Matthew Dix & Anor (as joint liquidators of Max 99p Ltd) v Venkata Sudheer Kumar Reddy Chigili

By application notice dated 20 November 2024, the Applicants, as Liquidators of Max 99P Limited (the company) issued proceedings against the Respondent ( Mr Chigili) pursuant to section 239 and 212 of the Insolvency Act 1986. The claim which was pursued before me was the preference claim (section 239) whereby the Applicants assert that the Respondent received payments from the company during the period 17 April 2018 and 6 July 2018 which constituted preferences in accordance with section 239. The Applicants seek an order that the total sum of those payments made, being £147,659.44, be ordered to be paid to the Applicants with interest thereon running from the date of liquidation.

The Respondent asserts that he had no knowledge of the insolvent position of the company and that he lent over £199,000 to the company during the period from January 2018 to April 2018. There was an agreement that he was to be repaid. In those circumstances, in the exercise of discretion, no order should be made against him. He considers he is a victim and that he remains a creditor of the company for a significant amount being £51,340.56.

The legal principles relating to section 239 preference were not the subject of dispute before me. As summarised by Mr Saunders in his skeleton argument, the requirements for a preference are :-

Mr Saunders relied upon the payments made by the company to the Respondent being connected transactions and also referred me to the following passage from In Re De Weyer Limited (In Liquidation) [2022] B.C.C. 1201 where Deputy ICCJ Curl QC said as follows:

As to the requirement of the ‘desire to prefer’, reference was made to the principles set out in Re MC Bacon Ltd [1990] BCC 78, at 87G-88B where the Judge stated as follows:-

Mr Cifonelli on behalf of the Respondent did not dispute the general principles but submitted the repayments were part of a pre-existing commercial obligation which did not constitute a preference. He relied on Re MC Bacon and submitted that the decision to pay the Respondent was driven by the terms of a commercial agreement and therefore the relevant desire was absent.

In MC Bacon Ltd, the Judge stated that the granting of a debenture to the Bank was not a preference because the company was not influenced by the relevant desire to prefer. The Judge stated that it is still possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. In MC Bacon, the agreement by the company to grant a debenture prevented the Bank from calling in the outstanding indebtedness which would have led to an immediate liquidation. The evidence established that the directors believed that ongoing trading would enable them to find a buyer or enable the company to be pulled round.

The company was incorporated on 16 September 2013 and its directors were Srinivasa Arumalla (“SA”) and Anuradha Arumalla (together “the Founding Directors”). The Company traded in retail sale, selling items for 99p across 9 stores. According to its last statutory filed accounts for the year end 31 March 2017, the company was balance sheet insolvent with a net deficit of £151,114. Those accounts were filed on 1 February 2018. The Applicants have received £286,112.47 in creditors’ proofs which exclude the sums which the Respondent asserts are still owing to him. A balance sheet prepared by Mr Stuart Garner, a licensed insolvency practitioner, for the period up to 3 February 2018 also demonstrated the company’s heavily insolvent position with liabilities exceeding £1 million. The balance sheet prepared by Mr Garner includes various loans which were made by the Respondent and one other director of the company at the time, Mr Vulisi, as well as loans made by other individuals.

In January 2018, according to the evidence, a sale of the company was agreed as between the founding directors and the Respondent, Mr Surya Reddy Vaddi and Mr Murali Krishna Vulisi. Each of the three named individuals obtained shares in the company and were appointed directors of the company. The Respondent is recorded as a director as from 12 February 2018 alongside Mr Vaddi and Mr Vulisi. The purchase price for the company was £1.

Between 26 January 2018 and 17 April 2018, the Respondent made payments to the company totalling £199,911. These payments created a debt in favour of the Respondent owed by the company. When he was cross examined, the Respondent provided the background to the acquisition of shares in the company. He explained that Mr Vulisi had contacted him about buying the company and had said that there was some debt in the company. In his witness statement, the Respondent stated that he was informed at the time of the acquisition that the company needed additional working capital. The Respondent agreed to provide loans to the company as from 26 January 2018. The evidence does not indicate that any working capital was provided to the company during the period January 2018 and the Respondent’s resignation as a director in May 2018.

