While not as frequently invoked as the fraudulent preference provision in section 286 of the Companies Act 1963, section 139 of the Companies Act 1990 dealing with fraudulent dispositions remains a useful provision in the armoury of a liquidator (or receiver).

Section 139 provides that where it can be shown that property of a company has been disposed and
“the effect of such disposal was to perpetuate a fraud on the company, its creditors or members, the court may… order any person who appears to have the use, control or possession of such property or the proceeds of the sale or development thereof to deliver it or pay a sum in respect of it to the liquidator….”

Section 286 of the 1963, on the other hand, deals with fraudulent preferences and provides that:
“… any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which is unable to pay its debts as they become due in favour of any creditor… with a view to giving such creditor… a preference over the other creditors, shall, if a winding-up of the company commences within 6 months of the making or doing the same and the company is at the time of the commencement of the winding-up unable to pay its debts (taking into account the contingent and prospective liabilities), be deemed a fraudulent preference of its creditors and be invalid accordingly.”

Section 139, in focusing more on the consequences of the action rather than any underlying intent, is wider than section 286 in the following respects:

• It is not limited by time
• It can be invoked not only by a liquidator, but also by a receiver (in accordance with section 178 of the Companies Act 1990)
• It does not require proof of a dominant intention to prefer the recipient over other creditors and
• It does not require proof that the company was insolvent at the time the impugned transaction took place.

Section 139 has been the subject of very little judicial consideration to date, but two decisions of the High Court, including one delivered in 2011, are worthy of note.

Le Chatelaine Thudichum Ltd (In Voluntary Liquidation) v Conway IEHC 349
A franchisor of a retail outlet decided to return “control of the premises” to the landlord after it became evident that rental repayments and other invoices could not be honoured. Following a stock take the landlord took possession of cash sums totalling €9,500 and stock valued at €112,080. The company was wound up shortly thereafter and a liquidator appointed. The liquidator applied for a declaration that the transaction to the landlord constituted a fraudulent preference under section 286 of the Companies Act 1963 or, in the alternative, a fraudulent disposition under section 139 of the Companies Act 1990.

The liquidator’s claim under section 286 failed as he was unable to establish that the transaction was driven by a dominant intention to prefer the landlord. However, Mr Justice Murphy noted that “unlike s. 286, which focuses on intention, the fraud criterion in s. 139 merely requires that the company, its creditors or members be deprived of something to which it is, or to which they are, lawfully entitled”. He was satisfied that the disposition in favour of the landlord had the effect of perpetrating a fraud not only on the company in depriving it of its assets, but also on the creditors in diminishing the pool of assets available for distribution upon liquidation. The creditors were thus deprived of a benefit to which they were lawfully entitled. The landlord was ordered to repay the sum of €121,580 to the liquidator.

Devey Enterprises Ltd (In Voluntary Liquidation) v Mark Devey and Jacinta Devey IEHC 340
The High Court accepted the liquidator’s evidence that €1.2 million belonging to the company was gratuitously paid to, or used to discharge the personal liabilities of, the directors. Ms Justice Laffoy was satisfied that the effect of the payments was to perpetrate a fraud on the company and its creditors. Accordingly, she ordered the directors to repay an equivalent sum to the liquidator on behalf of the company.

In her judgment, Laffoy J. endorsed a leading company law text which states that:
“Section 139… does not apply to fraudulent preferences, which are addressed by… s. 286. Section 139 can be analysed by counter reference to the limits of s. 286… Accordingly, it is irrelevant for the purposes of s. 139 that the company was insolvent at the time of the disposition or that it was made to a creditor, or that the disposition was made within a certain time frame. There needs only to be a disposal where the effect is to perpetrate a fraud on the company, its creditors or its members.”

Contributed by Delia McMahon.