When does a “running account” operate as a defence to a preference claim?

In the second reported appeal decision in this long-running insolvency litigation, the court has given helpful guidance on when a “netting off” approach should be taken when ordering relief in a preference claim.

Mills & Reeve act for a litigation funder (Cage) as assignee of insolvency claims from the liquidators of Totalbrand Limited (the Company). 

The second respondent (R) was the wife of a director of the Company and was also its landlord.

At trial in May 2021, R was ordered to pay to Cage £127,340 in respect of preferences which she had received from the Company, plus additional sums in respect of interest and costs.

R applied for permission to appeal on two grounds, asserting that:

  1. The district judge erred in law in holding that there could not be a running account between R and the Company
  2. Having found that R had been preferred within the meaning of s.239 IA 1986 in the sum of £127,340, the district judge erred in law in failing to give any credit for payments from R to the Company during the relevant period.

In summary, the “running account” principle is that, where there exists a relationship between a company and another party where:

  1. There is an active account between them
  2. There is a creditor/debtor relationship
  3. There is an expectation of further or continuing debits and credits on the account

then a “netting off” approach should be taken when ordering relief, such that the payee is only ordered to restore the overall loss to the company.

R’s application for permission to appeal was heard before the Vice Chancellor, Mr Justice Fancourt on 13 July 2022.

In dismissing R’s application, the vice chancellor gave welcome guidance on when a “running account” justifies a netting off approach.

In relation to the first ground of appeal, it was held that the district judge had not ruled that a running account relationship could not exist; but rather that it did not exist on the facts in this case. The mere fact that there had been a series of payments back and forth between R and the Company did not in itself establish the existence of a running account. In fact the evidence before the district judge at first instance did not allow such a finding; the director had in reality been the controlling mind behind all the transactions going both ways.

In relation to the second ground, Fancourt J held that it was not open to R to overturn the discretion of the district judge. S.239(3) IA 1986 provides that the court shall make an order to restore the position to what it would have been if the company had not made that preference. This means that regardless of what may happen afterwards (eg, a repayment of the sum), it is only where a relationship in the nature of a running account is established (which was not the case here), that one can net off the position between the company and the creditor in overall terms.

The decision provides authority on the treatment of preferences where there are multiple payments passing back and forth. Unless there is clear evidence that the preference payments were part of a running account relationship where there was an expectation of further or continuing credits and debits on the account, each preference falls to be considered on its own terms, and should be repaid without a “netting off” approach.

Cage Litigation Ltd (Formerly Cage Consultants Ltd) v Iqbal [2022] EWHC 2731 (Ch); [2022] 7 WLUK 694

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