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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Green (Liquidator of Stealth Construction Ltd) v Ireland [2011] EWHC 1305 (Ch) (20 May 2011)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/1305.html
Cite as: [2011] EWHC 1305 (Ch), [2011] BPIR 1173

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Neutral Citation Number: [2011] EWHC 1305 (Ch)
Case No: 2553 of 2010

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY

Civil Justice Centre
Manchester
20/05/2011

B e f o r e :

MR JUSTICE DAVID RICHARDS
VICE CHANCELLOR OF THE COUNTY PALATINE OF LANCASTER

____________________


IN THE MATTER OF STEALTH CONSTRUCTION LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986

ELLIOTT HARRY GREEN LIQUIDATOR OF STEALTH CONSTRUCTION LIMITED)
Applicant
- and -

JOANNA ELIZABETH IRELAND
Respondent

____________________

Mr James Morgan (instructed by Freeth Cartwright LLP) for the Applicant
Mr John Pennie (solicitor, Dickinson Dees) for the Respondent

Hearing date: 18 May 2011

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Mr Justice David Richards :

    Introduction

  1. The liquidator of Stealth Construction Limited (the company) applies for a declaration that the grant on 9 December 2008 of a second legal charge over a property owned by it to secure loans totalling £300,000 made by the respondent, Joanna Elizabeth Ireland, was a preference under s.239 of the Insolvency Act 1986. He applies for orders that the charge be set aside and that Mrs Ireland pay the sum of £130,414.09 paid to her as holder of the charge.
  2. The charge was created pursuant to an agreement or arrangement made in October 2007, when Mrs Ireland advanced £145,000 as the first part of her loan. The loans were made for the purpose of, and duly applied in, the purchase of the property. The principal issues which arise are, first, whether the agreement or arrangement created binding obligations or gave rise to an equitable interest in or charge over the property, and, secondly, when the operative decision to grant the legal charge was made and whether it was influenced by a desire to put Mrs Ireland in a better position in an insolvent liquidation.
  3. The Facts and evidence

