Ross & Anor v Gaffney & Anor

Abbreviations

In this judgment I shall adopt the following abbreviations.

Introduction

This application arises out of the insolvency of CSIL which entered into administration on 4 July 2014. In it the Administrators are making a number of claims against Mr Gaffney and CSIL(UK). At all material times Mr Gaffney was the sole shareholder and sole director of CSIL and Mrs Gaffney the sole director and shareholder of CSIL(UK).

The claims made by the Administrators were originally broken down into 4 separate categories. However the joint claims against Mr and Mrs Gaffney have been compromised in a Tomlin order dated 25 June 2015 and it is not necessary to refer to them further.

The remaining three categories may be summarised in this way:

On 28 March 2014 CSIL paid Mr Gaffney £181,000 by way of repayment of a loan made by Mr Gaffney to CSIL on 7 January 2014. The Administrators contend that this repayment was a preference to a connected person within s 239 of the 1986 Act and a breach of his duties as a director of CSIL.

Mr Gaffney contends that CSIL was not insolvent at the time of the repayment and that CSIL was not “influenced by a desire to put himself in a better position than other creditors”. Very substantial payments were being made to creditors at the time. Mr Gaffney does not accept that he acted in breach of his duties as a director. He had advice from CSIL’s accountant in the difficult circumstances that CSIL found itself. If he was acting in breach of duty he should be excused under s 1157 of the Companies Act 2006.

On 15 May 2014 CSIL paid Mr Gaffney £150,000 in repayment of loans of £50,000 and £100,000 he had made to CSIL in February 2014. The Administrators contend that this repayment was a preference and a breach of duty. Mr Gaffney relies on the same defences.

On 27 May 2014, Mr Gaffney caused CSIL to pay him £200,000 – at one time analysed as a salary of £53,100 plus a further £146,900 by way of reduction of his loan account. That was the same day that he chaired a meeting which passed a resolution that the Company was insolvent and filed a notice of intention to appoint administrators and the same day as Wetherby presented a winding up petition against CSIL

The claim that the £53.100 was a valid payment of salary was not pursued following the evidence of Mr McKenna. In any event the Administrators challenged the salary on the ground that it was not subject to a resolution as required under Art 82 of Table A and/or was a preference, and the value of Mr Gaffney’s services cannot be justified. The Administrators claim that the payment of £200,000 was an obvious preference and breach of duty by Mr Gaffney. Mr Gaffney relies on the same defences.

On 3 occasions between 20 March 2014 and 20 May 2014 Mr Gaffney caused payments totalling £31,284 to be made to JJ Quinn. These sums were debited from Mr Gaffney’s loan account. The Administrators contend that they were acts of misfeasance and/or preferences. Mr Gaffney contends that these payments were part of the amounts due for sponsorship of Cosy Seal Racing which generated publicity and customers for CSIL.

On 2 January 2013, CSIL entered into written agreement with CSIL(UK) under which CSIL promised to pay £15,000 per month to CSIL(UK).

On 12 and 23 May 2014 CSIL paid £2,000 and £9,000 to CSIL(UK) in repayment of loans that had been made in mid March 2014. More importantly on 23 May 2014 Mr Gaffney caused CSIL to pay CSIL(UK) £252,000 in respect of liabilities under the Jan 2013 Agreement.

The Administrators contend that at the very least these were preferences and/or acts of misfeasance by Mr Gaffney. In addition to the defences in relation to the preference claims Mr Gaffney makes the point that Mrs Gaffney devoted her time to working for the Company and all of the profit of CSIL(UK) was effectively diverted into CSIL as all its work was done through CSIL. He contends that the Jan 2013 Agreement was entered into in good faith with the expectation of it being of genuine benefit to CSIL.

On 7 March 2014 CSIL entered into a written agreement with CSIL(UK) for the transfer to CSIL(UK) of 40,000 carbon tonnes of credit for £100,000, giving a price of £2.50 per carbon tonne. Payment was to be made by CSIL(UK) in January 2015 on condition that none of the credits had been rejected by OFGEM.

No payment has been made by CSIL(UK). The Administrators challenge this on two grounds. It is contended that a price of £2.50 per carbon tonne is a significant undervalue and that this was a transaction at an undervalue within s 238 of the 1986 Act. The Administrators also contend that it was a breach of Mr Gaffney’s duties as a director to enter into this agreement which was plainly not in the best interests of CSIL. Mr Gaffney contends that the figure of £2.50 per tonne was for a variety of reasons a fair figure and that the agreement was in the best interests of CSIL.

Although it will be necessary to consider each of the challenged transactions separately there are four main issues to be determined:

As with many insolvency applications this case is document heavy with over 1,000 pages of documents.

In addition to the documents I heard evidence from four witnesses of fact. On behalf of the Administrators evidence was given by Mr Wainwright, one of the joint administrators, and Mr Green, a director of Home Group, one of CSIL’s principal creditors. On behalf of Mr Gaffney and CSIL(UK) evidence was given by Mr Gaffney and Mr McKenna. Mr McKenna is a Chartered Accountant who was closely involved in the affairs of CSIL, CSIL(UK) and Mr Gaffney. He acted as accountant to each of them, prepared the VAT returns, the annual accounts. He also prepared the cash flow forecasts, the management accounts and the aged debtor analysis to which I was referred during the course of the case.

In addition the Administrators called Mr Kimber as an expert in relation to the value of the carbon credits sold in March 2014. Mr Kimber worked for British Gas for 31 years. He has over 15 years experience in the low carbon/energy company obligation sector. Since March 2013 he has been a partner in AgilityECO. A major part of its business is the supply of ECO credits to energy companies.

