ROYAL COURT OF JERSEY
(Samedi Division)
3 September 1999
Before: F C Hamon, Deputy Bailiff
and Jurats Myles and Potter
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 (desastre) (Jersey) Law 1990, as amended
Referral by Court of Appeal to decide whether Miss Barrett, in procuring impugned payments on the Company’s behalf,
had the requisite desire
Advocate J G P Wheeler for the Viscount
Advocate G Le Sueur for PSD Enterprises
and Miss Eileen Phyllis Barrett
JUDGMENT
THE DEPUTY BAILIFF:
On 24 September 1998 [1998.195]the Court of Appeal allowed Miss Barrett’s appeal and ordered in the interests of justice 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 Court of Appeal went on to say that "the issue of the company’s inability to pay its debts has been sufficiently investigated and ruled upon; the finding of insolvency at the material time should therefore stand."
In this rehearing, Miss Barrett has been represented by Counsel and she has given oral testimony upon which she has been examined, cross examined and re-examined. She also called as a witness her cousin Mr. Michael Newing. We have been addressed by both Counsel.
Paragraphs 9 and 10 of the Court of Appeal judgment read as follows:
"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.’
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.’
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."
The Court of Appeal in the course of its judgment said:-
"As Millet 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 10th 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 anyone’s 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 Appellant’s knowledge of the Company’s 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 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.
In this cause of this rehearing neither Counsel submitted a skeleton argument; we had an agreed bundle of documents. The Viscount called no witnesses. Miss Barrett, through her Counsel, gave sworn testimony.
Mr Michael Newing told the Court that, as Miss Barrett’s cousin, he has known her all his life. He had known of her business interests in Jersey for a long time but became actively involved in about September 1994. It was in April 1995 that PSD Enterprises Limited was declared en désastre. Mr. Newing had set up a computer and accounting system at Something Special. (Mr Newing’s company (Church Business Systems Consultants) filed a claim for £9,200 in the PSD désastre.)
After Christmas 1994, Mr. Newing, who was in close contact with Miss Barrett, noted a clear breakdown in the relationship between the existing directors. These were Miss Barrett, Mr Brian Madagan and Mr David Brokdorf. Mr Newing was prepared to invest from £50,000 to £60,000 in the business. He dealt with his cousin and attended the board meeting when the directors were present. The arrangements were made with Mr Madagan and the intention was to buy him out. That seems surprising when Mr Newing’s only insistence was that Mr David Brokdorf was not to be involved in the company. Heads of agreement were apparently prepared at a meeting in Croydon with Mr Madagan and his solicitor. It is difficult for us to understand how buying out of a director/shareholder would have enhanced the fortune of the company at all. We found the evidence of Mr Newing of little help in the matter that we have to decide.
Out of the cross-examination of Mr. Newing by Advocate Wheeler came a matter of which the Court was not aware. A previous company of which Miss Barrett was a director and shareholder had been declared en désastre in 1987 or 1988. The company was called Ski Meribel Limited and it traded as Jersey Tours, dealing with incoming tourists. As Miss Barrett later said:
"It was declared en désastre for very similar reasons as in PSD Enterprises. That was a travel company at the time which traded on a seasonal operation and basically we had traded the summer season and at the end of the season there wasn’t enough funds left in the company to pay all the creditors."
Miss Barrett outlined the facts leading to the development of Something Special in the early 1980s so that it was able to move from a small shop to the larger premises where it became established. She already owned PSD Enterprises Limited, which she had bought as a shelf company in July 1990. Mr Magadan provided the finance for the move and he acquired shares and became a director when Something Special transferred its business to PSD Enterprises Limited. The name was suggested by Mr David Brokdorf, who introduced her to Mr Madagan.
There was a serious fire at the premises in October 1993. There was no income for four weeks. All the Christmas stock was in the premises at the time. There was a nominal profit made (less than one fifth of the anticipated profit) until the business re-opened in April 1994.