  4. The facts are largely uncontroversial. The liquidator and his solicitor provided witness statements in support of the application. Neither had direct knowledge of any relevant matter and their evidence was based on documents available to them and on interviews conducted by the liquidator.
  5. Evidence in opposition to the application was given by Mrs Ireland and Philip Saunders, a partner in Saunders Bearman, solicitors who had acted for the company. Each provided witness statements on which they were, quite briefly, cross-examined. Mrs Ireland was not significantly challenged on any of her evidence. She was an entirely reliable and truthful witness with a clear recollection of relevant events, who gave her evidence in a straightforward and impressive manner, all the more so as she has been very seriously ill. Mr Saunders was challenged on part of his evidence, giving rise to the only real issue of fact in this case, and I will consider the quality of his evidence when dealing with that issue.
  6. Neither party called the former directors of the company.
  7. The company was incorporated in April 2007 and commenced business shortly afterwards. Its directors and equal shareholders were Susan Gillis and Manuel Costa. Miss Gillis was an interior designer and Mr Costa ran two construction companies. Their intention was to use their skills and experience in the purchase, redevelopment and sale or letting of luxury residential properties in London.
  8. Between August 2007 and March 2008 the company purchased three properties in Primrose Hill and St John's Wood. These purchases were funded in each case by loans made by Royal Bank of Scotland (RBS) and a number of individuals. Loans were also made to fund the redevelopment of the properties.
  9. The property relevant to the present application was 20 Hill Road, St John's Wood, London NW8. Contracts of purchase at a price of £2.85m, with £142,500 payable on exchange, were exchanged on 26 October 2007. Because the vendors needed to obtain a grant of probate, it was agreed that completion would be delayed until early 2008. The purchase was completed on 25 March 2008.
  10. The purchase of the property was funded by loans of £2m from RBS and £300,000 from Mrs Ireland and by further loans from other individuals. A first legal charge over the property was granted to RBS immediately on completion on 25 March 2008. The second legal charge in favour of Mrs Ireland, in issue in these proceedings, was granted on 9 December 2008.
  11. Mrs Ireland and Miss Gillis are sisters. On a number of occasions during the autumn of 2007 Miss Gillis asked Mrs Ireland if she wished to invest in the company. Miss Gillis stayed with Mrs Ireland and her husband over the weekend of 20/21 October 2007. In discussions over the weekend, Mrs Ireland agreed to lend £300,000 to the company for a term of one year, with interest at the rate of 15% payable at six-monthly intervals. The purpose of the loan was to assist in the purchase of the property. Miss Gillis told Mrs Ireland that the bulk of the purchase price would be paid out of a loan from RBS secured by a first charge. Mrs Ireland told Miss Gillis that she would require a second charge over the property.
  12. On Monday 22 October 2007, Miss Gillis emailed Mrs Ireland as follows:
  13. "Hi Jo
    Firstly thank you for a wonderful day yesterday. Perry had a brilliant time and can't wait to come back.
    Regarding the deposit for hill road we are trying to agree to only transfer 5% in his account and he will try and do it with that.
    Therefore can you please transfer over £145,000 to:
    [Bank]
    [sort code]
    Saunders bearman client a/c
    [account number]
    I will let him know that it is from you and needs to go against hill road
    Also I will draw up a document that I will send to you having it signed by stealth but will make sure that both me and manuel have signed it.
    I will also arrange for you to have second charge over hill road and will instruct Phillip to draw that document up for you.
    Hope that this is alright.
    Have a wonderful time in Rome
    Lots and lots of love
    Suzy"
  14. On the same day Mrs Ireland replied:
  15. "Suzy,
    Do remind me tomorrow.
    Any news on the cooker,
    Jo"
  16. On 23 October 2007 Mrs Ireland transferred £145,000 to the account of the company's solicitors Saunders Bearman. They received instructions to apply it in payment of the deposit on exchange of contracts for the purchase of the property and did so on 26 October 2007. There is an issue, to which I will later return, as to what, if any, instructions were given to Saunders Bearman as to the terms of the loan or the giving of a second charge on the property.
  17. Also on 23 October 2007, Miss Gillis sent an unsigned letter to Mrs Ireland in the following terms:
  18. "Dear Jo
    RE: 20 HILL ROAD LONDON NW8
    Further to our various discussions I confirm that you have agreed to lend to stealth the sum of £300,000 (three hundred thousand pounds) in relation to the purchase and development of the above mentioned property.
    The sum loaned has been done so on the following basis:
    £145,000 23rd October 2007 for the sole purpose of exchange
    £155,000 on completion which will be on production of probate but in any event not sooner than the 8th January 2008 with a long stop date of end of March 2008.
    Interest is as follows:
    15% on the whole amount to be paid as stated below:
    7.5% by the 23rd of April 2008
    7.5% by the 23rd of October 2008
    In the event that stealth construction makes more than 20% net profit on the whole project then stealth shall pay a further 50% of any proceeds over the 20% net profit."
  19. Mrs Ireland's evidence, which I accept, is that the profit share provision included at the end of the letter had not been agreed or discussed with her. The letter was not signed by Miss Gillis or anyone else on behalf of the company or by Mrs Ireland.