Before dealing with the judgment in more detail it is right that I should acknowledge with gratitude the very considerable assistance I have had from the Counsel and solicitors involved in this case. In a document heavy and factually detailed case such as this I was guided through the detailed facts with considerable skill by each Counsel. Furthermore I received detailed skeleton arguments and written closing submissions which have been of considerable assistance in the preparation of this judgment. I also acknowledge with gratitude the provision at short notice of electronic copies of all the relevant documents in the case.

The facts

Since 1994 all energy companies of a certain size have been required under legislation to develop programmes to help domestic customers reduce their carbon emission. Initially this obligation only applied to electricity suppliers. However, in 2000 this was extended to gas suppliers as well. The current version of the energy supplier obligation is called the Energy Company Obligation (ECO). This programme commenced on 1 April 2013.

The methodology for calculation of the number of ECO credits from qualifying actions is complex. It can vary considerably on a product-by-product and an installation-by installation basis. As a rough guide, typically cavity wall insulation would generate around 25 tonnes of lifetime carbon reduction (ECO credits). Therefore the value paid by an energy company for the ECO credits relating to that cavity wall insulation would be 25 times the price per tonne that the energy company is willing to pay for ECO credits at the time.

In 2013 there was a fundamental change to the rules of the energy supplier obligation with the introduction of ECO 1.0 on 1 January 2013. This included scope for works undertaken from 1 October 2012 to count towards their target. This resulted in a hiatus within the sector, a sharp upward movement in ECO credit prices and the emergence of more complex compliance requirements on energy companies to demonstrate the legitimacy of the ECO credits claimed by them. Another fundamental change was the introduction of a carbon brokerage mechanism, allowing ECO credit suppliers to offer to sell tranches of ECO credits to energy companies at an offer price of their choosing, via a fortnightly auction process. It is important to note that there is not a single type of ECO credit with a single price, there are multiple types of ECO credits, each with its own price.

On 1 April 2014, there was a significant change to the ECO programme. Reacting to public pressure…the government re-designed ECO to reduce the cost of compliance for energy suppliers. In return suppliers agreed to reduce energy bills for householders by a similar amount. The most important change was that some of the more expensive qualifying actions were discouraged in favour of cheaper interventions. This change had a significant impact on certain categories of qualifying actions, namely external wall insulation and cavity wall classified as 'Hard to Treat' (HTT), In the case of the former the price per tonne of carbon for ECO credits reduced from a range of £100 - £140 per tonne to less than £40 per tonne. For the latter (HTT), this category of qualifying action was removed entirely from the programme.

CSIL was incorporated on 21 March 1995. Mr Gaffney became its sole director and shareholder. Mrs Gaffney was company secretary. CSIL was an insulation contractor installing CWI and LOFT for consumers and selling the resultant “carbon savings” to large energy companies to enable them to meet their statutory obligations under the government’s “ECO” schemes.

CSIL(UK) was incorporated on 10 September 2001. Mrs Gaffney became its sole director and shareholder, with Mr Gaffney as company secretary. CSIL(UK) primarily dealt with commercial insulation contracts whereas CSIL concentrated on grant funding for social housing. Both companies used sub-contractors for a third type of insulation, EWI.

There is no dispute that up to the end of 2012 CSIL was profitable and traded successfully. The year-end accounts for the year ending 2012 show that turnover increased from £2.2 million in 2011 to £6.3 million in 2012 whilst net profit increased from £188,542 to £679,585. Mr Gaffney’s “remuneration” in 2012 comprised a salary of £16,648, pension contributions of £157,200 and a dividend of £136,000. The net assets were £1,070,814.

In 2013 turnover increased to £14.5 million but the net profit reduced to £175,098. Mr Gaffney’s “remuneration” in 2013 comprised a salary of £15,427, pension contributions of £114,000 and a dividend of £650,000. The net assets were £595,912. It will be necessary to look at these figures more closely when considering the solvency of CSIL.

On 6 October 2012, CSIL entered into a written agreement for “sponsorship services” with Cosy Seal Racing Partnership which was a partnership between Mr and Mrs Gaffney. It provided that the Company would sponsor horses owned by them for the sum of £1,000 per month per horse up to a maximum of 10 horses over 24 months. It appears that the horses were trained by JJ Quinn.

On 2 January 2013, CSIL entered into a written agreement with CSIL(UK) which referred to the change in the nature of ECO contracts and the requirement for a blended approach. It provided that CSIL(UK) would cease to trade and not carry out any contracts in the insulation industry for 12 months from 1 January 2013. CSIL promised to pay £15,000 per month to include the “consultancy services” of Mrs Gaffney for 24 months.

The consultancy services were to be principally around

“ECO compliance and ensuring the compliance team of [CSIL] operates as effectively as possible”

No sums were paid under this contract until the payment on 23 May 2014.

I was referred to a number of the clause of the contract in the course of the trial. These included clause 4 which contained detailed measures on documentation. In summary CSIL was required to enter information on E.ON’s PEET system. The parties acknowledged (Cl 4.5) that the Ofgem rules were in their infancy and were being developed. CSIL agreed to provide the documentation within a reasonable time.

Under clause 4.2 E.ON were required to notify CSIL of any issues with the documentation within a reasonable period.

Under clause 7.2 there was an obligation to pay CSIL on the last day of the month following the month in which the invoice was to be paid.

