Insolvency update – Court of Appeal overturns High Court decision on Direct Agreements
The general principles behind voidable transactions in corporate insolvency are well known, even if they provide a somewhat fertile source for litigation. In the event of a liquidation, liquidators are able to look at transactions entered into by an insolvent company up to two years prior to its liquidation. If transactions by the company have resulted in one creditor receiving a preference over others, the transactions may be set aside at the suit of the liquidators.
The Ebert Construction case concerned the deceptively simple question of whether payments had been made “by” the company now in liquidation. More specifically, it addressed the practice of Direct Agreements (sometimes also called Tripartite Agreements) in construction project financing. In this case, a three-way contract was entered into between the developer, the builder and the financier of a construction project. Under the terms of that Direct Agreement, provided certain conditions had been met, the financier was obliged to pay the builder direct. The financier did so even after the developer had fallen into default with it, and was no longer entitled to draw upon the subject loan facilities.
In the High Court, Associate Judge Doogue had held that payments made by the financier were payments “by” the insolvent developer. As such, they could be set aside by the liquidators of that company. The essential reasoning was that undrawn loan advances from the financier were money that “belonged” to the developer. Accordingly, the fact that the payment was actually made by the financier was “neither here nor there”.
The Court of Appeal has firmly rejected this analysis in the context of section 292 of the Companies Act 1993. The Court held that, under the terms of the Direct Agreement, the financier owed its own discrete contractual obligations to the builder as principal. There was contractual privity between the two, and (importantly) the financier’s obligations to the builder were not dependant on the developer complying with its own obligations owed to the financier. The Court of Appeal rejected the suggestion that, in making payment, the financier was simply acting as an agent for the developer.
As a consequence, the payments in issue were not made “by” the insolvent company. They did not offend the pari passu principle among its unsecured creditors, and could not be set aside by the liquidators of the developer.
A copy of the Court of Appeal decision is here. This outcome will be a welcome one for those in the construction industry who, following the High Court decision, would have been obliged to conclude that Direct Agreements did not provide the protection that many had expected.
* Disclosure – MinterEllisonRuddWatts acted for Ebert Construction Limited in both the High Court and the Court of Appeal.