1943 (5) TMI 7 - DSC - Companies Law

Court declares post-May 10 payments as fraudulent preferences. Intent to prefer bank evident.

M Kushler Ltd., In re

The court allowed the liquidator's appeal, declaring that payments made into the company's bank account after May 10 constituted fraudulent preferences. ... Winding up – Fraudulent preference Issues Involved:1. Whether the payments made into the company's bank account constituted fraudulent preferences.2. The interpretation of the legal standards for determining fraudulent preference.3. The relevance of direct versus circumstantial evidence in proving intent to prefer.4. The application of precedent cases to the present facts.Issue 1: Whether the payments made into the company's bank account constituted fraudulent preferences.The liquidator appealed against an order dismissing a summons seeking a declaration that certain payments made into the company's bank account were fraudulent preferences. The company, M. Kushler, Ltd., was insolvent for at least three months before the winding-up resolution on May 23, 1941. The liquidator argued that payments made between February 23, 1941, and May 23, 1941, to extinguish the company's overdraft were fraudulent preferences. The court found no evidence of intent to prefer during the entire three-month period but focused on the payments made from May 10, 1941, onward. The court noted that the company's banking account showed normal transactions until May 10, after which payments were made to liquidate the overdraft, resulting in an unusual credit balance by the winding-up date. The court inferred that these payments were made with the dominant intention to prefer the bank over other creditors, especially given the pressure from a trade creditor, Debenhams, and the fact that the bank was not summoned to the creditors' meeting.Issue 2: The interpretation of the legal standards for determining fraudulent preference.The court emphasized that the intention to prefer must be the dominant intention behind the payments. The legal standard requires that the intention to prefer must be the primary motive for the payments. The court disagreed with the lower court's view that no inference of intent to prefer could be drawn in the absence of direct evidence. Instead, the court held that the state of mind of the debtor could be inferred from circumstantial evidence, provided there are solid grounds for such an inference.Issue 3: The relevance of direct versus circumstantial evidence in proving intent to prefer.The court clarified that the absence of direct evidence does not preclude the drawing of an inference of intent to prefer. The court rejected the notion that an inference of intent to prefer cannot be drawn if there is any other possible explanation for the debtor's actions. The court stated that the inference of intent to prefer could be drawn from the overall circumstances, even if there are other possible explanations.Issue 4: The application of precedent cases to the present facts.The court examined the precedent case of M.I.G. Trust Ltd. and clarified that the principles laid down in that case did not preclude the drawing of an inference of intent to prefer in the absence of direct evidence. The court also discussed the case of Lyons, In re, noting that the facts of that case were different and did not establish a general principle that an inference of intent to prefer could not be drawn if there were other possible explanations. The court concluded that the proper inference to be drawn from the facts of the present case was that the payments made after May 10 were intended to prefer the bank and discharge the guarantee.Judgment:The appeal was allowed. The declaration of fraudulent preference was confined to the payments made into the account after May 10. The court emphasized that the inference of intent to prefer was overwhelming based on the evidence presented.