being "something other than a dividend") for the purposes of considering whether the company was insolvent at the "relevant time" subsequent preferences were given.

Background

Property development company, Rococo Developments Ltd, went into creditors' voluntary liquidation on 21 April 2011 (the "Company"). The Company's two directors, Mr and Mrs Jones were also its sole shareholders who had made various loans to the Company, and were the respondents in the case.

The Company had entered into a building contract with WJG Evans Ltd ("Evans"). As the development was completed and units sold the Company repaid the various loans to Mr and Mrs Jones. Four such payments were made between 3 June 2010 and 18 March 2011 (being just over a month before the Company went into liquidation). In addition, the Company paid a £75,000 dividend to Mr and Mrs Jones on 1 June 2010 i.e. before the loan repayments.

It was accepted that each of the loan repayments counted as a "preference" for the purposes of sections 239 to 241 of the Insolvency Act 1986 (the "Act"), and were made within the period of two years ending with the onset of the Company's insolvency. However, the time a preference is made is not a "relevant time" for the purposes of those sections unless the company was unable to pay its debts within the meaning of section 123 of the Act or becomes unable to pay its debts within the meaning of that section in consequence of the preference.

In considering whether a company is insolvent, section 123 of the Act provides for a cash flow test of insolvency under section 123(1)(e), along with a balance sheet test under section 123(2). The balance sheet test provides that a company is deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

On 28 May 2010 Evans presented the Company with a final account for sums due of approximately £191,487 which the Company disputed. The matter was referred to adjudication and Evans was...