Court of Appeal
24 September 1998
Before: Sir David Calcutt, QC, President,
Miss E Gloster, QC, and
The Hon M J Beloff, QC
IN THE MATTER OF PSD Enterprises Limited, en Désastre;
AND IN THE MATTER OF Miss Phyllis Eileen Barrett;
AND IN THE MATTER OF Article 17 of the Bankruptcy (Désastre)(Jersey) Law 1990 as amended.
Appeal by Miss Phyllis Eileen Barrett (‘Miss Barrett’) from the Order made by the Royal Court, dated 14 January 1998, upon an ex parte Representation of the Viscount lodged with the Royal Court on 7 March 1997, whereby it was ordered that Miss Barrett repay £25,234.00 (being £26,984.00. less £1,750.00 to which Miss Barrett is entitled as a preferred creditor for arrears of wages).
Advocate D G Le Sueur for Miss Barrett
Advocate JGP Wheeler for the Viscount
JUDGMENT
BELOFF, JA:
1. INTRODUCTION
The Appellant was at all material times the beneficial owner and Director of the PSD Enterprises Limited ("the Company"), a limited liability company incorporated under the laws of Jersey and carrying on business as "Balloons for Fun" and under the style of "Something Special" at 12 Beresford Street, St. Helier. Its major business was the retailing of greetings cards.
The Respondent is the Viscount, an officer with, inter alia, duties under the Bankruptcy (Désastre) (Jersey) Law, 1990 ("Désastre Law").
From 13 December 1994, through to 5 January 1995, the sum of £26,984 was paid to the Appellant by the Company - by way of 12 payments of differing amounts - the Appellant herself effected the relevant payments.
The Company was declared en désastre by its landlord on 13 April 1995.
On 14 January 1998, the Royal Court (the Deputy Bailiff assisted by Jurats Myles and Potter) found that the Appellant, on behalf of the Company, procured a preference within the meaning of Article 17 of the Désastre Law in respect of the payment to herself of the sum of £25,234.00 ("the impugned payments") (being £26,984.00 less £1,750 to which she was entitled as a preferred creditor for arrears of wages ("the arrears sum")) in preference to other creditors of the Company and ordered that she repay the said sums ("the decision") pursuant to Article 17(1) of the said Désastre Law.
By an undated Notice of Appeal (subsequently amended) the Appellant appeals from the decision.
2. THE LAW
Article 17
Article 17 of the Désastre Law provides, so far as material, as follows:
"Transactions at an undervalue and preferences
(1) Subject to this Article, where a debtor in respect of whose property a declaration has been made, has at a relevant time -
...
(b) given a preference to any person,
the Viscount may apply to the court for such order as the court thinks fit for restoring the position to what it would have been if that debtor had not entered into that transaction or given that preference, as the case may be.
…
(3) For the purposes of this Article a debtor gives a preference to a person if -
(a) that person is one of the debtors creditors or a surety or guarantor for any of his debts or other liabilities; and
(b) the debtor -
(i) does anything, or
(ii) suffers anything to be done,
which has the effect of putting that person into a position which, in the event of a declaration being made in respect of the debtors property, will be better than the position he would have been in if that thing had not been done.
(4) The court shall not make an order under this Article in respect of a preference given to any person unless the debtor who gave it was influenced in deciding to give it by a desire to produce in relation to that person the effect referred to in sub-paragraph (b) of paragraph (3).
(5) Subject to paragraph (6), the time at which a debtor enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into or the preference given -
...
(b) in the case of a preference which is not a transaction at an undervalue, at a time in the period of one year ending with that day.
(6) Subject to paragraph (7), where a debtor … gives a preference at a time mentioned in … paragraph (b) of paragraph (5), that time is not a relevant time unless the debtor -
(a) is insolvent at that time; or
(b) becomes insolvent in consequence of the transaction or preference.
(7) Paragraph (6) shall not apply to a transaction at an undervalue which takes place less than two years before the day of the declaration."
The definition of insolvency is to be found in Article 1(1) of the Désastre Law as
"the inability of a debtor to pay his debts as they fall due".
The law thus requires materially to a decision of the kind appealed against findings, inter alia, (1) that the debtor was insolvent at the time the impugned payments were made; (2) that the debtor had the desire to favour the payee-creditor over other creditors in the event of a bankruptcy ("the requisite desire").
