Darty Holdings SAS v Carton-Kelly: Are We Just Talking Or Is There A Connection Here?

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In dismissing Darty Holdings SAS’ (“Darty”) appeal in a recent decision[1], Miles J. has confirmed that an English court will look at the actual relationship between the parties involved, rather than the wider context, when considering whether those parties are connected. This will be the case even where the wider context consists of a transaction that will, immediately following the relevant transaction, sever that relationship.

This decision will prove an unwelcome development for lenders with security over shares. The mortgagee will be a connected person if it is able to vote with shares comprising a third or more of the company’s voting shares and while the lender will usually exclude that power until enforcement of the mortgage, they will then be “connected” under the Insolvency Act 1986 (the “Act”).

Why were the two companies connected?

Eight months before liquidators were appointed over the operating company of the well-known high street electrical retailer Comet Group Limited (“Comet”), the company had entered into a series of transactions to repay sums due to a treasury company called Kesa International Limited (that later became Darty) in its parent company’s group. It was this repayment, entered into as part of a wider sale by the parent company of a group of companies including Comet, which was later challenged by the liquidator.

Comet was connected to Darty as Darty was an indirect subsidiary of Comet’s parent company. This meant that the two companies were “associates” according to the definition in section 425 of the Act and, therefore, were connected for the purposes of section 239, the provision making preferences vulnerable to attack by a liquidator.

Under sections 239 and 240 of the Act, a claim may be made in the case of a preference given to a person who is connected with the insolvent company if the preference occurred within two years of the onset of insolvency. This two-year lookback period is longer than the six-month lookback period applicable to unconnected parties. Here, as Darty was deemed to be a connected person for the purposes of the alleged preference and the payment took place within the extended lookback period, the liquidator was able to bring the preference claim against Darty. As such, Darty may be liable to account for the sums it received.

It had been unsuccessfully argued that the wider deal, which would later sever the relationship between Comet and Darty, should mean that the two companies should not be considered connected. One reason the argument was found unconvincing by Miles J. was that Comet itself did not actually enter into the sale and purchase agreement that dictated how Comet would be sold. As such, at the time Comet made the repayment, it was an associate of Darty and had not contractually agreed to be sold and cease being connected to the Darty; this contractual obligation was on Comet’s parent.

Timing is always key

Before the completion of the wider transaction, Comet and Darty, among others, had entered into a completion agreement which set out the order in which certain payments and steps would be completed under the sale and purchase agreement. This completion agreement stipulated that a payment would be made to Darty at a moment before the connection between Darty and Comet would be severed by the wider transaction. Darty had argued that the proper interpretation of this completion agreement, alongside the sale and purchase agreement, should result in the court finding that Comet and Darty were not connected.

In reaching his decision, Miles J. highlighted that there is nothing in section 435 of the Act which suggests that cases where the association was intended to come to an end shortly after the relevant transaction should be excluded.

Commentary

This case highlights the care that must be taken during sales of distressed companies and the importance of assessing the nature of the relationship between parties dealing with each other at each stage during a transaction.

A key focus should be the obligations and benefits being derived by each party at each stage. While it was argued in this case that the wider transaction meant Comet received an equal benefit to the payment it made to Darty, the court’s view of the payment in isolation meant it could be challenged as a preference.

In particular, this case has highlighted two ways in which those that own or take security over shares in companies should focus on the exact circumstances involved, namely:

  1. When a party is receiving a payment from another party as part of a wider transaction, the key concern for an English court will be the actual relationship between those two parties, rather than the wider transaction; and
  2. Even when a connection is about to be severed, the court will focus on the connection between the relevant parties at the time any payment is made.

Otherwise, the stakes might be a lot higher than a failed talking stage.


[1] The full citation of the relevant case is Darty Holdings SAS v Carton-Kelly [2021] EWHC 1018 (Ch).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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