In paragraph 10 of his witness statement Mr Green explained the nature of documentation required thus:

One of the matters which was discussed in the course of the hearing was the extent to which a pre EPC certificate was required. I was referred to an exchange of emails between Mr Gaffney and Ms Connolly of Ofgem between 28 January 2014 and 29 January 2014. In that exchange Mr Gaffney asked if a whole house survey by a Chartered Surveyor could be carried out without a pre EPC to support his survey. Ms Connolly confirmed that there was no such Ofgem requirement and that a full internal inspection should meet the requirements of a “whole house survey”. She pointed out that an energy supplier might have a preference for an EPC survey to be carried out as part of the process. She also confirmed that there was no information in the ECO guidance to suggest that the surveyor’s report must be based on an EPC survey.

Thus, although it appears that a measure supported by a whole house survey is compliant with Ofgem guidelines, some utilities required the documentation to include a pre EPC.

This was not a matter which was considered by Mr Kimber in his report. In cross-examination however he expressed the view that there had to be an EPC on the date before the work was carried out.

No problems arose with the E.ON contract until November 2013. It is not in dispute that substantial payments were made by E.ON to CSIL in this period.

However there were problems with 3 self billing invoices prepared by E.ON on 12 September 2013, 20 September 2013 and 3 October 2013 totalling £1,193,114.72 inclusive of VAT of £56,814.99. It is common ground that E.ON submitted these invoices to Ofgem and have received appropriate credits in respect of them. However E.ON have refused to make any payment to CSIL.

Prior to the administration Mr Gaffney attempted to negotiate with E.ON in order to resolve the compliance issues it was raising. At no time, however, did Mr Gaffney refer the matter to solicitors or write any letter before action to E.ON.

Following the administration order the Administrators caused its solicitors to write to E.ON on 19 September 2014 claiming £998,392.76 in respect of the work. On 13 October 2014 E.ON’s legal department sent a four page letter denying liability and raising serious issues as to the work carried out by CSIL. The whole of the claim was disputed and a Counterclaim was intimated for the return of £4,033,925.61 which had been paid under the contract to CSIL.

The Administrators took legal advice on the letter. That advice has not been disclosed. In evidence Mr Wainwright suggested that any litigation against E.ON must be regarded as speculative. In any event no recoveries have so far been made.

As a result of the problems with E.ON CSIL entered into a contract with Npower. According to Mr Gaffney this was to prevent the debt with E.ON getting larger. The agreement was reached orally in December 2013 and provided for payment 30 days after invoice which was not raised until after a 20 day compliance period. On 26 February 2014 Npower agreed a 2.5% rate reduction in return for payment within 7 days of invoice.

It is not in dispute that CSIL suffered cash flow problems. It had only made a profit of £175,098 in 2013 and only had net assets of £595,912. The failure by E.ON to pay the £1.2 million due had a serious effect on cash flow.

There is considerable evidence of the cash flow problems. However in the light of Mr Gaffney’s case that CSIL was not insolvent it is necessary to deal with them in a little detail.

On 6 January 2014 Mr McKenna submitted the VAT return to HMRC. In the covering email Mr McKenna stated that CSIL was experiencing cash flow issues as a result of the E.ON issue and asked that the refund could be authorised as soon as possible. One day later Mr Gaffney lent CSIL £181,000 to cover the VAT.

At the end of February 2014 Mr McKenna submitted a further VAT return. In the covering email he requested that the refund be authorised urgently as CSIL was suffering cash flow problems. In an email dated 28 February 2014 a number of queries were raised about the claim for the refund. Mr McKenna dealt with the queries on 6 March 2014 and concluded his email:

Both Mr Gaffney and Mr McKenna sought to play down the significance of this and to suggest that it was only inserted to speed up the repayment.

Home Group first entered into a contract with CSIL in September 2011. Under the contract (and subsequent contracts in 2013 and 2014), it was agreed that CSIL would fund, via ECO funding from the government, appropriate ECO measures of Home Group’s properties to enable utility companies to claim ECO credits on behalf of Home Group.

On the instruction of CSIL, Home Group would submit an invoice to CSIL for an agreed amount of credit due following a claim to a utility company in accordance with the contract.

In December 2013 it came to the attention of Mr Green, the Procurement Director of Home Group that invoices for September 2013 for £779,040 and £224,907 had not been paid. According to Mr Green the situation was monitored and at the beginning of 2014 there were various meetings between Mr Robson (on behalf of CSIL) and his colleagues which resulted in a payment plan. I was referred to an email chain at the end of January 2014 which resulted in an email dated 3 February 2014 from Mr Robson which included:

In his witness statement Mr Gaffney disowned the contracts between Home Group and CSIL alleging that Mr Robson had no authority to sign them. In cross-examination he also disowned the email of 3 February 2014. He stated that he did not approve its terms and had not seen it before it was sent. He acknowledged that he must have approved the cheque for £224,907.

In any event the payments due on 14 March 2014 and 28 March 2014 were not paid. As at that point the amount due to Home Group amounted to £1,880,014.30. Mr Green met with Mr Gaffney on 15 April 2014. At that time Mr Gaffney did not dispute the sums due.

Mr Gaffney has subsequently sought to raise disputes which Mr Green believes are without foundation. In cross examination he said that all information requested by CSIL had been provided. He accepted that there was a point when Home Group stopped the work and removed CSIL from site. This was because of the non-payment by CSIL.