Miss Barrett explained the problems faced with the settling of the insurance claims. These were in any event the responsibility of Mr Brokdorf. Miss Barrett, however, had to deal with the suppliers and with all the ordering. Special arrangements were made with the three main suppliers.
It was between December 1994 and 5 January 1995 that the company made the payments to Miss Barrett. These were, of course, substantial. Of these payments Deloitte & Touche in their report to the Viscount say this:-
"We understand from you that during the period 1 December 1994 to 5 January 1995 Miss Barrett withdrew cash from the company of £32,814.00. This amount was withdrawn in the following amounts:
£2,332.00, £3,498.00, £22,384.00, £4,600.00
We have verified that these amounts were passed through the company’s bank account and have seen photocopies of cheques for the last three. According to a letter from the bank, cheque number 122567 for £2,332.00 has been destroyed. However we note that Miss Barrett disputes the withdrawal of the first two mentioned amounts in the letter from her solicitors Pickersgill & Le Cornu dated 9 August 1995 as she contends that the amounts were simply bank entries with an equal and opposite entry that were made for recording purposes only - and only admits £26,984. Further she contends that the amount was in respect of arrears of salary in accordance with the terms of a written contract of employment. The only contract we have seen is attached at schedule 3. This document, which is between Miss Barrett and Something Special, does not define her salary in sufficient detail to enable us to verify that the payments could be considered arrears of salary."
The actual document makes for interesting reading:-
"SOMETHING SPECIAL 2A Beresford Street, ST. HELIER, JERSEY, CI
The business name of SOMETHING SPECIAL was registered with the Commercial Relations Department in Jersey on 21st day of November 1989 Certificate No. 12160 by PYLLIS EILEEN BARRETT.
The Trading Licence issued by The Finance and Economics Committee, under the Undertakings and Regulations Business Law was also issued to Phyllis Eileen Barrett.
It is anticipated that the business will shortly be taken over by a Limited Liability Company, and therefore the existing terms of employment will continue, as long as I am employed either as General Manageress or in the future as a Director, on either full-time or part-time basis.
Should the Company ever wish to issue any further shares, other than the anticipated original 35, then it shall not be done in such a manner that Phyllis Eileen Barrett will not retain the controlling majority, unless her prior written permission is given.
The normal working week will be for 40 hours and overtime rates will be paid for any additional time worked, but at the normal rate of pay.
A salary will be paid, of not less than 1% (one per cent) of the gross turnover, and will be subject always to annual reviews, after the first trading year, but will never be less than the Jersey cost of living index. The employees’ portion of Social Security contribution will be paid by the Company, and the rental on my house may be paid in lieu of part of earnings.
A bonus will also be paid annually, linked to the nett profits of the Company, before tax, in addition to any dividend on shares that will be available for distribution.
Holidays will be 28 days per annum and may be accumulated from one year to another, or cash will be paid in lieu of holidays.
A motor car, and all expenses in running it, including insurance and parking, will always be provided, but the car and insurance will always remain in the ownership of P.E.Barrett.
Any monies the business owes P.E.Barrett will be repaid on demand, and should I ever leave the employment of the company, all outstanding debts and monies due for salary and holidays will be paid in full, with agreed interest.
Dated this Saturday 15th September 1990."
SIGNED: PHYLLIS EILEEN BARRETT"
We have no idea whether this document was ever approved by the company or was even known to the other directors and shareholders.
The monies were paid because Miss Barrett said that, at the time, the company was very highly stocked, there must in her view have been £150,000 worth of stock in the shop, the creditors were "all up to date, apart from those that there were queries on." There were no outstanding liabilities. Turnover was up 36%. The company had paid out £78,000 to creditors which was due to be repaid by insurers. Mr Brokdorf, in her opinion, had sufficient information to enable him to settle the claim and her cousin, Mr Newing was eager to participate in the company’s future.
