A recent High Court judgment has considered how insolvency claims for transactions at an undervalue and preferences apply to a complex corporate restructuring.
The case, Cohen & Crooks v Co-operative Group Limited & ors, concerned claims brought by the joint liquidators of The Food Retailer Operations Limited, formerly Somerfield Stores Limited. The liquidators alleged that a 2015 restructuring should be challenged under sections 238 and 239 of the Insolvency Act 1986.
The claims were dismissed. For office holders, creditors, directors and those involved in restructuring, the judgment is a useful reminder that insolvency challenge claims are highly fact specific and will depend on careful analysis of the transaction, the consideration provided and the evidence of intention.
What was the case about?
The claim arose from a restructuring carried out in November 2015 as part of “Project Chicago”. The company later entered administration in February 2017 and subsequently liquidation.
The liquidators brought claims against Co-operative Group Limited, Co-operative Group Food Limited, Co-operative Foodstores Limited and Rochpion Properties (4) LLP. They sought relief under section 238 of the Insolvency Act 1986, or alternatively section 239.
In plain English, section 238 allows certain transactions to be challenged where an insolvent company has entered into a transaction at an undervalue. Section 239 allows certain transactions to be challenged where a company has put a creditor, surety or guarantor in a better position than they would otherwise have been in on insolvency.
The High Court dismissed the liquidators’ claims after a lengthy trial.
Why did the transaction at an undervalue claim fail?
A transaction at an undervalue claim requires close attention to what the relevant transaction actually was and what value, if any, was given in return.
- In this case, the court found that the return of capital through the withdrawal of share capital was not a transaction for no consideration within section 238(4)(a) of the Insolvency Act 1986.
- That point is important because liquidators often face difficult questions about how to characterise a transaction. A restructuring may include several linked steps, but the court still needs to identify the relevant transaction and apply the statutory test to the facts.
The judgment does not mean that restructurings are immune from challenge. It does show that the legal analysis will be precise, particularly where the claim concerns group reorganisations, capital movements and historic corporate transactions.
Why did the preference claim fail?
A preference claim under section 239 requires more than showing that one party was put in a better position. The statutory test also requires consideration of whether the company was influenced by a desire to prefer that party.
- In this case, the respondents succeeded in rebutting the presumption that there was a desire to prefer.
- That is a significant practical point. In claims involving connected parties, presumptions may assist an office holder, but they are not necessarily decisive. The court will examine the evidence and the commercial context.
The judgment also rejected allegations that the relevant directors had not acted in good faith. That finding matters because allegations of improper purpose or lack of good faith can carry considerable reputational and litigation significance.
What does the judgment mean for liquidators bringing insolvency claims?
For liquidators, the judgment underlines the need for disciplined case preparation before issuing high value antecedent transaction claims.
Claims under sections 238 and 239 can be powerful, but they require evidence that fits the statutory test. The fact that a company later enters administration or liquidation does not automatically mean that an earlier restructuring can be unwound.
Office holders will need to consider how the transaction should be defined, whether the company was insolvent at the relevant time, what consideration was provided, whether any statutory presumptions apply and whether those presumptions may be rebutted by the respondents’ evidence.
Where the claim involves a complex group restructuring, the evidential burden can be substantial. The commercial rationale, board materials, accounting treatment and surrounding documents may all become important.
What does the judgment mean for directors and restructuring advisers?
For directors and advisers, the case is a reminder that restructuring decisions may be scrutinised years later if the company subsequently fails.
- That does not mean directors should avoid restructuring. Proper restructuring can preserve value, support business continuity and improve creditor outcomes. The risk arises where transactions are poorly documented, commercially unclear or appear to favour connected parties unfairly.
- Directors should ensure that major restructuring steps are supported by clear advice, proper board consideration and a documented commercial rationale. Where there are signs of financial distress, directors should also consider creditor interests and take care before approving asset transfers, capital movements or payments to connected parties.
Good records can be critical. They may later help demonstrate why a transaction was entered into, what value was received and whether the decision was made for proper commercial reasons.
Why is this case relevant to transactions at an undervalue and preference claims?
The decision is relevant because it shows how the court approaches the statutory machinery of sections 238 and 239 in a substantial commercial dispute.
For claimants, it demonstrates that even large and carefully prepared claims may fail if the legal test is not satisfied on the facts. For defendants, it shows that there may be strong grounds to resist insolvency claims where the transaction had proper value, the statutory requirements are not met or the alleged desire to prefer can be rebutted.
The wider lesson is that antecedent transaction litigation is not simply about whether a transaction looks unfair with hindsight. The court will apply the statutory requirements closely and will assess the evidence in detail.
How can FWJ help?
Francis Wilks & Jones advises liquidators, directors, creditors and businesses on insolvency litigation, transactions at an undervalue, preference claims and claims against directors.
We assist office holders considering recovery claims and defendants responding to allegations arising from historic transactions, restructurings and asset transfers.
Our team also advises directors on duties during financial distress, including how to reduce later challenge risk when considering restructuring, creditor payments or connected party transactions.