When he gave evidence Mr Gaffney appeared to suggest that the whole of the Home Group debt was disputed. However it is to be noted that in an exhibit to a witness statement in support of a validation order made by Mr Gaffney on 24 June 2014 he stated that the dispute extended only to £779,040 thus leaving over £1 million undisputed.

In February 2014 Hamilton presented a winding up petition for £2.3 million. The debt was undisputed and CSIL was not in a position to pay.

As a result on 21 March 2014 a meeting was held between Mr Gaffney, CSIL’s accountant, Mr McKenna, its solicitor Mr Bramley and an insolvency practitioner Mr Kelly.

There are no notes of the meeting and no written advice was given. It is not clear what information was provided to Mr Kelly. In evidence Mr McKenna made it clear that he did not profess to give insolvency advice at the meeting. In cross-examination Mr McKenna said that the inference he drew form the meeting was that if a deal could be done with Hamilton CSIL could continue to trade.

Following the meeting there was an email exchange between Mr Bramley and Mr Kelly on 24 March 2014. Mr Bramley stated that CSIL were talking to Wetherby about putting in money to get rid of Hamilton and get the petition withdrawn. In the meantime he (Mr Bramley) was in the process of briefing Counsel to deal with a number of possible insolvency applications. Mr Kelly stated that he would hold off preparing a report until other routes had progressed.

On 25 March 2014 there was a meeting between CSIL, Hamilton and Wetherby. Mr McKenna had prepared a cash flow forecast which appeared to show that between the 28March 2014 and 31 May 2014 there would be receipts of £9.1 million and payments out of £8.9 million. It is however to be noted that the forecast involved deferring an undisputed debt of £1.85 million that was due to Wetherby until the end of May. The forecast does not make clear precisely what payments are intended for each debtor as payments of £4.7 million are included within the description “Others”. In evidence Mr McKenna said he thought he had made provision for 50% of the moneys due to Home Group and had included the £181,000 loan that had been made in January by Mr Gaffney in relation to the VAT.

It is not in dispute that an agreement was reached with Hamilton and the petition was withdrawn in April 2014. Payments totalling £2.1 million were made to Hamilton between April and May 2014.

In the course of his closing submissions Mr Stubbs produced two helpful spreadsheets giving details of payments received into CSIL’s bank account and payments over £1,500 made to unconnected parties. I have summarised the spreadsheets in the following table.

Mr Gaffney relied on the substantial moneys coming into the bank accounts as showing that CSIL was not insolvent. He also made the point that substantial payments were in fact being made to unsecured creditors. However there are a number of points that need to be made about these figures.

On 23 May 2014 solicitors for Wetherby demanded payment of £2.6 million by 27 May 2014 and threatened a winding up petition in default.

On 27 May 2014 CSIL filed a Notice to Appoint an Administrator in Newcastle. The form included a statutory declaration signed by Mr Gaffney that CSIL was or was likely to be unable to pay its debts. On the same day Mr Gaffney chaired a meeting of directors which resolved that CSIL was insolvent and unable to pay its debts as and when they dell due.

In cross examination Mr Gaffney disowned these statements saying that he thought that CSIL could trade through its difficulties.

On the same day Wetherby duly presented a winding up petition based on the debt of £2.6 million. Mr Gaffney has sought to say that the debt was disputed because it was not due until the end of May 2014. This was not a point taken at the time. In any event it is plain from subsequent events that CSIL was not in a position to pay Wetherby £2.6 million at the end of May. The petition was supported by Home Group in respect of its debt of £1.8 million.

On 20 June 2014 Mr Gaffney made two witness statements – one in support of an administration order and the other in support of a validation order. In the witness statements Mr Gaffney:

The application for the Administration Order was made on 24 June 2014. Included within the application was an estimated outcome statement which suggested that there would in any event be a substantial deficiency for creditors. It valued the assets in an administration at £1.17 million against liabilities of £6.29 million.

On 27 June 2014 a validation order was granted in respect of payments from 27 June 2014 until 4 July 2014. On 4 July 2014 an Administration order was made.

Following the order the Administrators employed Mr Gaffney and a staff of about 35 in order to assist in the collection of the debts. The principal debts said to be due to CSIL comprised £520,000 from Npower, £234,000 from Tadea and the sums already mentioned from E.ON.

I have set out the position above and will not repeat it. No sum has currently been collected from E.ON. There has been no response to E.ON’s letter.

According to Mr Gaffney his time was spent in collating the necessary information required by Npower to enable funds to be released. He said that he collated the necessary information and placed it on a USB stick. In so far as there was a lack of warranty documentation this was as a result of failures by subcontractors who were unwilling to provide the documentation. I was referred to the meeting of creditors held on 22 September 2014 where there was a discussion about the supply of warranties.

There was an exchange of emails on 9 and 10 October 2014 between the Administrators’ solicitors and Npower. It was pointed out that the USB stick would be available shortly and would be sent to Npower.

In response Ms Harris of Npower pointed out that there were 776 measures with a value of £820k with insufficient evidence. As only about £500k was being withheld there could be no immediate release of funds.

Ms Harris asked for information to enable her to reconcile the invoices and said that upon receipt of the USB stick the team would be able to validate information and recalculate the figures. If the result was favourable to CSIL payments would be made.

There is no further information save that no further payments have been made.

There has been no further payment from Tadea which itself became insolvent in February 2015. There is no prospect of any significant recovery from Tadea.

