Where a company is in liquidation Section 139 of the Companies Act 1990 provides that if it can be shown to the satisfaction of the court that:

1. any property of the company of any kind whatsoever was disposed of either by way of conveyance, transfer, mortgage, security, loan, or in any way whatsoever whether by act or omission, direct or indirect, and
   
   
2. the effect of such disposal was to perpetrate a fraud on the company, the court may, if it deems it just and equitable to do so, 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 on such terms and conditions as the court sees fit.

In summary, Devey Enterprises Ltd (in voluntary liquidation) (Devey) was incorporated in mid-1998. In October 2007 it was placed into liquidation and Jim Stafford of Friel Stafford Corporate Recovery was appointed liquidator. Between 1998 and 2007 it had been involved in the business of a plastering contractor.

The Statement of Affairs presented at the creditors' meeting showed Devey's deficit to be slightly in excess of 1.9 million Euros.

The respondents in the case were Devey's directors. They also had other business interests which they conducted in their personal capacities. The liquidator's first challenge was to form a view with regard to Devey's financial situation on the basis of the limited books and records that had been maintained. The liquidator discovered that certain personal expenditures of the directors was recorded as being business expenditure on Devey's behalf.

The liquidator engaged with the directors' accountants to try to reach agreement as to the directors' personal liability to Devey. As a result the liquidator initially formed the view that there was a balance of approximately €2.7 million owed to Devey by its directors. Subsequently, as a result of further engagement between the liquidator and the directors and their accountants, the liquidator was in a position to whittle down the directors' liability to the sum of 1.24 million.

The liquidator's case was that the directors had no entitlement whatsoever to the money, the subject matter of his action.

In The High Court, Ms. Justice Laffoy, considered that:

"it is appropriate to regard the actions of the respondents in procuring the payments made by the Company as giving rise to dispositions which come within Section 139 of the Act of 1990".

Accordingly, Ms Justice Laffoy made an order under Section 139 directing Devey's directors to pay the liquidator the sum of approximately €1.2m.

Section 139 is an underused weapon in the armory of a liquidator. It does not apply to fraudulent preference claims, which are addressed by Section 286. Pursuant to Section 139 it is irrelevant that the company was insolvent at the time of the disposition, that it was made to a creditor or that the disposition was made within a certain time frame.

For Section 139 liability there needs only to be a disposal where the effect is to perpetrate a fraud on the company, its creditors or its members.

Contrary to the position under Section 286, under Section 139, in order to set aside an asset disposition, the liquidator does not have to prove that the company intended to defraud its creditors. To his advantage he has to jump the lower hurdle of establishing that the effect of the asset disposition has been to defraud creditors.

No doubt, Section 139 will feature more prominently in the coming years.

For further information please contact Jill Callanan.