In this client alert, we set out the key findings by the Court of Appeal in Darty Holdings SAS v Geoffrey Carton-Kelly [2023] EWCA Civ 1135, which considers an appeal against the High Court decision that a repayment by Comet Group plc (“Comet”) of £115 million of unsecured intra-group debt to Kesa International Ltd (“KIL”) was a preference under section 239 of the Insolvency Act 1986 (the “Act”).

Background to the Case

Kesa Electricals plc (“Kesa”), the owner of Comet, entered into a sale and purchase agreement (the “SPA”) with OpCapita on 9 November 2011 for the sale of Comet. The terms of the SPA stated that a balance of £115 million owed by Comet to KIL (Kesa’s group treasury company) would be repaid by Comet as part of completion. Comet’s board approved its entry into the completion agreement, which included the requirement to repay the £115 million to KIL, in February 2012. The completion agreement was executed the same day.

Subsequent to an application for relief brought by Comet’s liquidator against Darty Holdings SAS (“Darty”), KIL’s successor, the High Court considered whether this repayment was a preference under section 239 of the Act. The court determined that the repayment did fall within the meaning of a preference under section 239(4). It was undisputed that the board’s decision to enter into the completion agreement in February 2012 was not influenced by a desire to prefer, but the court found that this was not the date of the operative decision to give the preference for the purposes of section 239(5). The court instead looked at the decision made by one of Comet’s directors at the time of the entry into the SPA, in November 2011. The director’s decision was deemed to have been made on behalf of Comet. In the eyes of the court, the director’s earlier decision meant that the board’s ‘hands were tied’ on the completion, and so it was the director, not the board, who had actually made the operative decision on behalf of Comet. That decision, unlike the board’s decision in February 2012, was found to have been influenced by a desire to prefer. The court therefore held that there was a preference under section 239 of the Act and granted the application.

Decision

The Court of Appeal’s decision is the result of an appeal against the finding above. Importantly, the Court of Appeal did not disagree with the law as stated by the High Court and accepted that the repayment was in fact a preference under section 239(4). The court only disagreed with the High Court’s finding of fact that the operative decision was made by Comet’s director in November 2011.

The court first found that there was no evidence to support the High Court’s inference that the director had made a decision on behalf of Comet. Indeed, although the director had likely participated in the negotiation of the repayment, there was nothing to suggest that he was actually authorised to make the decision to repay. Next, even if the director had made a decision on behalf of Comet, it could not amount to an operative decision since it was conditional upon board approval being obtained – only Comet’s board could approve entry into the completion agreement. The fact that the board was potentially pressured to approve the repayment did not mean that the board’s decision could not be operative.

As a result, the court held that the only operative decision was the board’s decision in February 2012. Since it was undisputed that the board’s decision was not influenced by a desire to prefer, section 239(5) could not be satisfied. This meant that there was no preference under section 239 of the Act, and the appeal was allowed.

Conclusions and Key Takeaways

With the Court of Appeal’s decision, we perhaps see that the court has adopted a stricter definition as to what will amount to ‘deciding’ to give a preference under section 239 of the Act. The court’s statement that an operative decision cannot be conditional on the approval of the board (or ratification by shareholders) limits what can in fact amount to a decision to prefer. Even though the Court of Appeal remained reluctant to reverse findings of fact by the court of first instance, it felt compelled to do so – the High Court’s interpretation simply could not be plausible due to the fact that the director’s decision was wholly conditional on the board’s approval. We see that the court has limited the factual inferences that it will make and appears to instead focus on the hard facts. Whether there was the required desire to prefer is therefore likely to be assessed in relation to a much later stage, when the company has conclusively entered into the preferential transaction. Whether there is a desire to prefer at the time of entry into a conditional sale and purchase agreement seems to now be irrelevant.

On the facts here, this benefited the creditor since there was no desire to prefer at the time of the operative decision to repay. The inverse could equally play out in other cases. The Court of Appeal’s decision should provide important clarification for creditors as to when there might be a preference under the Act, which is particularly relevant for those who are wary of the solvency of their debtors.

Albert Khazen, London Trainee Solicitor, contributed to the drafting of this alert.

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