Assessment of witnesses

In my view both Mr Wainwright and Mr Green were honest straightforward witnesses who were trying to assist the Court. I agree with Mr Morgan that Mr Green’s evidence in relation to defects is more consistent with the documents than that of Mr Gaffney. Not only is there no hint of a complaint about Home Group’s work until 2 June 2014 (after the date of the presentation of the Wetherby petition) but the emails in January and February resulting in the “guarantee of payment” are inconsistent with the allegations now being made. Mr Wainwright has, of course no direct information about events before his appointment. Whether or not the debts from Npower and Eon are of any value is a matter I shall consider later in this judgment.

I regret that I did not find Mr Gaffney to be a reliable witness. In his closing note Mr Morgan set out 10 matters to justify this conclusion. I agree with most of them. To my mind the most important matters relate to the documents signed by Mr Gaffney at the time of the insolvency and his evidence in relation to the Home Group settlement. If Mr Gaffney did not believe that CSIL was insolvent he should not have passed a resolution to the effect that it was or have stated in a statutory declaration and two witness statements that it was. As he said in his witness statement CSIL was not in a position to pay the £2.6 million owed to Wetherby. He should not have said that the Wetherby debt was undisputed if there was a genuine dispute. Mr Stubbs tried to suggest that Mr Gaffney had changed his mind later but that was not Mr Gaffney’s evidence. His evidence was that despite the documents he signed he did not believe that CSIL was insolvent. To my mind that seriously undermines Mr Gaffney’s credibility. Mr Gaffney’s evidence over the Home Group settlement is, to my mind, simply incredible. To suggest that Mr Robson negotiated the settlement behind his back is, bearing in mind the sums involved, unlikely. It is made the more unlikely by the fact that Mr Gaffney either authorised or signed the cheque for £224,907.

I also agree that Mr Gaffney’s attempt to downplay the use of the word “desperately” in Mr McKenna’s email of 6 March 2014 was wholly unconvincing. If right it shows that Mr Gaffney was prepared to allow CSIL’s accountant to mislead HMRC if it suited his purpose. Again this is a matter which goes to Mr Gaffney’s credibility.

In the end I agree that I can only rely on Mr Gaffney’s evidence if uncontroversial, consistent with the documents or corroborated.

Mr Morgan was critical of Mr McKenna’s evidence. There is force in some of his criticisms. However Mr McKenna readily admitted that he had no knowledge of insolvency law and at no time gave insolvency advice. He did not know the statutory criteria for preference or transfers at an undervalue.

I did not think that Mr McKenna was trying to mislead the court on factual matters. However his opinions on matters to do with insolvency are clearly opinions upon which I can attach no weight.

Relevant time

It will be recalled that a major issue between the parties is whether the transactions were made at a relevant time. This depends on the provisions of the 1986 Act.

The relevant provisions are contained in ss 238, 239 and 240 of the 1986 Act. The relevant parts of those sections are set out below.

A number of matters are conceded on behalf of Mr Gaffney and CSIL(UK). It is conceded that Mr Gaffney and CSIL(UK) are connected persons within the meaning of the 1986 Act. It is also conceded that all of the challenged transactions took place within 2 years of the onset of insolvency as defined. Thus the question whether the transactions were made at a relevant time depends on whether at the time of each transaction CSIL was unable to pay its debts within the meaning of s 123 of the 1986 Act or became so unable as a result of the transaction. In the case of transactions at an undervalue there is a presumption in favour on the Administrators; in the case of preferences the burden rests with the Administrators.

S 123 contains two relevant definitions in ss 123(1)(e), and s 123(2)

This is an area of where there are 3 recent authorities to which I was referred – Eurosail [2011] 1 W.L.R. 2524 , a decision of the Supreme Court where the leading judgment was given by Lord Walker, Casa Estates [2014] EWCA Civ 383, a decision of the Court of Appeal where the leading judgment was given by Lewison LJ and Cheyne Finance [2007] EWHC 2402 (Ch) where the judgment of Briggs J was expressly approved in Eurosail.

In paragraphs 27 and 28 of his judgment in Casa Estates Lewison LJ summarised the legal effect of the two subsections.

The first of the challenged transactions was the 7 March 2014 – the agreement for the transfer of carbon.

On 7 March 2014 CSIL had cash flow problems. There was the outstanding winding up petition from Hamilton for £1.5 million. In the absence of funds from E.ON the only realistic prospect of paying Hamilton involved deferring the debt due to Wetherby. The debt from E.ON was disputed and more than 3 months overdue. No steps were being taken to enforce it.

On 6 March 2014 Mr McKenna had described CSIL as desperately needing a refund to honour the payment agreement with subcontractors.

Although some debts were being paid they were not being paid within the agreed payment terms. There was no concluded agreement to defer credit terms to 60 days. In any event many of the payments were paid more than 90 days after the invoices.

Some debts were not being paid at all. There was a liability to Home Group for £779,040 before the end of March with half being payable in 7 days.

This was the date of the first payment to JJ Quinn - £9,635.

CSIL’s position does not appear to have been very different from that on 7 March 2014. The meeting with Mr Kelly had not taken place. The Hamilton petition was still outstanding and there was no agreement with Hamilton. A payment of £788,710 had been made to Hamilton. The first of the payments to Home Group (£389,520) which had been guaranteed to be paid by 14 March 2014 had not been made. 6 other creditors were paid between 7 March 2014 and 20 March 2014. Some of the invoices dated back to October 2014.

This was the date of the repayment by CSIL of Mr Gaffney’s loan of £181,000 which had been made in January 2014.

