By Claire Mansell - 27 Nov 2015
The recent case of
Galvanising HB Limited v Fisk has sent out a warning to
directors who pay debts owed to related companies over other
creditors.
The Court of Appeal determined that certain transactions between
a group of related companies including Galvanising HB Limited (GHL)
were voidable transactions under the Companies Act. These companies
had received more than they would have received in the liquidation
of East Quip Limited (EQL), a related company in the group.
An internal arrangement existed between the companies whereby
payment for goods and services was made through cash payments and
followed by journal entries in each company's sub-account of the
group accounts.
The shareholders of GHL acted as a "banker" for the group. They
personally funded all of the various transactions between the
entities and were the true creditors by virtue of capital
investment.
The Court of Appeal rejected the appellant's argument that it
was in fact the directors who incurred the obligation. It held that
the directors were not part of the transaction and if GHL extended
credit to EQL, the creditor would be GHL and the debtor EQL. The
shareholder's actions in funding GHL were separate
transactions.
The appellants also contended that the transactions between the
companies were entered into as part of a continuing business
relationship "running account". This running account defence would
have significantly reduced the debt owing by EQL to GHL. In order
to establish a running account defence, GHL had to show that the
payments induced further supply of goods. The Court of Appeal held
it was open to the High Court to dismiss this argument as it was
improbable that future supplies would be withheld if payments were
not made as the companies were all controlled by the same
director.
This case highlights the need for directors to ensure that
related companies are not preferred over other creditors otherwise
they risk having payments clawed back under the voidable preference
regime.
For more information on voidable transactions, please
contact Claire Mansell or Rob Akroyd.
Contacts
Claire
Mansell
Rob
Akroyd