3.ISSUES
The following issues arise in this appeal:
3. If so, did the Royal Court correctly apply the insolvency test and reach a correct conclusion on the evidence? ("insolvency test: application")
4.What is the proper approach to the test for the requisite desire? ("requisite desire test: approach").
5. Did the Royal Court correctly address the requisite desire test? ("requisite desire test: direction")
6. If so, did the Royal Court correctly (or at all) apply the requisite desire test and reach a correct conclusion on the evidence? ("requisite desire test: application")
4. THRESHOLD POINT
At the outset of his submission Advocate Le Sueur advanced an ingenious argument that since the Viscount did not accept that the Appellant was a creditor for anything other than the arrears sum, it was not open to him to contend that she was a creditor within the meaning of Article 17(3)(a) of the Désastre Law for the balance. The Viscounts preliminary position was that he had taken no final view on the Appellant's position as a creditor for the balance.
It seems to me that neither party can properly blow hot and cold. The Appellant cannot properly both claim to be a creditor, and then seek to take advantage of the fact that the Viscount may take a different view. (In any event, if she were not a creditor the impugned payments would be automatically repayable). The Viscount cannot properly assert that the Appellant is a creditor for purposes of Article 17 but resile from that position at any stage in the liquidation: upon reflection, Advocate Wheeler for the Viscount accepted the logic of that analysis. Accordingly, since both parties now accept that the Appellant is - and was - a creditor within the meaning of Article 17(3)(a), the threshold point wholly disappears.
5. DELOITTE & TOUCHE REPORT
As appears throughout its judgment the Royal Court placed heavy reliance on a report prepared for the Viscount dated 2 August 1996, by the well-known accountants Deloitte and Touche which was confirmed in the evidence of its main compiler Mr Wojkiechowski. It is convenient, therefore, to set out the salient portions of that report ("the DLT Report")
"1.1We have examined the records of the above company in order to establish whether the company was insolvent at the beginning of December 1994 or whether the company became insolvent as a result of the cash withdrawals made by the director Miss Phylllis Eileen Barrett ("Miss Barrett") in the amount £32,814.00 from the company during the period 1 December 1994 to 5 January 1995.
1.2Our work has been designed to enable us to calculate the net asset and creditor position of the company as at 1 December 1994 from the records available.
6.Position at 1 December 1994
6.5Known Liabilities
Creditors excluding Miss Barrett £44,229.23.
7.Insolvency
7.1The question of insolvency is not based on whether a companys net asset position is negative but is defined in the Bankruptcy (Désastre) (Jersey) Law 1990 as "the inability of a debtor to pay his debts as they fall due". Therefore a company is defined as being solvent if it can meet its liabilities as and when they fall due.
7.2In addition to the liabilities to third parties of £44.229.23 the company was due to pay rent on 25 December 1994 amounting to £8,035.50 in respect of the quarter to 25 March 1995 together with a £3,000 premium and was also liable in December for wages, excluding Miss Barrett, of £2,960.03. Therefore the company's liabilities to third parties falling due in December were £55,224.76.
7.3The companys takings in December, a month of traditionally high retail sales, were £46,956.16. Therefore, all of these proceeds together with the balance of cash of £4,942.08 which amounts to £51,898.24 would have been insufficient to repay the third party liabilities falling due in December 1994 of £55,224.76.
7.4Miss Barretts withdrawal of funds which were at least the amount she has admitted of £26,984 could only exacerbate the third party creditor situation since January takings could not reasonably be expected to be at this level. Takings from 1 January 1995 to the end of March 1995 amounted to £33,689.61, and liabilities rose to £164,253.63 and therefore creditors could not be paid. Third party creditors rose from £44,229.23 to £89,051.56. Indeed the rent of £8,035.50 referred to above was not paid until 15 March 1995 ten days before the next quarters rent became due for payment.
7.5Included in the minute book are notes of a Board Meeting held on Tuesday 10 January 1995. At this meeting Miss Barrett informed the members that:
"There are trade creditors of £59,204 total outstanding £76,584 approximately. In addition rent is due £8,436 and £3,000 premium which was agreed to be paid every December. The company has very little funds in the bank £1,200 approximately"
and
"The company needs a cash injection of £60,000".