By 28 March 2014 Mr Gaffney had met with Mr Kelly and with Hamilton. It is not clear what advice Mr Kelly gave. I do not accept that Mr Kelly advised that CSIL was solvent. This is evident from the email exchange on 24 March 2014. Some form of agreement was reached with Hamilton on 25 March 2014. I do not accept that there was any contractual obligation deferring payment to Wetherby until 31 May 2014.

Only 2 other creditors were paid between 20 March and 28 March 2014 – Wetherby (£29,843) and Green Dealer (£24,157). The invoices were dated October and November 2013. The second payment of £389,520 due to Home Group on 28 March 2014 was not made.

This was the date of the second payment to JJ Quinn - £11,146.

In the period between 28 March 2014 and 18 April 2014 Hamilton was paid £1,725,000 and the petition was withdrawn. Substantial sums were paid to CSIL from Tadea and Npower. A number of creditors were paid. Some of the invoices dated back to October 2013.

No payment was made to Home Group. On 15 April 2014 CSIL sent the first letter to Mitie demanding a credit note in respect of the invoice for £1.2 million. No provision had been made for this sum.

This was the date CSIL repaid CSIL(UK) £2,000 in respect of a loan of £11,000.

Substantial payments were received in the period from 18 April 2014 to 12 May 2014. As already noted the amounts received were in fact somewhat less than anticipated in Mr McKenna’s cash flow forecast.

The substantive reply was received from Mitie on 25 April 2014 making it very clear that Mitie regarded the sum of £1.2 million as due and gave a deadline of 19 May 2014 for payment.

Payments were made to some creditors. The invoices appear to have been overdue. Some creditors were not paid at all. These included Home Group, Mitie and Ryedale.

This was the date CSIL repaid Mr Gaffney £150,000 in respect of a loan he had made in February 2014

There is nothing to add to the comments in respect of 12 May 2014.

This was the date CSIL made the final payment of £10,772 to JJ Quinn Racing

Save to note that Mitie’s deadline passed on 19 May 2014 there is nothing to add to the comment in respect of 12 May 2014.

This was the date when CSIL paid CSIL(UK) £252,000 in respect of sums due under the Jan 2013 Agreement and £9,000 in repayment of the balance of the loan of £11,000.

Mr Gaffney pointed out that the £252,000 was not the total sum due under the Jan 2013 Agreement. It was the sum calculated to the end of February 2014 (i.e 14 months plus VAT).

On 23 May 2014 Wetherby’s solicitors issued a formal demand for £2.6 million to be paid by 27 May 2014. The letter was sent by email. As Mr Gaffney acknowledged in his witness statements in support of the administration order and the validation order the debt was undisputed and CSIL could not pay it. It was also not in a position to pay or make provision for sums due to Mitie or Home Group.

Some creditors were paid in May but as already noted many were not.

This was the date that CSIL paid Mr Gaffney £200,000 in repayment of his loan account.

At one time it was suggested that part of that sum was arrears of salary. However when Mr McKenna gave evidence the position was clarified. On 23 May 2014 Mr Gaffney had asked him to calculate a salary on the basis of £15,000 per month based on Mr Gaffney’s taxable allowance. However the matter never went through CSIL’s books and was not included in the payroll. There was never any agreement that Mr Gaffney would receive such an amount. I have no difficulty in accepting that evidence.

On 25 May 2014 Mr Gaffney had received the unfavourable advice from Counsel in respect of the claim by Mitie for £1.2 million.

On 27 May 2014 Mr Gaffney took advice from insolvency practitioners and passed the resolution necessary to file the Notice of Appointment of Administrators at the High Court in Newcastle.

On 27 May 2014 Wetherby duly presented the threatened winding up petition.

Mr Stubbs submits that this is not a case where I should apply the cash flow test. He submits that there are issues on many of the claimed debts with the result that the court should apply a balance sheet test as to whether CSIL was insolvent at any particular date.

Whilst I accept that Mr Gaffney has asserted that there are issues in respect of some of the debts the allegations are vague and uncorroborated. Furthermore Mr Gaffney has not given any details in respect of the amount of the disputes. That put Mr Stubbs in the difficult position of having to submit that the whole of the claims were disputed. I do not accept that submission.

I am conscious that the cash flow test is flexible and fact sensitive; I am also conscious that I must not apply a blinkered approach so as to miss a “temporary illiquidity”. It is for that reason that I have chosen to look at the whole period between 7 March 2014 and 27 May 2014.

I am quite satisfied that for the whole of that period CSIL was unable to pay its debts as they fell due. I shall not repeat the comments made above in respect of the individual dates. It is to my mind plainly not a case where there was temporary illiquidity. Rather there was an endemic shortage of funds caused in part by E.ON’s failure to pay the £1.2 million, and in part by the huge dividend of £650,000 paid to Mr Gaffney in 2013. The position was made worse by the changes to the market for carbon credits in April 2014. This led to a position where creditors that were paid were paid late, some creditors were not paid at all, and agreements in respect of late payments not honoured. As Mr McKenna pointed out at the beginning of March CSIL was desperate for cash. That position did not improve despite the fact that substantial amounts of cash was in fact received between March and the end of May 2014.

It is not necessary for me to consider whether CSIL was balance sheet insolvent at the relevant dates. However in the light of the argument I shall deal with it briefly.

In order to assist the application for a validation order Mr McKenna prepared management accounts for the period ending 31May 2014. This included as balance sheet as at 31 May 2014 which showed a surplus of assets over liabilities of £622,656. Included within this sum was an item for trade debtors of £1,466,253 and an item for work in progress of £2.8 million. The item for trade debtors includes the E.ON debt. The item for work in progress was substantially written down (to £140,000) in the estimated outcome statement prepared in support of the administration application.

