Vol 14 (2017) - Issue 3

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Contingent Assets and Balance Sheet Insolvency: Evans v Jones [2016] EWCA Civ 660

Introduction
Is it permissible to take into account a contingent asset for the purposes of determining balance sheet insolvency under section 123 (2) of the IA 1986? The answer would seem fairly straightforward: only present assets can be considered for the purposes of the balance sheet insolvency test. However, the 'very peculiar facts' in Evans v Jones [2016] EWCA Civ 660, to use Lewison LJ’s expression at [22], illustrate how the dividing line between present and contingent assets is far from being clear-cut in every case. Approaching the distinction between the two, the Court of Appeal reiterated that the statutory test under section 123 (2) IA 1986 ought not to be applied mechanistically but in accordance with commercial reality.


The facts
In Evans v Jones, the question of balance sheet solvency arose in the context of a claim by liquidators that a series of payments made by a company constituted ‘preferences’ for the purposes of section 239 to 241 of the IA 1986.
Rococo Developments Ltd ('the Company') had two directors, Mr and Mrs Jones, who were its only shareholders. Mr and Mrs Jones had made various loans to the Company. The Company entered into a building contract with a company called WJG Evans Ltd ('Evans'). As units on the sites being developed by the Company and Evans were sold, the Company made a series of five payments between 2010 and 2011 totalling GBP 450 000 odd in repayment of the debts owed to Mr and Mrs Jones. The fifth payment came just a month before the Company went into creditors’ voluntary liquidation in April 2011. In addition, on 1 June 2010, prior to making the first of the five payments, the Company had paid a dividend to Mr and Mrs Jones in the sum of GBP 75 000.
The proximate cause of the Company’s entry into liquidation was an adjudication award made in March 2011 in favour of Evans. Evans had referred to adjudication a dispute surrounding the final account for building works it had conducted, and sought to include a number of 'headline items', which Evans claimed created a balance in its favour of some GBP 191 000. Eventually, the adjudicator awarded Evans a total of GBP 82 000 odd, including legal costs, which the Company was unable to pay, having made no provision whatever in its accounts for the Evans claim.
Subsequently, the Company’s liquidators decided to pursue a preference claim under section 239 of the IA 1986 against Mr and Mrs Jones. Following their investigations, they also sought to recover the GBP 75 000 dividend, which they considered to have been paid unlawfully, given that there had been insufficient distributable profits in June 2010.