First appeared in Company Secretary's Review, 1 Aug 2012
Re Algrave Ltd and 726 other companies Cohen and another v Safe Solutions International Ltd and another
A payment made from insolvent companies was a voidable preference within the meaning of section 239 of the Insolvency Act 1986 ("IA"). By allowing the payment, the de facto director of the companies had been guilty of misfeasance within the meaning of section 212 of IA.
The joint administrators of Algrave Limited made an application against Safe Solutions International Ltd (S) for a declaration that the sums (£75,000, £250,000 and £50,000) received by S from various companies (C) in November 2007, January 2008 and 9 June 2008 were voidable preferences. A declaration was also sought against Mr Hill (H) that he acted in breach of his fiduciary duties for allowing the payments to be made by C.
H was de jure director of Safe Business Services Ltd (SB) and S. SB was the only de jure director of C. H was de facto director C. S provided administrative services to C pursuant to a management agreement. The management agreement entitled S to "an amount (the "Bank Administration Charge") equivalent to all interest from time to time arising in respect of the bank account(s) from time to time administered by SSIL [S] for the company". The schedule to that agreement provided that the "Bank Administration Charges shall be due to SSIL [S] from the moment any interest accrues on the relevant account(s) and such interest shall be deemed to belong to SSIL [S] from such moment."
C were placed into administration on 29 September 2008. The Court held that C were insolvent by the time C made the first payment to S in November 2007. Specifically, C owed HMRC a total of £4.4 million in respect of unpaid VAT.
S lent another company named Safe Solutions Investments Limited the £375,000. The loan was paid out of an account in S's name which had held funds on trust for C.
The Court rejected the applicants' argument that because S was entitled to an amount "equivalent to interest" rather than "all interest" the money belonged to C if only for a 'scintilla' of time. S was entitled to interest on the account as soon as it was credited to it. There was no beneficial ownership of the interest by C.
However, the Court held that the balance (£174,898.71) did constitute a preference in favour of S at a time when C were insolvent. Even if S was owed professional fees, there could be no operation of set off to prevent the payments being preferences (applying Manson v Smith  2.B.C.L.C 250). Accordingly, and in the absence of any evidence that H acted honestly and reasonably, the Court declared that H had acted in breach of his duty to C by allowing the payment to be made to S. The Court emphasised that H's duty was to protect the interests of the creditors generally (applying West Mercia Safety wear Limited (in liquidation) v Dodd  B.C.L.C.250.)