Subsequent events have shown that so far no part of the E.ON debt or the Npower debt has been recovered. Tadea is insolvent. Nothing has been recovered in respect of the work in progress save for £5,000 pursuant to an agreement with Mitie.

The court has to make a judgment whether looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to meet those liabilities. Cases such as Green v Tai [2015] BPIR 24 paragraph 82and Watchorn v Jupiter [2014] EWHC 3003 (Ch) are authority for the proposition that the court is entitled to use hindsight to determine if the test is met.

Mr Stubbs submits that the court should test the matter on a going concern basis. On that basis it should treat the work in progress and the E.ON debt as recoverable in full. I do not accept that submission. This is a case where throughout the period there was a substantial risk of insolvency. For example the email exchange on 24 March 2014 shows clearly that the survival of CSIL was by no means certain. It is also to be noted that no steps were being taken by CSIL to enforce the E.ON debt even though it was more than 3 months overdue. To my mind that indicates that Mr Gaffney appreciated that recovery might not be straightforward.

It would not in my view be right to write off the E.ON debt and work in progress but in my view a significant discount of at least 30% should be applied to reflect the risks of non recovery. Such a discount would be more than enough to make CSIL balance sheet insolvent. The matter does not quite end there because it is by no means clear how far the disputed debts are included in the management accounts. In particular it is not clear what figure has been included for the Mitie claim of £1.2 million. In the light of Counsel’s opinion there must be a very significant risk that that claim will be held to be valid.

For these reasons I would have held that CSIL was also balance sheet insolvent.

The Preference Claims.

The first question to be decided is whether the payments made by CSIL did have the effect of putting Mr Gaffney and/or CSIL(UK) in a better position than they would have been in the event of an insolvent liquidation at the time of each payment.

In paragraph 52 and 53 of his opening skeleton Mr Morgan produced a helpful table of cumulative debts which I reproduce for convenience (omitting footnotes):

Mr Stubbs did not seek to argue that Mr Gaffney and CSIL(UK) were not in a better position than they would have been in an insolvent liquidation. It is clear from this table that he was right not to do so.

Thus, as noted above, the critical question that arises under s 239(5) is whether CSIL was influenced by a desire to put Mr Gaffney and/or CSIL(UK) in a better position than he/it would have been in an insolvent liquidation.

This is a case involving connected persons. It follows that under s 239(6) it is presumed that CSIL was influenced by the requisite desire unless Mr Gaffney can prove otherwise.

The meaning of “desire” was explained by Millet J in Re MC Bacon[1990] BCC 78 at 87 as follows:

“Desire has been substituted. That is a very different matter. Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.

It is not, however, sufficient to establish a desire to make the payment or grant the security 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. A man is not to be taken as desiring all the necessary consequences of his action. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages. It will still be possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditors’ position in the event of its own insolvent liquidation.

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 have influenced the decision to enter into the transaction. It was submitted on behalf of the Bank that it must have been the factor which “tipped the scales”. I disagree. That is not what sub-s (5) says; it requires only that the desire should have influenced the decision. That requirement is satisfied if it was one of the factors which operated on the minds of those who made the decision. It need not have been the only factor or even the decisive one. In my judgment, it is not necessary to prove that, if the requisite desire had not been present, the company would have entered into the transaction. That would be too high a test.”

In paragraph 76 of the judgment in Re Oxford Pharmaceuticals Ltd [2010] BCC 834 Mr Mark Cawson QC explained the effect in a transfer to a connected person in this way:

As noted above there are 3 challenged payments to Mr Gaffney - £181,000 on 28 March 2014, £150,000 on 15 May 2014 and £200,000 on 27 May 2014. This is a case where I have rejected Mr Gaffney’s evidence as unreliable unless corroborated by either documentary evidence or other reliable witnesses.

There is no corroboration for the explanation proffered by Mr Gaffney that he was trying to treat creditors fairly and paying creditors with debts up to the end of February. For reasons already given it is an explanation that does not hold water. Some creditors were not paid at all, others were not paid up to the end of February. As Mr Morgan pointed out there was no pressure on CSIL to make any repayments to connected parties.

To my mind the only possible explanation for the payment on 27 May 2014 is that Mr Gaffney was influenced by a desire to prefer his debt over others. There is no other explanation for making that payment on the same day as he had filed the Notice to Appoint Administrators and been party to a resolution that CSIL was insolvent.

On 15 May 2014 CSIL was faced with the “undisputed” debt from Wetherby’s which it could not pay. Substantial sums were due to Home Group and there was a claim from Mitie. Other debts were not paid. In those circumstances Mr Gaffney has failed to satisfy me that a desire (i.e. a subjective wish) to better his position in the event of an insolvent liquidation did not operate on his mind at all.

On 28 March 2014 Mr Gaffney had negotiated an agreement with Hamilton. However substantial sums had to be paid to Hamilton. Furthermore CSIL had failed to make the two agreed payments to Home Group and owed substantial sums to Wetherby. Creditors were being paid late or not at all. There was no commercial reason to repay the loan that had been made in January 2014. Thus Mr Gaffney has failed to satisfy me that a desire (i.e. a subjective wish) to better his position in the event of an insolvent liquidation did not operate on his mind at all.

