Scottish Court of Session Decisions

Pursuer: Wilkinson, Solicitor Advocate; Canons Law Practice

Defender: D Thomson; Harper Macleod LLP

26 July 2012

[1] On 15 April 2009, as a director of 3G Design Engineering Limited, the defender executed a resolution which declared that the company was insolvent and unable to pay its debts as they fell due. On the same day he withdrew £9,000 from the company's bank account in favour of himself. He did this in respect of sums said to be due to him in repayment of a loan to the company. That day the company's solicitor was instructed to present a petition to the Court of Session for the winding up of the company. On 17 April 2009 a first order was pronounced. The pursuer was appointed interim liquidator on 16 July 2009. By resolution at the first creditors meeting she was appointed liquidator. She now seeks, amongst other things, repayment of the said £9,000.

[2] In the defences to the current action the defender explains that the company "was generally funded (to a greater or lesser extent from time to time) by a series of short term loans by inter alios the defender." At the time of the withdrawal, the defender's loan account in respect of the company stood at £42,000. The averments for the defender continue:

"...monies were regularly lent to the company by the defender and, equally, monies were regularly repaid to the defender. The company and the defender did not enter into any written agreement regarding the making of such loans. Rather, as the company bank account shows, the loans made to the company by the defender personally were repaid within short order, as and when the company was able to make such repayment. The sum of £9,000 was repaid on that basis. It was a short term loan which was due to be repaid when the company was able to do so. The defender was not in the habit of issuing written demands to the company. Such an approach would have been artificial and unrealistic in a small private company such as the company. The defender had borrowed the sum of £9,000 via a credit card held by him. Having borrowed that sum of money he, in turn, lent it to the company. Its repayment was necessarily made for adequate consideration, given that the defender had lent that sum to the pursuer and indeed was still owed some £33,000 even after the sum of £9,000 was repaid to him. As such, the withdrawal was not a gratuitous alienation. Moreover, in the circumstances hereinbefore condescended upon, the withdrawal was a transaction falling within each of paragraphs (a), (b) and (c) of section 243(2) of the (Insolvency Act 1986). Accordingly the transaction is not challengeable."

[3] At a debate the discussion focused on the withdrawal of £9,000 on 15 April 2009. For the pursuer, Mr Wilkinson's submission was presented on a short and narrowly focused basis, namely that the withdrawal was a voluntary payment and thus an unfair preference in favour of one creditor to the prejudice of the general body of creditors, all in terms of section 243 of the 1986 Act. For the purpose of the debate, Mr Wilkinson laid aside any other potential line of attack based upon, for example, alleged collusion or breach of the duties of a director. Emphasis was placed upon the conjunction of the resolution and the withdrawal. If the loan was repayable "as and when the company was able to make such repayment" this could not lie with the terms of the contemporaneous resolution. It was submitted that, in any event, as vouched by the decision in Rose v Falconer (1868) 6 M 960 (Second Division), on 15 April the company was under no legal obligation to repay the loan, therefore the payment fell outside the statutory exceptions to unfair preferences.

[4] As the debate progressed it became apparent that the defender is relying upon the exception contained in subsection (b) of section 243 (2), which relates to "a payment in cash for a debt which when it was paid had become payable...". For the reasons given above, Mr Wilkinson submitted that this line of defence is irrelevant, and, in the absence of the potential application of either of the other exceptions, the payment was a challengeable unfair preference. Decree for payment of £9,000 plus interest should be pronounced in terms of the second conclusion of the summons.

[5] For the defender Mr Thomson submitted that the specific facts of Rose v Falconer allowed it to be distinguished from the present case. In any event the decision in Nordic Travel Limited v Scotprint Limited 1980 SC 1 (First Division) was "a short answer" to the submission presented on behalf of the pursuer. Mr Thomson emphasised the narrow basis of Mr Wilkinson's argument. He submitted that the defender was entitled to a proof on his averment that the debt was due and exigible on the date when it was paid.

