The recent case of F Options Ltd v Prestwood Properties Ltd concerned the setting aside of a transaction as a preference under section 239 of the Insolvency Act 1986.

A preference arises when a company's creditor is put in a better position than they would otherwise have been in the event of the company's insolvency. Transactions may be a preference whether or not the parties are connected, but where it can be shown that there is a connection within section 249 of the Insolvency Act 1986, two important advantages are gained:

  • the need to demonstrate that the transaction was intended to put that party in a better position on the company's
    insolvency falls away as there is a presumption that this was the case; and
  • the period in which a transaction may be caught extends from six months prior to liquidation to two years.

As transactions which are found to be preferences can be set aside by the administrator, it is in the unsecured creditors' interests to ensure any such transactions are indeed set aside to increase the pot of funds available for distribution to the unsecured creditors. Landlords of insolvent tenants may therefore wish to consider whether their position can be improved by encouraging the administrator to challenge any transactions of which they are aware and take advantage of the presumption in respect of connected person, including any potential de facto directors.

In this case, F Options Ltd (F Options) received a partial VAT repayment in 2006 following a claim that VAT had been overpaid. These funds were the company's sole asset and were transferred to Prestwood Properties Ltd (Prestwood) and Mr Saunders personally. When F Options was dissolved in 2007, it had outstanding VAT liabilities and the joint liquidators applied for the payments to be set aside as preferences.

Mr Saunders, although not a director of either company, was alleged to be a connected person and therefore to be subject to both the presumption and longer period in respect of which transactions could be set aside. Mr Saunders had resigned as a director of F Options in 2003 and had never been a director of Prestwood but Mr Charles Hollander QC considered the nature of Mr Saunders' relationship with the companies, concluding that he was a de facto or shadow director of each.

The factors considered relevant to this assessment included, in the case of F Options, that the person named as the replacement director on Mr Saunders' resignation lived in Australia and had nothing to do with the running of the company. In contrast, Mr Saunders had signed Companies House and HMRC forms as a director and represented to third parties in correspondence that he was a director for the period after his resignation to the company's winding up in 2007. These actions were held to be sufficient to find that Mr Saunders was a de facto director of F Options.

In the case of Prestwood, the sole director of the company was Mr Saunders' aunt. The company's only asset, however, was a house in which Mr Saunders lived and Mr Saunders had guaranteed the mortgage over the property. In respect of Prestwood, Mr Saunders was therefore held to be the controller or real owner of the company and a shadow director.

The result of these findings was that the transactions were set aside as a preference and Mr Saunders and Prestwood were ordered to repay the money with interest.

When faced with an insolvent tenant (or other insolvent creditor) landlords may wish to consider whether the actions of any party other than those directors listed at Companies House should be reviewed. De facto and shadow directors may not be immediately visible but thought should be given to any information which may
point to the involvement of other people or companies in the running of the insolvent company. An exercise as simple as confirming who has signed documents which are publically available at Companies House or reviewing correspondence against the dates between which relevant directors were in post may lead to potentially useful lines of inquiry.

F Options Ltd sub nom (1) Ian Mark Defty (2) David Ingram v (1) Prestwood Properties Ltd (2) John Gerrard Saunders [2011] EWHC 3325 (Ch).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.