8.Conclusion
We consider that Miss Barrett, as the director and operating manager of the company, should have been aware of the outstanding creditor position and cash balance at the beginning of December 1994 and also that the rent was due to be paid during that month. She should also be expected to have a reasonable idea of the projected December and January takings. The notes on the board meeting indicate that she was indeed aware of the financial position of the company in January 1995 and considered that the company required a significant injection of cash of £60,000.
In our opinion Miss Barrett was therefore aware of the financial position of the company before making major payments to herself. On that basis Miss Barrett could not have misunderstood that the action of withdrawing cash of at least £26,984 from the company ensured that the company would be unable to meet its liabilities as they fell due in that month and would be insolvent. Miss Barrett therefore failed in her duty as a director and was, in our opinion, exercising a preference over other creditors of the company."
6. INSOLVENCY TEST: APPROACH
The Deputy Bailiff in the case of In the Matter of the Application of Rosedale (JW) Investments Limited (1995) JLR at 123 stated the test at p.132 line 31 as follows:-
"The test of insolvency in law appears to us to be that of a cash flow test and not a balance sheet test. The cash flow test is concerned with the payment of debts as they fall due; the balance sheet test requires account to be taken of liabilities both contingent and prospective. There is an example of the cash flow test in art.56(a) of the Companies (Jersey) Law 1991 and of the balance sheet test in art.56(b) of that Law. Both tests are described in art.74(2)(b) of the Law and in art.176(6)(a) and (b). There are other examples. We do not need to cite them here."
Both parties accepted that this was the test.
7. INSOLVENCY TEST: DIRECTION
The Appellant alleges that it is, however apparent from the Judgment that the Royal Court in fact applied a "balance sheet test" as opposed to a "cash flow test" in finding that the Company was insolvent at the material times. She relies on the fact that at p.4, line 155, the Royal Court stated:
"From the figures produced to us the company had a net excess of liabilities over assets of £84,799.53 at 1st December 1994 …."
and other references to the balance sheet to like effect.
In my view, the references to the balance sheet as at 1 December 1994, (a convenient baseline) were statements of fact, not applications of law.
(1)The Royal Court had well in mind the Deloitte Touche report in which the salient paragraph 7.1 (quoted above) distinguished between the two tests and correctly identified which was correct, and which was incorrect. There were several passages in oral evidence in which Mr Wojchiehowski reaffirmed how he had understood the law e.g. "The test is (whether) you can actually meet your liabilities as they fall due, you may have assets, but may not be able to pay your liabilities".
(2)The Royal Court expressly stated at p.4 of its Judgment "as the law states, the question of insolvency is "the inability of a debtor to pay his debts as they fall due"."
(3)As a matter of common sense, the state of its balance sheet may be a powerful indicator of a Company's inability to pay its debts, instructive if not conclusive.
Professor Goode: Principles of Corporate Insolvency Law (1990) states at pp.26-27
"Under the cash flow, or commercial insolvency test, a Company is unable to pay its debts as they fall due. For this purpose the fact that its assets exceed its liabilities is irrelevant; if it cannot pay its way in the conduct of its business it is insolvent, for there is no reason why creditors should be expected to wait while the Company realises assets, some of which may not be held in readily liquidated form. The cash flow test is relatively easy to apply in practice, for the Court looks at what the Company is actually doing; if it is not in fact paying its debts as they fall due (ignoring cases where there is a bona fide dispute as to the indebtedness) it is assumed to be insolvent".
It is noteworthy that Professor Goode stresses that balance sheet solvency is not dispositive of cash flow solvency. He does not suggest that balance sheet insolvency may not be evidence of cash flow insolvency.
8. INSOLVENCY TEST: APPLICATION
Advocate Le Sueur for the Appellant correctly stated that the Royal Court must identify a state of insolvency at the date of each payment which it is sought to impugn as a preference. Non sequitur, however, that the Royal Court may not legitimately infer from a finding of a state of insolvency before (or indeed after) the date of such payment that such a state subsisted at the material date after or before as the case may be.
Although the DLT Report, (see e.g. paras. 6.5 and 7.2) could be read as assuming rather than concluding that the third party creditors referred to had debts which fell due at the material times, at para.7.5 it records that the Appellant herself at the Board Meeting on 10 January 1995 identified those creditors as trade creditors whose debts were due as at that date (see Minutes of Board Meeting). Further, in oral evidence, Mr Wojchowski explained "We looked at their (i.e. Creditors) statements as at the date of the désastre and again worked backwards only to take into account those debts that were due on the company as a debt on 1st December".