Discussion and decision

[6] I will approach the case on the same narrow basis as that adopted by Mr Wilkinson. In Rose the trustee on the sequestrated estate of one John Williams sought to set aside a payment of £60 made by the bankrupt to the respondent, Falconer, within 60 days of bankruptcy. Falconer had become drawer and indorser, for the accommodation of the bankrupt, of a bill for £60 dated 1 November 1866 and payable on 1 February 1867. On 10 December 1866 the sum of £60 was paid by the bankrupt to Falconer. It was submitted that this payment was not voluntary in the sense of the Act of 1696, but a payment under the compulsion of a positive legal obligation. The evidence was that Falconer offered a bill for a month, but the bankrupt said "Make it three, in case I shall not have money in a month, but as soon as I have money I shall pay it." Falconer understood that the bill would be paid as soon as the bankrupt had money to pay it. The Lord Justice-Clerk, Lord Patton, asked the question "Where, in an assurance that an obligation would be extinguished by payment as soon as the debtor could, can be read obligation at all?" His Lordship continued:

"...an understanding or even an obligation to pay when one shall have money to pay could not form the basis of an action...It would certainly appear to be a strange reading of the Act of 1696 to hold that an assurance given that something would be done when the debtor should be in a position to do it, should constitute an obligation and take the act done out of the operation of the statute....There was, at the date of its constitution, no pressure from any definite, precise or tangible obligation; and, therefore, the payment must, I think, be viewed as voluntary, and so made in violation of the Act 1696."

The other judges were to similar effect.

[7] Mr Wilkinson's submission was that the defender's offer to prove that the £9,000 was a short term loan which would be repaid when the company was able to do so is irrelevant for the reasons given in Rose. In any event, he submitted that the proposition upon which the defender's case is based cannot co-exist with the terms of the resolution of the company made on the same day as the payment to the defender. Mr Thomson sought to distinguish Rose v Falconer by pointing to the background of the three month bill, and to the court's references to "an understanding" that the bill would be repaid when the bankrupt was able to do so.

[8] I do not consider that the reasoning of the court in Rose can be laid aside in the manner proposed by Mr Thomson. On the contrary, it is directly applicable. At its best, the arrangement between the company and the defender was as loose and open-ended as that which was before the court in Rose. In any event, how can the defender realistically hope to prove the alleged condition precedent for an enforceable obligation, given the contemporaneous resolution of an inability to pay the company's debts as they fell due?.

[9] I turn to Mr Thomson's submission based upon Nordic Travel Limited. The First Division rejected the propositions that from the moment of knowledge of absolute or irretrievable insolvency an insolvent person cannot lawfully continue trading, and that only ignorance of insolvency on the part of the creditor can avoid an order for repayment. However there was no retrenchment on the rule that within the relevant period an insolvent cannot make an anticipatory or voluntary payment to one creditor to the prejudice of the general body of creditors. I can identify nothing in Nordic Travel which provides the promised "short answer" to the pursuer's submission based upon the lack of any relevant averments that there was "a payment in cash for a debt which when it was paid had become payable".

[10] Mr Thomson sought support from the discussion at pages 20/21 of the report, in particular in respect of the understanding that payments for the travel brochures provided by Scotprint would be made, not as soon as they were due, but as and when Nordic's cash flow made funds available. For Nordic's liquidator the argument was that this amounted to an unusual arrangement rendering the payments fraudulent and beyond the scope of transactions taking place in the ordinary course of trade or business. The court's rejection of that submission was based upon the specific facts of the case before it, including that the arrangement was to the benefit of the general body of creditors. In my view there is a material difference between agreeing to a postponement beyond the due date and a loan repayable if and when the debtor is able to do so. The relevant facts in Nordic are very different from those in the present case. Even leaving aside the voluntary nature of the payment, I can identify no relevant or sufficiently specific averments on behalf of the defender which support any case that the withdrawal of £9,000 and the payment to the defender was part of a transaction in the ordinary course of trade or business. On any view it would take very specific averments to justify the repayment of a director's loan on the very day that the company declared itself insolvent and instructed solicitors to petition the court for its winding up.

[11] I shall grant Mr Wilkinson's motion that I should uphold the pursuer's fourth plea-in-law. It states that the company, having disposed of cash assets of the company to one creditor, being the defender, to the prejudice of the general body of creditors within six months of the winding up, all in terms of section 243 of the Insolvency Act 1986, decree for payment should be pronounced in terms of the second conclusion. Mr Wilkinson stated that if his fourth plea-in-law is upheld his second plea falls to be repelled. I shall also repel the defender's third plea-in-law.

[12] The liquidator also challenges another payment made by the company. The discussion at the debate did not extend to that challenge. Mr Wilkinson made a motion, which was of consent, for the averments in the defences concerning section 243(2)(c) of the 1986 Act to be excluded from probation. I shall reflect the terms of that application in the court's interlocutor. For completeness I should record that an argument was presented concerning the relevancy of certain averments of the defenders which provide an explanation as to why the director's loan account was not mentioned in the defender's sworn statement of affairs. In the result this issue is of little importance, but if I had rejected the other arguments, I would not have upheld this part of Mr Wilkinson's submissions. Meantime I shall reserve the question of expenses.