‘Commercial obligations’ and unreliable witnesses: lessons from Dix v Chigili

Between 26 January 2018 and 17 April 2018 Venkata Chigili made payments to Max 99P Limited totalling £199,911 in connection with a proposed sale of the company. The payments gave rise to a debt due from the company in his favour. Between 17 April 2018 and 6 July 2018 Mr Chigili received repayments totalling £147,659.44. The company went into liquidation, and the liquidators brought proceedings for an order that he pay that sum plus interest on the basis that the repayments were preferences under s 239 Insolvency Act 1986.

In Re MC Bacon Ltd Millett J found that granting a debenture to the bank had not been a preference because the company had not been influenced by the relevant desire to prefer. He said that it was possible to provide assistance to a company in financial difficulties provided the company’s conduct was motivated only by proper commercial considerations. In Re MC Bacon the agreement by the company to grant a debenture was to avoid the bank’s calling in its outstanding indebtedness, which would have led to its immediate liquidation. The evidence had shown that the directors believed that continuing to trade would enable them to find a buyer for the company or enable the company’s fortunes to be turned around.

Mr Chigili said that he had lent money to the company on the basis of a commercial agreement that he would be repaid. He also claimed to have had no knowledge of the company’s insolvent position. In those circumstances, he argued, in the exercise of its discretion the court should make no order against him but treat him as a victim; he remained a creditor of the company for £51,340.56.

A major difficulty with the respondent’s defences was that ICC Judge Agnello did not find Mr Chigili to be a reliable witness. Although he claimed that he had no knowledge of the financial position of the company, he accepted that he had been aware that the company required funding when he became a director and made the loans. The company’s financial difficulties had, in fact, caused him to resign as a director on 1 May 2018. The judge said,

“I do not accept that the Respondent was as ignorant as he professes to be of the insolvent position of the company. In my judgment, he was aware of the financial position of the company when he agreed to acquire shares and become a director. The purchase price was a token £1. This clearly reflects the insolvent position of the company.”

She went on,

“[I]t is clear that the Respondent’s view was that he was entitled to be repaid because he had provided loans to the company. In my judgment, his attempt to distance himself from the insolvent position of the company was to avoid the unpleasant truth that he effectively wanted to be repaid in priority to other creditors at a time when the company was unable to pay its debts and was insolvent.”

She also found that the agreement to repay Mr Chingili’s loan had not been a commercial arrangement of the type contemplated in Re MC Bacon:

“There was no commercial justification to make the repayments to the Respondent. The company was insolvent. By the time the agreement was made with Mr Poudel [a director], no further lending was being provided by the Respondent to the company. The agreement was all about the Respondent being repaid. It was of no commercial utility for the company. I reject the submission that this was a commercial arrangement such that the desire to prefer did not exist.”

The liquidators succeeded in establishing all the elements necessary to satisfy a claim in preference under s 239, and the judge made an order in the terms they sought.

In reaching her decision, the judge also had regard to the judgment of Deputy ICC Judge Curl KC in Re De Weyer Limited (In Liquidation) [2022] BCC 1201 on connected transactions, from which she cited the following passage:

“Taking a realistic view, [counsel for the liquidators] argued, the payments on 9 and 10 February 2017 were in substance a single composite transaction, undertaken without derogation or delay. Mr Brown relied in particular on the decision of the House of Lords in Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143. That was a case about a transaction at an undervalue under s. 238 of the IA 1986. In valuing the incoming consideration received by a company in exchange for an asset, their Lordships held that it was appropriate to combine the consideration payable under the sale agreement itself as well as any collateral agreement with a third party: see 150G-151A. Accordingly, Phillips v Brewin Dolphin supports the view that commercial common sense should be applied to linked or composite transactions involving more than one stage or multiple parties under the transaction avoidance machinery in the IA 1986. Phillips v Brewin Dolphin was mentioned by Neuberger J (as he then was) in Damon v Widney Plc [2002] BPIR 465, which was, like the instant case, a case under s. 239 of the IA 1986. Neuberger J held that as a matter of commercial common sense, it was unreal to divide up any part of the overall transaction.”

Counsel for the liquidators contended that the repayments made by the company in this case had been just such  connected transactions.

There are, of course, circumstances in which the court will exercise its discretion not to make an order in a preference case (and in others relating to antecedent transactions), but cases in which it does so are rare, and the evidence in support of its doing so must be strong, which was plainly not the case here.

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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