  20. As the letter makes clear, it was envisaged that completion of the purchase would be delayed until January 2008 at the earliest pending production of a grant of probate. In fact it did not occur until 25 March 2008 when the balance of the purchase price, amounting to £2,715,165, was paid. It was funded by a loan of just under £2m from RBS, the second tranche of £155,000 of the loan from Mrs Ireland (less interest due on the first tranche of £5,875) and further loans from other individuals.
  21. Mrs Ireland assumed that the necessary steps would have been taken by the company to grant her the second charge which had been agreed in her discussions with Miss Gillis on 20/21 October 2007. She was very seriously ill throughout the period from October 2007 until well into 2009 and quite naturally the grant of the charge was the least of her concerns.
  22. In October 2008, when the loan and accrued interest became payable, Miss Gillis and Mr Costa told her that the company was facing at least cash-flow difficulties and was unable to pay the sums then due. Her husband suggested that she should check whether the second charge had in fact been granted and enquiries by a solicitor friend disclosed that it had not. Mrs Ireland was understandably very angry and upset and made it very clear to her sister that she expected the charge to be granted.
  23. Steps were then taken to put the second charge in place. The consent of RBS as first chargee was required under the terms of its security and first Miss Gillis and then Saunders Bearman, in a letter dated 27 November 2008, requested its consent, which was given. Under cover of a letter dated 26 November 2008, Saunders Bearman sent a draft charge to Miss Gillis. In the letter, Mr Saunders wrote that she was going to let him see the letter between her and Mrs Ireland recording the loan, which would be annexed to the charge, and in a postscript stated that he had received from her the two letters dated 23 October 2007 and 28 February 2008 and that he had amended the charge on that basis.
  24. Under cover of a compliments slip dated 26 November 2008 Mr Saunders sent the revised draft charge to Mrs Ireland. Mr Saunders wrote on the compliments slip:
  25. "Enclosed a fresh print of the second charge – there was a mistake in the one sent to Suzy. I'm sorry that this was not put into place (your security) that is on completion. It should have been."
  26. The second charge was executed on behalf of the company and dated 9 December 2008. It was duly registered both with the registrar of companies under the Companies Act and on the title register at the Land Registry.
  27. The company failed to repay loans to other lenders and on 16 June 2009 a petition was presented to wind up the company based on a debt of £483,750. A winding-up order was made on 29 July 2009. In August 2009, RBS appointed receivers of the three properties owned by the company and charged to it, and in due course the properties were sold and RBS was fully repaid the sums due to it.
  28. In December 2009, the net surplus of £130,414.09 arising in respect of the property at Hill Road was paid to Mrs Ireland as holder of the second charge.
  29. The one disputed issue of fact is whether Miss Gillis or anyone else instructed Saunders Bearman to prepare the second charge in favour of Mrs Ireland in the autumn of 2007 or at any other time before October or November 2008.
  30. Mr Saunders' evidence, which Mr Morgan for the liquidator challenged in cross-examination, was that he was instructed in October 2007 on behalf of the company to prepare the charge. He proposed to prepare the charge and arrange for its execution once the purchase was completed but as a result of the delays in completion he forgot to do so until reminded by Miss Gillis in the autumn of 2008. I reject this evidence. Saunders Bearman's file has been inspected and there is no document referring to any such instructions or the possibility of a second charge until November 2008. There is no file note of any conversation on the subject with Miss Gillis and no letter or email to or from Miss Gillis or anyone else referring to a charge.
  31. Mr Saunders knew that completion would be delayed until January 2008 at the earliest, but his file contains no reminder to prepare the charge on completion. It was his standard practice to annex the terms of a loan to a security document, but he did not have the letter of 23 October 2007 until 26 November 2008 nor is there any evidence that he knew the terms of the loan until then. When asked for an explanation as to why he did not ask for details of the loan agreement in October 2007, he could give none. He had no contact with Mrs Ireland on the subject.
  32. Mr Saunders says that he knew that the consent of RBS would be required but through inefficiency did not approach RBS in 2007 for its consent. However, he wrote to the solicitors for RBS on 29 October 2007 concerning the proposed loan by RBS and the security for it but made no mention of a second charge and the need for the consent of RBS.
  33. While I accept, as Mr Saunders suggested, that he is not meticulous in preparing file notes, I am satisfied that by reference to these factors, combined with the unconvincing tenor of his evidence, that he did not receive instructions to prepare the second charge until late 2008. He has accepted that in June 2009 he concocted a letter, on which he forged Mrs Ireland's signature, which stated, untruthfully as he must have known, that her loan of £300,000 was to Miss Gillis personally to enable her to introduce capital into the company. This letter was prepared in connection with entirely personal loans made by Mrs Ireland to Miss Gillis. Miss Gillis was very embarrassed that she had not provided the security over her own home which she had promised for these personal loans. Mr Saunders told me that a complaint about this has been made to the Solicitors Regulatory Authority and that it is currently the subject of an investigation. I will say no more about it, save that it does demonstrate a willingness on Mr Saunders' part to do what he can to assist Miss Gillis and save her from personal embarrassment.
  34. Section 239 Insolvency Act 1986

