The Désastre of Psd Enterprises Ltd

JurisdictionJersey
CourtCourt of Appeal
JudgeCalcutt, Gloster and Beloff, JJ.A.:
Judgment Date24 September 1998
Date24 September 1998
COURT OF APPEAL
Calcutt, Gloster and Beloff, JJ.A.:

D.G. Le Suer for the appellant;

J.G.P. Wheeler for the Viscount.

Cases cited:

(1) Agriplant Servs. Ltd., Re, [1997] 2 BCLC 598; [1997] BCC 842.

(2) Bacon (M.C.) Ltd., Re, [1990] BCLC 324, applied.

(3) Exchange Travel (Holdings) Ltd., Re, (No. 3), [1996] 2 BCLC 524; [1996] BCC 933.

(4) Rosedale (J.W.) Invs. Ltd., In re, 1995 JLR 123, applied.

(5) Wills v. Corfe Joinery Ltd., [1998] 2 BCLC 75; [1997] BCC 511.

Additional case cited by counsel:

Weisgard v. Pilkington, [1995] BCC 1108.

Legislation construed:

Bankruptcy (Dsastre) (Jersey) Law 1990, art. 1(1): The relevant terms of this paragraph are set out at page 325, line 18.

art. 17: The relevant terms of this article are set out page 324, line 20 - page 325, line 16.

Insolvency Act 1986 (c.45), s. 239(6): The relevant terms of this sub-section are set out at page 330, lines 30-36.

Texts cited:

Goode, Principles of Corporate Insolvency Law, 1st ed., at 26-27 (1990).

Bankruptcydsastrepreferencescourt may only make order under Bankruptcy (Dsastre) (Jersey) Law 1990, art. 17 in relation to preference given by debtor if debtor unable to pay debts as they fall due, i.e., "cash flow" test of insolvencypermissible to consider state of debtor's balance sheet, since may be evidence of cash flowmay infer insolvency if debtor insolvent before or after relevant time

Bankruptcydsastrepreferencesby Bankruptcy (Dsastre) (Jersey) Law 1990, art. 17(4), debtor to be influenced by desire to give preference, i.e., to improve position of creditor in event of insolvency, not merely desire to make impugned paymentcourt to give reasons for finding as to debtor's state of mindfailure may vitiate decision

The Viscount sought to recover from the appellant a preference which her company had allegedly given to her immediately before being placed en dsastre by one of its creditors.

The appellant was the owner and director of a company which experienced financial difficulties. Apparently knowing that the company's credit balance and projected income were insufficient for it to be able to meet its liabilities, the appellant nevertheless paid out a large sum to herself from its account, allegedly representing her salary as director.

Shortly afterwards, the company was placed en dsastre by one of its creditors who had not been paid on time. On a subsequent application by the Viscount for an order under art. 17(1) of the Bankruptcy (Dsastre) (Jersey) Law 1990 for this sum to be repaid, the Royal Court (Hamon, Deputy Bailiff and Jurats Myles and Potter) ordered that she should repay the sum, since (a) the company had clearly been insolvent at the time of the payment within the meaning of art. 1(1) of the 1990 Law, in that it was unable "to pay [its] debts as they fell due," having regard also to its net excess of liabilities over assets; and (b) the payment had been a "preference" within the meaning of art. 17(3) of the Law, in that with respect to the dsastre, the payment put the appellant in a better position as a creditor of the company than she would have been but for the payment (in proceedings noted at 1998 JLR N-2). The court held that the appellant had been "influenced ... by a desire" to give herself a preference within art. 17(4), even though it admitted in evidence a written statement that she had not intended to do so; furthermore, it made this finding without explaining its reasons. At the hearing of the Viscount's application, the appellant was not legally represented.

On appeal, the appellant submitted that (a) the Royal Court had wrongly had regard to the state of the company's balance sheet in making its finding of insolvency, even though it had purported to apply the correct "cash flow" test, i.e., whether the company had been able to pay its debts as they fell due; furthermore, the company had to be insolvent at the time a debt was due, whereas the court had wrongly had regard to the company's general financial state over a period of time; and (b) there was no evidence that she had desired to give herself a preference within the meaning of art. 17(3); in particular, the court should have accepted her statement that the payment had been made legitimately to cover her wages as director and had not been intended to put her in a better position as a creditor of the company in the event of its insolvency than she would have been but for the payment.

The Viscount submitted in reply that (a) the Royal Court had explicitly recognized the proper test of insolvency as being the "cash flow" test, had correctly applied it to the present case and had been fully entitled to refer to the state of the company's balance sheet as evidence of its ability to pay its debts as they fell due; and (b) as director of the company, the appellant had been well aware of its inability to pay its existing debts and in these circumstances, there was ample evidence to support the court's finding that the payment had been intended to put herself in a more advantageous position than other creditors in the event of the company's insolvency.

Held, allowing the appeal:

(1) The Royal Court had properly held that the test of the company's insolvency at the relevant time was whether it was able to pay its debts as they fell due (the "cash flow" test), and not whether its total assets exceeded its liabilities (the "balance sheet" test). It could not be said that the court's references to the company's assets showed that it had applied the wrong test, since it had explicitly referred to the correct test and clearly had the relevant evidence in mind; in any case, it was a matter of common sense that a company's balance sheet could provide evidence of its ability to pay its debts. Furthermore, although the company had to have been unable to pay a particular debt on the date it fell due, it was open to the court to infer an inability to pay it from a state of insolvency existing before or after the relevant date (page 327, line 40 - page 329, line 30).

(2) The court had also properly found that the test as to whether the appellant had been influenced by the requisite desire under art. 17(4) was whether she had desired to produce the effect referred to in art. 17(3) and not merely to make the payment in question. However, on the evidence before the Royal Court, including the appellant's statement as to her state of mind at the relevant time, it would have been open to it to make a finding either way on the question of whether she had desired to give herself a preference. In these circumstances and having regard to the fact that the appellant had been a litigant in person, the court should have...

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