CGL Realisations Ltd [2020] EWHC 1707 (Ch)

Frances CoulsonSenior & Managing Partner, Head of Litigation & Insolvency, Moon Beever

Re CGL Realisations Ltd [2020] EWHC 1707 (Ch), a recent judgment of deputy ICC judge Agnello, concerned a single issue, namely whether at the relevant time for the purposes of section 240(1)(a) Insolvency Act 1986, CGL Realisations Ltd (“Comet”) was connected (within the meaning of section 425 Insolvency Act 1986) to the respondent, Darty Holdings SAS, (the successor to the assets and liabilities of Kesa International Limited (“KIL”)). Kesa Holdings Limited (“KHL”), which owned the entire shareholding in Comet, had entered into an agreement to sell its shares in Comet to Hailey Acquisitions Limited (“HAL”). Before the sale, Comet had been using a revolving credit facility provided by KIL. On 3 February 2012, the date of completion of the sale, Comet repaid £115.4 million owing under the RCF.

  

The question for the court was whether Comet was connected to KIL at the time of that repayment so as to make the transaction susceptible to attack as a preference.

  

There was no dispute that KHL was connected to KIL, so if KHL was connected to Comet, KIL was also connected to it by reason of section 435.

  

Counsel for the liquidator asserted a connection. Counsel for the respondent contended that under the terms of the agreements KHL was not free to exercise any vote at a general meeting and that therefore the connection had been severed: (under the terms of the share purchase agreement there was a restriction on  KHL’s ability to vote freely).

  

Much of the judgment deals with the transaction documents and is fact specific. It is the judge’s analysis of the principle authorities that is of interest.

  

Two authorities were considered by the court: Re Kilnoore Ltd, Unidare plc v Cohen [2005] EWHC 1410 (Ch) and Granada UK Rental & Retail Ltd v the Pensions Regulator [2019] EWCA Civ 1032.

  

In Unidare Lewison J found that the declaration of trust had the effect that a company involved in the underlying share transaction could not to be regarded, for the purposes of s 435(10)(b) Insolvency Act, as being entitled to exercise voting power in respect of the shares: it was bound to act in accordance with the directions of the beneficial owner, who did not control the voting powers either. Accordingly there was no connection. Lewison J held that “entitled” in section 435(1)(b) did not mean “entitled as between the registered shareholder and the company” but “entitled as between the registered shareholder and the controller of the voting power”. Furthermore, a distinction between “power” and “rights” was to be made, which meant the court could look to the reality of the case: a shareholder holding shares under a bare trust which required voting in accordance with the direction of the beneficial owner may be said to have voting rights but not voting power.

 

That approach did not find favour with the Court of Appeal in the Granada UK case. That was a case on pensions legislation which adopted the definitions in sections 249 and 435 Insolvency Act. The deputy judge noted that the Court of Appeal had made clear that section 435, and the term “associate” in particular, were to be construed more generously than they had been by Lewison J. Unsurprisingly, she followed the Court of Appeal decision:

 

 

 

 

 

 

 

 

 

 

 
 

“[which] makes… clear that section 435 is to be construed widely. The Court of Appeal stated that the provision is not about who controls the voting in practical terms. That must apply even if the period of time between the act which forms the basis of the preference and the severance of the connection is as short as in this case. Accordingly, those parts of the defence which seek to argue that there was no connection at the relevant time are to be struck out. In relation to the application brought by KIL by way of a preliminary issue, this is answered by me by declaring that KIL was a person connected with the Comet in relation to the alleged preferential payment, in so far as this is necessary.”