  35. Section 239(2)–(6) provides as follows:
  36. "E+W(2) Where the company has at a relevant time (defined in the next section) given a preference to any person, the office-holder may apply to the court for an order under this section.
    (3)Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference.
    (4)For the purposes of this section and section 241, a company gives a preference to a person if—
    (a) that person is one of the company's creditors or a surety or guarantor for any of the company's debts or other liabilities, and
    (b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.
    (5) The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b).
    (6) A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5)."
  37. 'Relevant time' is defined, for the purposes of s.239, by s.240(1) as being either, in the case of a preference given to a person who is connected with the company, any time in the period of 2 years ending with the onset of insolvency or, in any other case, any time in the period of 6 months ending with the onset of insolvency. In the present case, the onset of insolvency means the commencement of the winding up of the company, i.e. 16 June 2009: s.240(3)(e). Persons connected with a company are defined in a combination of ss.249 and 435 and, relevantly for present purposes, include a sister of a director of the company. A time is not 'a relevant time' unless the company was at that time unable to pay its debts within the meaning of s.123 or became so in consequence of the transaction.
  38. Issues and common ground

  39. There is common ground between the parties on a number of issues.
  40. First, it is accepted that, because Mrs Ireland and Miss Gillis are sisters, Mrs Ireland is a person connected with the company. This has two consequences. The first is that the 'relevant time' for the purposes of s.239(2) is any time within two years ending on 16 June 2009 when the winding-up of the company commenced. Therefore execution of the charge in December 2008, and the agreement made in October 2007, occurred at 'a relevant time'. The second is that, if the company gave a preference to Mrs Ireland by the execution of the second charge, the company is presumed, unless the contrary is shown, to have been influenced in deciding to give it by a desire to put Mrs Ireland into a position which, in the event of the company going into insolvent liquidation, would be better than would otherwise have been the case, in other words, to prefer her.
  41. Secondly, the liquidator does not contend that the company was or became insolvent, as defined in s.240 (2), in October 2007. Equally, it is accepted on behalf of Mrs Ireland that the company was insolvent, as so defined, from October 2008.
  42. The issues between the parties are these.
  43. First, Mrs Ireland does not accept that the execution of the second charge in December 2008 constituted a preference, as defined in s.239(4)(b), by reason of the rights already enjoyed by her as a result of the agreement made in October 2007 and the application of her loans in the purchase of the property.
  44. Secondly, and if the execution of the charge satisfied s.239(4)(b), Mrs Ireland submits that the company's decision to grant the charge was taken in October 2007 and was not influenced by a desire to put her in a better position. The liquidator submits that the decision was taken in late 2008 and that Mrs Ireland has not rebutted the statutory presumption that it was influenced by a desire to put her in a better position.
  45. This focus on the date of decision, for the purposes of the relevant desire, rather than the date on which the legal charge was executed, stems from the terms of s.239(5) and (6) and authorities beginning with Re MC Bacon Ltd [1990] BCC 78 to which I will later refer.
  46. Rights conferred on Mrs Ireland in October 2007

  47. The liquidator accepts that over the weekend of 20/21 October 2007 an oral agreement was made between Miss Gillis on behalf of the company and Mrs Ireland that Mrs Ireland would lend a total of £300,000 to the company to be applied towards the purchase of the property, repayable after one year, carrying interest at 15% per annum, and secured by a second legal charge on the property.
  48. The liquidator submits that a contract to grant a second legal charge had to be in writing and satisfy the other requirements of s.2 of the Law of Property (Miscellaneous Provisions) Act 1989. He submits that these requirements were not satisfied and that therefore there was no obligation enforceable against the company to grant the second legal charge.
  49. The liquidator further submits that Mrs Ireland has not made out any other basis for an enforceable security interest in the property.
  50. (i) Section 2 Law Property (Miscellaneous Provisions) Act 1989 (the 1989 Act)