In her reply and statement, the Appellant stated "The liabilities falling due in December were £50,072". In the same minutes she identified the Company as "in need of a cash injection of £60,000" and the accuracy of this part of the minute was confirmed in her own letter to the Royal Court dated 13 January 1998.
It should also be noted, by way of tangible proof of the Companys insolvency, that the rent due on 25 December 1994 was not paid until 1 March 1995 (DLT Report para.7.2 and 7.4).
The Royal Court had such evidence well in mind (Judgment p.4 line 169) and its conclusion that "the (insolvency)test in law is fulfilled" seems to me to be unassailable. In so far as there was contradictory evidence from the Appellant, it was entitled (as was DLT) to be unpersuaded by it.
9. REQUISITE DESIRE TEST: THE APPROACH
Article 17(4) of the Désastre Law (which it is accepted by both parties for the purpose of this appeal is in identical terms to Section 239(5) of the Insolvency Act (UK) 1986) was construed by Millett J as he then was in the case of re M C Bacon Limited (1990) BCLC 324, as follows:
"It is not, however, sufficient to establish a desire to make the payment ... which it is sought to avoid. There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor's position in the event of an insolvent liquidation." (p.335)
and
"Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditor's position in the event of its own insolvent liquidation." (p.376)
Both parties accepted that this was the correct test.
10. REQUISITE DESIRE TEST: DIRECTION
The Royal Court cited the passages from the judgment of Millett J in Bacon which I have quoted above, and concluded:
"We must look at the transactions and decide whether the Company was motivated by proper commercial considerations or was desirous of improving the creditors position in the event of its own insolvency."
(cf. Willis v. Corfe Joinery (in liquidation) [1998] 2 BCLC 75 at p.77).
There can be no doubt that the Royal Court had the correct test well in mind: indeed the contrary was not argued.
11. REQUISITE DESIRE TEST: APPLICATION
There are in truth two separate sub issues under this heading:
First, did the Royal Court apply the test at all?
Secondly, if so, did the Royal Court apply it correctly?
It is these issues which have caused me the greatest concern. I must observe at the outset that, in my respectful view, it is incumbent upon the Royal Court in performance of its judicial functions not only to address the relevant issues, but to explain, however succinctly, what its conclusions on them were, and what reasons, particularly by way of analysis of evidence, supported those conclusions. Failure to do so, in my judgment, constitutes in this context an error of law.
Although I decline to infer that having addressed the requisite desire test so accurately the Royal Court then omitted entirely to apply it, I am bound to say that its judgment is silent on how it applied it, and what process of reasoning underlay its apparent conclusion that the requisite desire test was met. The English cases in the analogous area provide a guidance as to the degree of analysis and exposition appropriate Willis v. Corfe cit.sup. at p.72-82; Re Exchange Travel (Holdings) Ltd [1996] 2 BCLC 524, pp.540-543; Re Agriplant Services Limited [1997] 2 BCLC 598 at pp.609-611.
The English Insolvency Act of 1986 provides at Section 239(5) that"A company which has given a preference to a person connected with the company otherwise than by reason only of its being its employee at the time the preference is given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by a desire" - to borrow the Royal Court's phrase - "of improving the creditor's position in the event of its own insolvency".
Such a provision (which by itself might have resolved the issue, given the Appellant's position in the Company) is absent from Jersey law.
As Millett J said in Bacon at p.336 "There is, of course, no need for there to be direct evidence of the requisite desire. Its existence may be inferred from the circumstances of the case". I can, for my part, identify the following factors which were capable of giving rise to the conclusion that the Appellant had the requisite desire
(i)Her status in the Company;
(ii)The timing of the payments - postponed, it would seem, until the time of insolvency;
(iii)Her knowledge of the company's unhealthy financial situation (see e.g. the Minutes of the Board Meeting of 10 January 1995 and the associated material referred to above) (see further: Conclusions of DLT report, para.8).
(iv)The apparent lack of any commercial justification, from the Company's perspective, for the payments.
