Meaning of ‘associate’ – interpretation of a ‘person connected with the company’ in a preference claim

Meaning of ‘associate’ – interpretation of a ‘person connected with the company’ in a preference claim

In Darty Holdings SAS (2021 EWHC 1018 Ch), the former owners of the collapsed Comet Group (“Darty”) failed in their appeal against a previous decision to strike out part of Darty’s defence to a £83m preference claim brought by the liquidator of Comet Group.

The liquidator brought a claim in relation to Comet’s repayment to KIL (its former owner, which was later acquired by Darty) of £115m under a revolving credit facility. This was part of a wider transaction in which the entire shareholding of Comet was sold by KIL’s parent company (KHL) to a third party. Nine months later, Comet went into administration and the repayment was alleged to have taken place within the ‘relevant time’ of a preference claim, being a two-year period from the onset of insolvency.

Darty’s defence was that it was not connected to Comet at the time of the allegedly preferential payment to KIL. It argued that the terms of the share purchase agreement prevented KHL from exercising its voting rights under its Comet shares and, consequently, this meant that any purported connection as an associate (defined in s.435(10)(b) of the Insolvency Act 1986) was not engaged. In addition, Darty argued that repayment had been made as part of the wider corporate transaction which has completed by that time.

The appeal court upheld the lower court’s decision in favour of the liquidator – KIL was connected with Comet in respect of the repayment. There is no provision in section 435 suggesting an exclusion applies in instances where the association ends shortly after a relevant transaction, and the definition should have a consistent interpretation given that it is relevant to other provisions within the Insolvency Act. As such, Darty’s arguments were considered unreal and did not reflect the sequence in the transactional agreements.

The case serves as a caution to those effecting complex transactional arrangements, such that if parties intend to sever connections before payments are made which might offend section 239, then the transaction will need to be formulated carefully to ensure the payment is made after the connection between the parties has clearly come to an end.