  51. Section 2, so far as relevant, provides as follows:
  52. "2 Contracts for sale etc. of land to be made by signed writing.E+W
    (1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
    (2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
    (3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.
    (5) …
    nothing in this section affects the creation or operation of resulting, implied or constructive trusts.
    (6)In this section—
    "disposition" has the same meaning as in the Law of Property Act 1925;
    "interest in land" means any estate, interest or charge in or over land or in or over the proceeds of sale of land."
  53. It is not disputed that a contract for the grant of a charge on land is a contract for the disposition of an interest in land and that therefore s.2 applies to any such contract made between the company and Mrs Ireland.
  54. The only documents which may be said to record or constitute the contract were the exchange of emails on 22 October 2007 and the letter dated 23 October 2007. The latter cannot satisfy s.2, first because it does not mention or refer to the grant of security, and secondly because it was not signed by or on behalf of Mrs Ireland or, as it seems to me, the company.
  55. The exchange of emails on 22 October 2007 was in electronic form, and hard copies have been printed only in the context of the subsequent dispute. The liquidator accepts, adopting the reasoning of HHJ Pelling QC in J.Pereira Fernandes SA v Mehta [2006] 1 WLR 1543 in the context of the statutory requirements for a guarantee, that Miss Gillis on behalf of the company and Mrs Ireland, by inserting their names at the end of the emails sent by them respectively, had 'signed' them for the purposes of s.2.
  56. Section 2 (3) requires also that the document incorporating the terms be signed by or on behalf of each party. The liquidator accepts that Miss Gillis' email to Mrs Ireland and Mrs Ireland's reply constitutes a single document for these purposes. In my view, this is right where, as here, the second email is sent as a reply and so creates a string, as opposed to be simply a new email referring to an earlier email. It is the electronic equivalent of a hard copy letter signed by the sender being itself signed by the addressee.
  57. The points taken by the liquidator are twofold. First, the exchange of emails on 22 October 2007 do not constitute or contain a contract at all, but at best evidence in part an oral agreement made on 20/21 October 2007. Secondly, and in any event, the emails do not incorporate all the terms expressly agreed by the parties.
  58. In my judgment, both points are well-founded. Miss Gillis' email contains a request that Mrs Ireland should transfer £145,000 to Saunders Bearman, combined with statements that she will send a document signed by Mr Costa and herself, presumably setting out the agreed terms, and that she will arrange for a second charge to be given. Mrs Ireland's reply states only, 'do remind me tomorrow'. The emails are not expressed in terms which suggest binding obligations on the parties, nor do they state the terms of any contract but on the contrary state that a further document will be drawn up. In my judgment, leaving aside issues under s.2, neither party could maintain an action on the basis that these emails were themselves a contract, save possibly a unilateral contract that if Mrs Ireland advanced £145,000, the company would create a second legal charge on the property to secure it.
  59. In any event, the emails do not incorporate all the terms which the parties have expressly agreed. The emails contain no reference to either the date of repayment or the rate interest and dates for payment of interest, all of which had been agreed on 20/21 October 2007. Further, the agreement was for a loan totalling £300,000, not a loan of £145,000.
  60. Both sides relied on the decision of the Court of Appeal in North Eastern Properties Ltd v Coleman [2010] 1 WLR 2715. In that case, a distinction was drawn between the terms of the contract of sale or disposition of the interest in land (the land contract) and other terms which commercially formed part of a composite transaction but were not, nor intended to be, terms of the land contract. In this case, it seems clear to me that the terms referred to above were terms of the land contract. The total amount of the loan, its repayment date, the terms as to interest and the obligation to grant a second charge to secure both principal and interest were all terms of the one agreement, not collateral contracts forming part of a composite transaction in commercial terms.
  61. It follows that no enforceable contract for the grant of a charge in favour of Mrs Ireland was made in October 2007.
  62. (ii) Other rights