Advocate Le Sueur chose by his examination of Miss Barrett to criticize strongly the Deloitte Touche report. He went so far as to say that the report had not in fact been professionally prepared. He did it this way. The report shows debts due by the company of £167,021.05p. These were, in fact, the claims lodged in the désastre. Touche Ross (section 5.4 of their report) say that "This includes a claim in respect of Miss Barrett in the amount of £77,969.49p of which £1,750 is a priority claim for unpaid wages and claims from third party creditors of £89,051.56p."
Touche Ross appear to have followed through Miss Barrett’s claim. They say this at paragraph 5.5:-
"Miss Barrett has supplied a list of payments which make up £76,219.49- of the ordinary claim and these are attached at Schedule 2. The majority of this claim refers to £45,000 in respect of the purchase of shares by Mr B Madagan and we do not understand why this is a claim by Miss Barrett on the company. Of the remainder only £9,803.98 was incurred after 1st December 1994.
There was also apparently a credit arrangement with Carlton Cards there that they would take back all the stock left over after Christmas 1994 trading.
What Miss Barrett appeared to us to be saying was that the shortfall would have been covered had Touche Ross realized that with the insurance claim, the Something Special liability of £8,000 and the credit verbally promised by Carlton Cards would have been sufficient to meet all the liabilities.
There seems, in our view, to be a partially sighted approach to the real problems that the company faced.
The company, at the time that Miss Barrett paid herself what she considered to be her legitimate arrears of wages, owed rent to its landlord and a premium of £3,000. There were outstanding invoices for parish rates and water rates. As is shown in the affidavit of Gerald Roger Fuller, a director of the landlord company who successfully applied to put PSD Enterprises Limited en désastre:-
1.The rent was £32,142
2.By April 5 the company was owed £13,093.60p. That was made up by way of Foncier Rates, Water Rates, a proportion of the insurance premiums and rental.
On April 7, Channel Electrics took a judgment for £3,705.69. The Jersey Electricity Company had apparently cut off supply to the premises. Mr Miller says in his affidavit, sworn on 12 April 1995:-
"I have been informed by Miss Barrett that the sub-lessee has extensive liabilities and a poor cash flow with no prospect of improvement in the near future."
When Mr. Wheeler asked Miss Barrett why, instead of paying herself from the substantial turnover, she had not paid the landlord the rental due on the December Quarter Day there was this exchange between them.-
"Advocate Wheeler:The rent was due on December quarter day?
Witness:That’s right.
Advocate Wheeler:And, it is a busy time of year, substantial turnover?
Witness:Yes.
Advocate Wheeler:You could have paid the rent out of the income the shop enjoyed up to Christmas couldn’t you?
Witness:There was a 21 day grace on the rent to be paid and I had no reason to believe that the rent would not be paid from the income from the shop, from the turnover.
Advocate Wheeler:But you took all the income out of the shop for yourself?
Witness:No, I did not take all the income from the shop I was still paying money into the bank. The total income from the shop was over £50,000 ... was £48,000 and only for the month of December and the month of January ... the first week in January was concerned was about another £3,000, so that was over £50,000 and I only paid myself £26,000.
Advocate Wheeler:But, it didn’t occur to you to pay the rent at that time?
Witness:The rent wasn’t due on 13th December and there would be adequate funds in the company to cover that payment to the landlord and the landlord had a good relationship with our company as well.
Advocate Wheeler:On 10th January meeting which you had you told your co-directors that the company had very little funds in the bank, £1,200 approximately?
Witness:That’s correct, sir.
Advocate Wheeler:So, how can you say then that the company would have been able to pay the rent. It had gone through its busy Christmas trading session and had £1,200?
Witness:because on 9th January we were due to get the insurance claim settled, according to my co-director David Brokdorf, who telephoned me and told me that he was going to have an agreement for a ... a proposal rather, for the insurance settlement. We also had all the income for the moths of ... first two weeks in January. We were scheduled to have a large January sale, we had a lot of stock in hand, twice the amount we normally have and if we’d have had a sale we probably would have turned over, like we should have done, we would have turned over probably £50,000 in the month of January.