From 17 April 2018 until 6 July 2018, the company made repayments to the Respondent in a total of £147,659.44. This forms the preference claim. These sums were paid by the company to the Respondent as follows:-

The Respondent sets out in his witness statement that Mr Vulisi was responsible for all management of finance. According to the Respondent, his role was primarily to manage the shop operations.

At some stage in February/March 2018, insolvency advice was sought and obtained from Mr Garner, a licensed insolvency practitioner. When asked in the witness box, the Respondent asserted that he did not meet up with Mr Garner and that he was not aware of his involvement. Mr Garner produced the balance sheet dated 3 February 2018 which demonstrates the insolvent position of the company as at that date. The email dated 29 June 2023 sent by Mr Garner to Mr Grummitt’s colleague, enclosing the balance sheet, states as follows:-

The Respondent remained a director until 1 May 2018 when he, alongside Mr Vaddi and Mr Vulisi, resigned as directors. In his witness statement, the Respondent states that when he became aware that the finances of the business were not as good as he had believed, he took immediate action and resigned. According to the Respondent, before the three of them resigned, the company accountant had located a Mr Kashiram Poudel who was appointed as the sole director of the company. Mr Poudel also acquired the shares in the company.

According to the analysis of the payments made to the Respondent from the company, a significant amount of these were made after he resigned on 1 May 2018. An analysis of the bank statements shows that on many occasions after a payment was made to the Respondent, very modest sums then remained in the company’s bank account. On 22 May 2018, after the payment to the Respondent of £12,000, the company’s bank account was left in credit by £7.98. On 25 May 2018, after a payment to the Respondent of £13,800, a sum of £85.63 was left in the bank account. On 31 May 2018, after a payment to the Respondent of £10,980, a balance of £1.15 remained in the bank account.

After the appointment of Mr Poudel, the bank statements do not show funding being made available to the company such as capital investment or loans by Mr Poudel or any external loans or funding. It appears from consideration of the bank statements that the company’s insolvent position further deteriorated in that direct debits were not being paid.

There is also evidence that sums were due and owing to creditors from at least March 2018. The statement of account for Nisa Retail Ltd, being a supplier of the company, shows the sum of approximately £13,532 being outstanding from March 2018. Very small credits then appear in the rolling statement of account which totals £57,502.15 by 24 May 2018. Another creditor, Pricecheck Toiletries Limited, was owed the sum of £10,964.26 plus interest in the sum of £559.71 relating to goods delivered to the company on 30 April 2018. According to the proof of debt filed by HMRC, there was underpayment of PAYE and NIC contributions in the total sum of £31,699.40 from 6 April 2018 until the date of liquidation, being 22 November 2018. HMRC also claimed in relation to unpaid VAT the total sum of £100,486.03 but this has not been broken down in the proof of debt statement into relevant quarter periods. There are also outstanding business rates due to Chelmsford City Council for the years 2017/18, and 2018/2019.

Nisa Retails Ltd served a statutory demand in July 2018 and thereafter issued a winding up petition on 5 September 2018. The winding up order was made on 22 November 2018. The Official Receiver remained liquidator until the appointment of Mr Grummitt and a Mr Rose on 22 March 2021. Mr Rose was thereafter replaced by Mr Dix.

According to Mr Grummitt, the Official Receiver transferred very little to the liquidators by way of books and records. Mr Grummitt had some bank statements but he had to obtain further bank statements in relation to other bank accounts held by the company. He also interviewed the Respondent as well as Mr Srinivasa Arumalla, one of the founder directors. He was unable to locate Mr Poudel who had also failed to cooperate with the Official Receiver.

The Respondent’s written evidence states as follows:-

At the start of his cross examination, the Respondent stated that part of this witness statement was incorrect and that he had not reached an arrangement with Mr Poudel directly. He asserted that he had an agreement/arrangement with Mr Vulisi that any sums which the Respondent loaned to the company would be repaid to him. He said he had entered into this agreement with Mr Vulisi in around January 2018. When asked by Mr Saunders on behalf of the Applicants, he accepted that someone had to have informed Mr Poudel about the agreement because the company made several payments totalling £140,000 to the Respondent after Mr Poudel’s appointment and the Respondent’s resignation. He stated that Mr Vulisi was likely to have informed Mr Poudel of the need to make the payments to the Respondent.