In addition there were the 3 payments to JJ Quinn each of which was debited to Mr Gaffney’s loan account. In effect Mr Gaffney was drawing on the credit balance of his loan account to enable him to make these payments under which CSIL might have achieved some benefit. The sums involved are relatively small and with some hesitation I have come to the conclusion that Mr Gaffney probably did not consider the question of improving his position when making these payments. It follows that these claims do not succeed

It follows that the first 3 of these claims succeed and I would order Mr Gaffney to repay the money with interest.

The most important of these is the payment of £252,000 on 23 May 2014. It will be recalled that this was the day upon which Wetherby issued the final demand for £2.6 million which CSIL could not pay. There was no pressure to repay the £252,000. The only possible inference is that Mr Gaffney was influenced by a desire to better CSIL(UK)’s position in the event of an insolvent liquidation. I cannot think of any other reason why he would have chosen to cause CSIL to make this payment at that time

In relation to the two loans totalling £11,000 there was no reason to repay them at this difficult time. The loans were only made in March. Thus Mr Gaffney has failed to satisfy me that a desire (i.e. a subjective wish) to better CSIL(UK)’s position in the event of an insolvent liquidation did not operate on his mind at all.

It follows that each of these claims succeed and I would order CSIL(UK) to repay the money with interest.

The Undervalue claim

On 7 March 2014 CSIL entered into a contract with CSIL(UK) for the sale of 40,000 tonnes of carbon at £2.50 per tonne. Thus the value of the contract was £100,000. Under clause 5 any outstanding money to CSIL(UK) was to be netted off any sum payable. Under clause 6 payment was to be made in January 2015 on condition that none of the carbon was rejected by Ofgem.

The contract was not favourable to CSIL in that even if £2.50 was a fair value payment was deferred for 9 months and CSIL(UK) could set off the payment against sums due under the Jan 2013 Agreement. In effect CSIL was disposing of 40,000 tonnes of Carbon to CSIL(UK).

In paragraphs 56 and 57 of his witness statement Mr Gaffney explained his reasons for entering into the contract:

Mr Gaffney managed to sell approximately 18,000 tonnes of the carbon to GSI on about 24 March 2014. Initially the subcontract showed that CSIL was the seller. However a later contract showed it to be CSIL(UK). In any event a sum of £684,442 was paid to CSIL(UK) on 4 June 2014. A witness statement from Mr Bridges the Managing Director of CSI indicates that he was not entirely clear whether he was dealing with CSIL or CSIL(UK). This appears to be confirmed by the contemporaneous emails and documentation.

When he gave evidence Mr Gaffney stressed the difficulty that he had had in trying to sell the carbon before 7March 2014. He made the point that there was a risk that the carbon was worthless. He said that it did not have a pre EPC certificate although it was compliant. He said that the figure of £100,000 was reached on the basis of risk. He said that there was a risk that it was valueless.

In his report Mr Kimber took the view that the price paid by GSI was a fair price. He also took the view that a price of £2.50 per tonne was significantly less than the market rate at the time.

I have already mentioned the cross-examination of Mr Kimber on the question of pre EPC certificates. I do not accept that these carbon credits had no value. They were plainly treated by GSI as compliant. In his witness statement Mr Gaffney described them as compliant. There is no evidence that the ultimate funder (British Gas) has queried them in any way.

The crucial question is whether the value of the consideration provided by CSIL(UK) was significantly less than the value of the consideration provided by CSIL. The value provided by CSIL(UK) was a deferred payment of £100,000 coupled with a right to set off against other sums due to CSIL(UK) when there was in existence the Jan 2013 Agreement.

I accept that some of the factors mentioned by Mr Gaffney might have had some effect on the market value. However there is no real reason to believe that CSIL(UK) was in any better position to sell the carbon credits than CSIL. Certainly Mr Bridges did not distinguish between the two companies. Thus those factors would have been taken into account in the price achieved by CSIL(UK). It is to be noted that it was Mr Gaffney who negotiated the sale on behalf of CSIL(UK).

The Court is entitled to take into account the price achieved by CSIL(UK) within a short time of the purchase from CSIL.

I am quite satisfied that the value of the consideration provided by CSIL(UK) was worth significantly less than the value of the consideration provided by CSIL. I assess this at the price achieved on the sale by CSIL(UK) or £684,442.

In my view CSIL(UK) should repay £584,442 with interest.

Breach of Duty

I shall not lengthen this already long judgment by setting out the sections of the Companies Act 2006. Both Counsel were agreed that the law is adequately summarised in paragraphs 88 – 92 of the judgment of Mr John Randall QC in Re HLC [2014] BCC 337:

Mr Morgan also cited GHLM Trading Ltd v Maroo [2012] 2 BCLC 369 at [148]-[149] as authority for the proposition that once it is shown that a director (or a connected person) has received company assets, the burden is on him as quasi-trustee to show that the transaction was proper one for the company to have entered into.

In my view this is a case where the interests of creditors are plainly engaged. It is also a case where I am entitled to take an objective approach. In my view none of the payments were objectively in the best interests of the creditors as a whole. In my view all of the payments (including the payments which were used to pay JJ Quinn) were in breach of duty. In my view this is not a case where it would be proper to relieve Mr Gaffney from the consequences of the breach of duty under s 1157 of the Companies Act 2006. This is a case where Mr Gaffney and/or CSIL(UK) have gained financially as a result of the breach of duty. There is no basis for saying that Mr Gaffney’s conduct was reasonable or for saying that he ought to be excused.

I accordingly consider that Mr Gaffney is jointly liable with CSIL(UK) to make repayments by way of equitable compensation and is also liable to repay the £31,284 paid to JJ Quinn even though I am not satisfied that the payment of those sums constituted a preference.