Vol 10 (2013) - Issue 6

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In the matter of Kerr Aluminium Limited (In Voluntary Liquidation) [2010 No. 709 COS]

The High Court of Ireland recently dismissed an application by a liquidator for a declaration that certain payments made by a company in favour of its bank be deemed a fraudulent preference within the meaning of Section 286 of the Companies Act 1963 (as amended). The High Court found that the liquidator had failed to establish a dominant intention to prefer one creditor over another.

Background and relevant legislation
Section 286 of the Companies Act 1963 (as amended) ('the 1963 Act') provides, inter alia, that any disposal of property or other transaction made by a company, in favour of any creditor, with a view to preferring that creditor over other creditors of the company, and made within a defined period of the company entering into liquidation, shall be deemed a fraudulent preference. Section 286 only applies to companies in liquidation and applies if, at the time of the transaction concerned, the company was unable to pay its debts as they fell due.1
The applicable period in which a transaction may be challenged pursuant to Section 286 is six months prior to the date of liquidation for payments made to a 'stranger' or a party unconnected to the company. Where a party is deemed to be 'connected' (for example, a director, shareholder or group company) the relevant period is two years prior to the liquidation. When a transaction is made in favour of a connected party there is a statutory presumption of an intention to prefer. In all other instances, the onus of proof is on the applicant to establish a dominant intention to prefer one creditor over another. The High Court of Ireland has adopted a strict interpretation of the onus to demonstrate a dominant intention to prefer one creditor over another as is clear from the decision in Kerr.

Facts in Kerr
Prior to its liquidation, Kerr Aluminium Limited ('the Company') carried on the business of provider and fitter of aluminium windows. On 26 May 2010 the Company resolved that it be wound up voluntarily as it could not pay its debts as they fell due. The applicant was appointed liquidator of the Company at a meeting of creditors on 26 May 2010. Following an investigation by the liquidator into the affairs of the Company, the liquidator brought proceedings seeking an order declaring that certain payments made by the Company in favour of the respondent bank in the period 8 April 2010 to 26 May 2010 be deemed a fraudulent preference within the meaning of Section 286, and invalid.

The Company had an overdraft facility on its current account with the respondent bank. The respondent bank had received a number of letters of guarantee from Mr Kerr (a director of the Company) in relation to that account and the personal guarantees were secured by a first legal charge over a commercial unit and two apartments registered in the name of Mr Kerr and by the assignment of a life policy. At all material times, Mr Kerr was one of the two directors of the Company.

Prior to the applicant being appointed liquidator of the Company, the applicant had been a financial advisor to the Company. Based on that experience, the applicant averred in the proceedings that Mr Kerr was aware that there was little prospect of fresh investment in the months prior to the liquidation and that the Company was indeed insolvent. He also averred that Mr Kerr was aware, at the time the payments were made, of his personal exposure on foot of the guarantee and the security he had given to the respondent in respect of the Company’s overdraft facility.