Advocate Wheeler:But, you didn’t have a sale in January?
Witness:No, because the other two directors would not agree to it.
Advocate Wheeler:But, you were the managing director weren’t you?
Witness:I was not after 9th January, I was not in charge of the company’s management, nor of the company’s finances after 9th January. The company had no management from 9th January."
If we examine the board meeting of 10th January (it says a meeting of Something Special Limited. That is a misnomer) we can see the clear signs of friction between the directors.
When Miss Barrett analysed the trading figures she mentioned that she had paid herself "some salary" but that is in a sense glossed over. The relevant section of the minutes reads:-
"David said that he telephoned Eileen the other day and as far as he is concerned, that makes the sum of £64,000 and he then asked how this disappeared so suddenly? Eileen commented that the creditors have been rolled over since the time of the fire and debts have accumulated. Creditors have to be paid, there are still some outstanding staff salaries to be paid; we have had to engage temporary staff during the Christmas period. Eileen has paid herself some salary and some of the money that has been loaned; she also personally paid for stock. David asked if we had any idea what the stock levels were? Eileen said she had no idea at this particular time; having only opened for three days after Christmas and last week (five days) it is necessary to get the Christmas sale going and the staff, one of whom has been off sick since prior to Christmas. The business has been operating six days a week, 9 am until 6 pm with one full-time member of staff two part-time and Eileen. They needed to expand other lines into the shop; the Christmas sale stock had to operate from one corner of the shop. David said he will go through this when he can. The company does need a cash injection and Eileen wonders whether it would be better to openly discuss this fact.
Earlier a cash injection of £60,000 is mentioned and also the clear statement by Mrs. Barrett "The Company has very little funds in the bank £1,200 approximately."
It does seem to this Court that the timing of the payments was more than unfortunate - particularly when Miss Barrett must have known that the payment of rental would be a prerequisite to the company’s feasible continuation.
The Viscount, in his representation to this Court, says at paragraphs 9 and 10:-
"9.During the period from 1st January 1995 to 31st March 1995 the takings of PSD in its business amounted to £33,689.61 and liabilities rose to £164,253.63. Third party creditors rose from £44,229.23 to £89,051.56. the quarter’s rent referred to above was not in fact paid until 15th March 1995, i.e. ten days before the next quarter’s rent became due for repayment.
10.At a board meeting of the directors of PSD held on 10th January 1995, Miss Barrett informed the meeting that PSD had trade creditors of £59,204, with total liabilities of approximately £76,584 and an additional rent of £8,436.00 and a £3,000 premium were due as at 25th December 1994. At the same time PSD had cash at the bank of approximately "£1,200. Miss Barrett further advised the meeting that PSD needed a cash injection of £60,000.
The learned Jurats entirely share the conclusions of Deloitte Touche that Miss Barrett must have known the somewhat parlous state of the company when she decided, without reference to her fellow directors, to make substantial payments to herself. The timing of the payments was such that with the inevitability of the rental and the rates being of unarguable priority, she must have realized that the company would not long survive. That realization became increasingly apparent as one reads the increasingly depressing financial situation unfold.
The citation of In Re Bacon (Re M.C.Bacon Ltd. (1990) BCLC 324 at 336 by the Court of Appeal can be expanded.
"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 just as the dominant intention could be inferred under the old law. But the mere presence of the requisite desire will not be sufficient by itself. It must just have influenced the decision to enter into the transaction."
With the knowledge of the company’s affairs which were only fully known to Miss Barrett - and with her previous experience of a désastre in similar circumstances - the requisite desire is in our view inferred.
The Court re-affirms its decision for the reasons shown.
Authorities.
re: PSD Enterprises & Barrett ( 24th September, 1998) Jersey Unreported CofA; [1998.195]
Bankruptcy (Désastre) (Jersey) Law 1990.
Re Bacon (1990) BCLC 324.