The Respondent then stated that after he resigned he was not involved in the company and did not contact Mr Poudel or Mr Vulisi. He asserted that he was unaware of the financial position of the company. He stated that he was not involved in its financial operations. He did accept that when he decided to resign, he knew that the company was in financial difficulties.

The Respondent was not a reliable witness who was seeking to assist the court. He provided no explanation as to why he had signed a witness statement with a statement of truth and then at the start of his evidence in court, changed significantly what was set out in his witness statement. In my judgment, the Respondent changed his story that there was an agreement prior to the handover in an attempt by him to improve his position evidentially. His evidence given before me was that there was no such agreement at hand over, but some agreement/arrangement with Mr Vusili that the Respondent would be repaid the sums he had loaned. He was quite unable to explain when asked how this arrangement/agreement was communicated to Mr Poudel.

The evidence shows significant payments made to the Respondent in May 2018 and thereafter. Clearly there was some agreement with Mr Poudel that these payments would be made to the Respondent. There is, in my judgment, no other reason as to why Mr Poudel would make large payments to the Respondent severely depleting the sums available for the company to meet other liabilities of the company. It is clear on the evidence that the company was insolvent throughout the period from January 2018 until it was wound up by the court in November 2018. In my judgment, this change in his evidence arose because the Respondent realised whilst sitting in court before he gave evidence that the case against him would succeed in so far as there was an agreement made at handover. In my judgment, there was an agreement with Mr Poudel at handover and before the directors resigned that payments would be made to the Respondent from the company.

The Respondent was keen to assert that he had no knowledge of the financial position of the company. He did accept that he was aware that the company required funding when he became a director and that he provided loans. The Respondent also accepted that he was aware of the company’s financial difficulties and that this caused him to resign on 1 May 2018. 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.

He was quite unable to explain why the financial difficulties led to the resignation of all three directors. In my judgment, the conduct of the Respondent in resigning is an attempt by him to distance himself from the heavily insolvent company. Even if, as asserted by the Respondent, he was unaware of the advice provided by Mr Garner, he accepted that the company was in financial difficulties. I do not believe his claim that he needed to step away from the company due to other business interests. The company had been provided with insolvency advice by Mr Garner that the company should be placed into a creditors voluntary liquidation. Instead, all three resigned. I do not believe the Respondent that all he was aware of was ‘financial difficulties’ of the company at the time that he resigned. In my judgment, he was aware of the advice Mr Garner had provided and then all three directors decided to resign rather than place the company into liquidation. The Respondent was attempting to distance himself from an insolvent company but at the same time, he considered that he was entitled to be repaid loans he had made to the company.

In giving evidence, it 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.

One of the repayments made, being £7,000 was made prior to the resignation of the Respondent as director. In my judgment, the analysis below applies equally to this payment made prior to the resignation of the Respondent. There was no commercial reason for the Respondent to be paid this sum at a time when the company was insolvent and he was still a director. No separate submissions were made in relation to this pre- resignation payment.

Mr Saunders submitted that the relevant time when the preference was made was when the agreement was reached with Mr Poudel that payments would be made to the Respondent. On the Respondent’s altered case, there would still need to be an agreement between Mr Poudel at handover even if the Respondent’s evidence was that he did not reach such an agreement with Mr Poudel. It is accepted that at the time of the preference, the Respondent was a creditor. The Respondent did not produce any evidence rebutting the evidence that the company was insolvent when he acquired his shares in January/February 2018. The company remained insolvent all the way through until its compulsory liquidation. The evidence in this respect is, in my judgment, compelling. The company was balance sheet insolvent in its last accounts and its balance sheet insolvency deteriorated further as set out in the balance sheet prepared by Mr Garner dated February 2018. The company was also, in my judgment, cash flow insolvent. It had outstanding liabilities owed to creditors dating back to at least March 2018 and continuing thereafter. In my judgment, the company was insolvent at the time that the payments which constitute the preference claim were made.

There was no dispute before me relating to the time of the preference occurring within the relevant limitation period set out in section 239.

Mr Cifonelli submitted that there was no evidence of a desire to prefer. He submitted that the agreement made for the repayment of the Respondent’s loan was a commercial arrangement and as such could be considered along the lines set out by the Judge in MC Bacon. The agreement in MC Bacon was the agreement to grant a debenture to the Bank so as to enable the company to continue to trade and not be faced with a demand for repayment of the bank debt.