It might well be concluded that, appreciating the likely possibility of a shipwreck, she deliberately made off with the cargo at the expense of others equally entitled to a share of it.
However, Advocate Le Sueur drew our attention to countervailing factors which were capable of giving rise to the contrary conclusion.
(i)The Appellant had not paid salary to herself before making the impugned payments (reply and statement para.23) and had paid (some) trade creditors and staff before (ditto).
(ii)The Minutes of the 10th January 1995 Board Meeting do not suggest that bankruptcy was in anyones mind (including the Appellants); on the contrary plans were discussed in relation to management and ownership of the company which presumed its continued commercial existence. (Against this it could be said that the Appellant was keeping all her options open. Hope that a company may survive is not inconsistent with a fear that it may not - and the making of provision against the latter eventuality).
(iii)The Appellants knowledge of the Companys financial state would not be equated with a premonition of its bankruptcy. At worst she acted Micawberishly, not mala fides. She said "There was never any question of a désastre" (Her reply and statement para.14).
(iv)The Appellant was at any rate in her view paying herself only that which was her due (indeed overdue) "I was entitled to a regular payment of salary, as other employees, for the management of the company in its day to day activities" (ditto para.15).
In my view, it would have been (with the qualification to which I now turn) open to the Royal Court to make a finding either of requisite desire or of lack of it by adopting either of the lines of reasoning outlined above. The critical qualification is this. Even if the Appellants reply and statement may not have been evidence stricto sensu, they were accepted by the Royal Court as such: in the transcript the Deputy Bailiff said this "Now do you want to talk to us, do you want to say anything in addition to your statement, your reply, that you have filed with us because that's very helpful? Your reply and statement is there anything you want to add to that?. I think we have covered most of the points haven't we?". The Advocate for the Viscount did not demur from this approach.
In such a situation, in my view, the Appellant should have been treated as having given admissible evidence that she, as the moving spirit of the company. did not intend to give herself (as one of its creditors) a preference. In issue therefore was her state of mind: the Viscounts allegation against her was a serious one: legal consequences (other than the order to repay the money) could flow from a finding adverse to her. In my view, in such circumstances, it was incumbent on the Royal Court, if it was to make such an adverse finding, to do so on the basis that her evidence as to her purpose in making the impugned payments had been tested by cross-examination, and found wanting. It should have had regard in this context to the fact that she was a litigant in person and ensured that the procedures were observed which were fair to her and useful to the Court.
Whether the adverse conclusion apparently reached albeit sub silentio by the Royal Court without the benefit of such exercise would equally have been reached with it, I cannot say: it is for the designated Tribunal of fact to reach a conclusion one way or another, subject only to appeal. I am, however, ultimately unpersuaded that such apparent conclusion was fairly or properly reached, where the Appellant was not afforded, indeed even dissuaded from giving viva voce testimony, and where particularly no reasons are available to explain such adverse conclusion.
12. ORDER
For my part accordingly I would allow the appeal, and, in the interests of justice, order that the matter be reheard only on the issue as to whether the Appellant in procuring the impugned payments on the Company's behalf had the requisite desire. The issue of the Companys inability to pay its debts has been sufficiently investigated and ruled upon; the finding of insolvency at the material time should therefore stand.
I express the hope, although I cannot order, that oral testimony from and cross-examination of the Appellant would forms part of such rehearing. I also express the hope that, in any event, an appropriately reasoned judgment will be delivered, in my view, such is itself required by law.
I would only wish, additionally, to thank both counsel for their extremely helpful submissions.
CALCUTT, JA: I agree
GLOSTER, JA: I agree
Authorities
In the Matter of the Application of Rosedale (JW) Investments Ltd (1995) JLR 123 at 132
Re MC Bacon Ltd (1990) BCLC 324
Bankruptcy (Désastre) (Jersey) Law 1991
Insolvency Act 1986: ss 236-242
Companies (Jersey) Law 1991
Goode: Principles of Corporate Insolvency Law (1990): pp.26-7
Re Corfe Joinery Ltd [1997] BCC 511
Weisgard -v- Pilkington [1995] BCC 1108
Re Exchange Travel (Holdings) Ltd [1996] 2 BCLC 524
Re Agriplant Services Ltd [1997] 2 BCLC 598
Willis -v- Corfe Joinery [1998] 2 BCLC 75 at 77