  63. Mr Pennie on behalf of Mrs Ireland submitted that, even if no enforceable contract was made, Mrs Ireland acquired an equitable right, which became an equitable interest in the property on completion in March 2008, resulting from the combination of the agreement in fact made for the grant of a second charge to secure Mrs Ireland's loans, the making of the loans by her and the application of the borrowed money, as agreed, towards the payment of the deposit and purchase price.
  64. Mr Pennie made clear that he was not seeking to assert a resulting, implied or constructive trust, so that the exception for them in s.2(5) of the 1989 Act was not in point. He developed his submission principally by reference to Holroyd v Marshall (1862) HLC 191. That case however was concerned with rights arising as a result of a specifically enforceable contract, which therefore run precisely into the difficulty posed by the need for compliance with s.2 of the 1989 Act.
  65. I conclude that no case has been made out that following the making of her loan Mrs Ireland had any enforceable right to the grant of a security over the property or any equitable interest in the property following completion of its purchase.
  66. Was the grant of the charge dated 9 December 2008 a preference to Mrs Ireland?

  67. The test of a preference contained in s.239(4)(b), is whether the act in question "has the effect of putting that person into a position which, in the event of the company going into solvent liquidation, will be better than the position he would have been in if that thing had not been done."
  68. In the light of my decision that Mrs Ireland acquired no security rights or rights to the grant of security before the grant of the charge on 9 December 2008, it necessarily follows that the test for a preference is satisfied. Mrs Ireland thereby became a secured creditor rather than an unsecured creditor. Further, even if the company had earlier created an equitable charge, it would have been void for non-registration as against a liquidator or any creditor.
  69. The decision to grant the charge