In my judgment, the agreement for the Respondent to be repaid his loan was not a commercial arrangement of the type contemplated or which actually existed in 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, 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.

As the Respondent was connected to the company by reason of being a director when the agreement was made with Mr Poudel, the presumption arises pursuant to section 239(5). Mr Saunders submitted this was the case but also submitted that regardless of the existence of the presumption, the evidence established the desire to prefer in any event. I agree. There was no commercial justification for the payments which were made to the Respondent by the company. No further lending was being made by him. The bank statement analysis demonstrates that large payments were made to the Respondent mostly in May 2018 when other debts remained outstanding including a direct debit payment which remained unpaid. The only sensible conclusion was that the agreement was designed to enable the Respondent to be repaid before other creditors. No alternative commercially sensible reason was proffered for the agreement. There was no evidence of pressure from the Respondent that he would seek to wind up the company if he was not repaid. I am satisfied that the relevant desire to prefer is established.

In my judgment, the preference claim is established as against the Respondent.

Mr Cifonelli invited me, in the event I determined that the preference claim was established, that in the exercise of my discretion, no order should be made against the Respondent. Mr Cifonelli relied upon the discretion pursuant to section 239(3). He submitted that without the loans made by the Respondent, the company would have ceased trading earlier and creditors would have been worse off.

He submitted that the Respondent was himself a victim because he was unaware of the financial position of the company and he relied on Mr Vusili. Mr Cifonelli also relied upon the fact that had the repayments not been made, then the Respondent would have been a much more substantial creditor of the company ( £199,000) and as such, he would have recovered a substantial dividend from the company in liquidation.

Mr Cifonelli relied on the delay in bringing these proceedings by the Applicants. Proceedings were issued one day before the expiry of the limitation period. He submits that this has caused prejudice to the Respondent. The prejudice that he relied upon was the inability of the Applicants to obtain copies of the bank mandates in relation to the company accounts. The Respondent asserted that he was not on the bank mandates. He was unable to obtain documentary evidence of this by reason of the delay. The Respondent also complains that the Applicants could have done more to investigate matters and obtain documentation.

In my judgment, there is no evidence to support the submission that the creditors would have been worse off had the company ceased trading in January 2018. In fact, the evidence points to a deteriorating financial position by reason of the ongoing trading of the company from January 2018 onwards. The Respondent did not make a capital injection but instead provided loans. That increased the overall liabilities of the company during the period.

I have held that the Respondent was aware of the financial position to the extent that he was certainly aware that under the agreement made, he would receive payments at a time when there existed other creditors of the company who were owed significant sums. Accordingly, I have rejected that his knowledge was such that he was unaware of the effect of the agreement made for him to be repaid.

As set out in the evidence of Mr Grummitt, a total of £286,112.47 has been received by way of proofs of debt in the liquidation. This excludes the sum of approximately £52,000 outstanding to the Respondent. In my judgment, there is no evidence that there is likely to be a dividend paid to the creditors in this insolvent estate. Accordingly, I do not accept that this factor can be taken into account in the exercise of my discretion.

In my judgment, the issue of the bank mandates does not take the Respondent’s defence much further. Even if he was not on the bank mandates, in my judgment, there was an agreement that the Respondent would be repaid the historic loans he had made at a time when the company was handed over to Mr Poudel and the Respondent resigned. The issue as to who directed the mechanics of the payments made thereafter in accordance the agreement made is not, in my judgment, a key issue on the defence raised. Equally whilst there was also the issue of the lack of books and records, the evidence is not that these were not available due to the passage of time. There is no evidence that books and records were handed over at the time of liquidation to the Official Receiver. The evidence is that Mr Poudel failed to cooperate. The delay in the issue of these proceedings cannot have caused prejudice to the Respondent in relation to books and records of the company. The Respondent was in a position to seek further information from his fellow directors. There is no evidence he did so.

Accordingly I reject the delay and prejudice as being a factor which I should take into account in the issue of discretion.

In my judgment, the factors raised by Mr Cifonelli are not such that I will exercise my discretion and not make an order. The Respondent was paid significant sums at a time when the company was heavily insolvent and there were other creditors. There is no justification for the Respondent to be able to retain the benefit he received over other creditors. I will make the order sought.