  70. As I earlier mentioned, it is the decision to give a preference, rather than the giving of the preference pursuant to that decision, which must be influenced by the desire to produce the effect set out in s.239(4) (b). For these purposes, therefore, the relevant time is the date of the decision, not the date of giving the preference.
  71. In Re MC Bacon Ltd [1990] BCC 78, the company reached the limit of its overdraft facility on 14 April 1987. It was loss-making and had lost a major customer, and the directors were planning to retire. The bank was insisting that a debenture be granted if it was to continue to provide facilities to the company. Discussions took place during the second half of April and the first half of May. The company executed a debenture towards the end of May. In considering the time at which the company must be influenced by the desire to put the other party in a better position, Millet J said at p.88:
  72. "It was also submitted that the relevant time was the time when the debenture was created. That cannot be right. The relevant time was the time when the decision to grant it was made. In the present case that is not known with certainty. It was probably some time between 15 April and 20 May, although as early as 3 April Mr Glover and Mr Creal had resigned themselves to its inevitability. But it does not matter. If the requisite desire was operating at all, it was operating throughout."
  73. In Re Fairway Magazines Ltd [1992] BCC 924, a director agreed to provide funding to the company under the terms of a written loan agreement dated 21 August 1990, which provided for the grant of a debenture to secure the loans. Advances were made under the agreement and on 27 September 1990 the debenture was executed. It was signed by the lender on the same date as the loan agreement and the only reason for the delay in execution by the company was that the director who was to sign on behalf of the company was slow in doing so and returning it to the company's solicitors. Mummery J referred to Re MC Bacon Ltd as relevant for a number of purposes, including:
  74. "Finally, the relevant time to consider is the time when the decision is made to grant the debenture, not the date of the execution of the debenture itself. In this case the relevant date is the date of the agreement on 21 August 1990."
  75. By contrast, in Wills v Corfe Joinery Ltd [1997] BCC 511, where two directors lent sums to a company in January 1994 on terms that they would not be called in for a year and were repaid by the company in February 1995, Lloyd J held that the decision to repay was made not when the loans were made on the agreed terms as to the date of repayment, but when the cheques for repayment were signed in February 1995. He said at p.513:
  76. "However, I do not accept that January 1994 was the date by reference to which it is appropriate to consider whether, in giving the preference that undoubtedly was given, the company was influenced by the relevant desire. It seems to me that all that happened in January 1994 at most was that the loans became repayable in January 1995. A lot of debts were payable by the company in January 1995 and a lot of them were not paid. The fact that the directors' loan accounts were repayable in January 1995 does not lead to the conclusion that there was not a relevant decision to give the preference by actually paying those debts. It seems to me that the relevant decision to make the payments was and could only have been made at the time, or immediately before the time, when the cheques were drawn, that is to say, on 2 February and 6 February 1995. Even if, as I am prepared to accept for present purposes, what passed in January 1994 meant that there was an obligation on the company to pay the debt in January 1995, it was necessary for the board to review at that time whether to honour that obligation. If the board had known that the company was insolvent or would be made insolvent by honouring that obligation, it could not have made the payment."
  77. Most preferences involve the payment of some debts in preference to others. All debts stem from an enforceable obligation to make the payment. If the decision to incur the debt, rather than the later decision to pay it, was the relevant time at which the company's desire was to be judged, the payment of debts would rarely constitute a preference under s.239.
  78. It might be argued that there is a distinction between the payment of debts on the one hand and other obligations, such as an obligation to grant a security, on the other. I do not see why in principle that should be so. Even if there had been an enforceable obligation incurred in October 2007 to grant a charge, there would in ordinary circumstances after a delay of 12 or so months be a further decision to comply with the obligation, just as in the case of a debt there would be a further decision to comply with the obligation to pay the debt. Precisely the same considerations would apply in the former case as Lloyd J said would apply in the latter:
  79. "it was necessary for the board to review at the time whether to honour that obligation. If the company had known that the company was insolvent or would be made insolvent by honouring that obligation, it could not have made the payment."
  80. The position is, of course, all the stronger in a case such as the present where the company was not subject to any enforceable obligation to grant the charge. It would be a voluntary act and, after an interval of 12 months or more, would necessarily involve a decision to proceed with the grant of the charge.
  81. In my judgment, the question of when the decision is made is a question of fact to be determined in the particular circumstances of each case. An existing contractual obligation is neither necessary nor of itself sufficient. There was no prior obligation to grant a debenture in Re M C Bacon Ltd but on the facts of the case Millett J found that the decision to do so had been made at some time in the period of negotiations up to 20 May 1987. In Re Fairway Magazines Ltd, where the delay in execution of the debenture was simply because the director had been slow to sign for the company, the company's decision was found to have been when the loan agreement was made, and the lender signed the debenture, a few weeks earlier. By contrast, on the very different facts of Wills v Corfe Jointer Ltd, the decision to repay the loans was made long after the loans were made and the obligation to repay them was incurred.
  82. Because Miss Gillis and Mr Costa did not give evidence, I do not know what discussions or decisions in fact took place in October to December 2008, except that the instructions to prepare the charge were given to Mr Saunders in that period. That itself is some evidence that the decision was then taken to grant the charge. In circumstances where there has been a delay of over a year and where the company was under no obligation to grant the charge, and where even then the charge was granted only because Mrs Ireland raised the issue, the reasonable inference is that Miss Gillis, whether on her own or with Mr Costa, decided that the company should proceed to grant the charge to Mrs Ireland.
  83. The time for judging whether the company was influenced by a desire to improve the position of Mrs Ireland is therefore about November 2008. This is entirely an issue of the thought processes of the directors of the company. They knew that the company was unable to pay its debts, including the debt to Mrs Ireland, as they fell due. Objectively it would seem likely that Miss Gillis wished to improve the position of her sister but in any event, without calling Miss Gillis and/or Mr Costa to give evidence, Mrs Ireland is unable to rebut the presumption created by s.239(6).
  84. Conclusion

  85. It follows that the liquidator has established the requirements of s.239 and is entitled to the relief claimed under that section.
  86. I wish only to add this. Mrs Ireland is an entirely innocent participant in all this, as no doubt are other creditors of the company. Section 239 focuses not on the conduct or state of mind of the creditor concerned, but on that of the directors or others acting for the company. In many cases, the preferred creditor will share the desire to be preferred but this need not be so. It is not the case with Mrs Ireland who reasonably believed that she already had the benefit of a charge until October 2008 and that she received no more than her due. The result in this case implies no criticism of her at all.


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