Cohen v Co-Operative Group Limited – £478m transaction at an undervalue/preference claim fails

The High Court has dismissed claims totalling £478m under sections 238 (transaction under value, TUV) and 239 (preference) of the Insolvency Act 1986 arising from an intra-group restructuring within the Co-operative Group (TCG), making a clear distinction between the treatment of registered societies and companies. TCG had transferred substantial 'good' assets out of The Food Retailer Operations Limited (in liquidation) (FROL), both registered societies, funded by withdrawing its share capital in FROL to the value of around £478m. FROL later went into administration and then liquidation – with its liquidators bringing the claims against TCG.

The key reasoning for the dismissal of the claims was that FROL was a registered society rather than a company. The court held that the original subscription monies paid for withdrawable shares constituted sufficient consideration for the later return of capital on withdrawal. Although the court otherwise accepted much of the liquidators’ case — including that FROL became balance-sheet insolvent “in consequence of” the restructuring — the transaction at an undervalue claim failed on the consideration point. The preference claim failed because the directors were not found to have been influenced by the requisite desire to prefer and it was instead deemed that the restructuring was the least-worst option compared to the relevant alternative of a total withdrawal of wider group support.

Whilst much turned on the society issue, we set out below a number of key takeaways of more general application.

Framing the ‘transaction’ being challenged is critical – and difficult

The judgment demonstrates the importance of identifying the relevant “transaction” in a way that reflects commercial reality, as opposed to cherry-picking. The court rejected an attempt by FROL to isolate the share withdrawal as a singular transaction from the wider restructuring, holding that a common-sense approach was required. In complex group reorganisations, how the transaction is framed may be outcome-determinative.

‘Consideration’ comes in many forms

The court held that, in the context of a registered society, the right to withdraw shares and receive capital back formed part of the original rights attaching to the shares. That meant the original subscription monies supplied the necessary consideration to defeat the TUV claim. The court rejected the joint liquidators' attempts to characterise this as a payment of a dividend by a company, which was held in Sequana to be a transaction for no consideration – making a clear distinction between treatment of registered societies and companies.

The ‘insolvency’ requirement entails a commercial reality test, with questions of valuation requiring a real-world approach

Although the section 238 claim failed, the court accepted that FROL became balance-sheet insolvent "as a consequence" of the restructuring. In reaching that conclusion, it treated historic accounting information as relevant but not conclusive, and focused instead on the commercial reality of FROL’s position after the restructuring. In particular, it was deemed that FROL could no longer assume that the wider group would continue to bear liabilities as it had done previously.

‘In consequence’ is a causative, not temporal concept

The judgment is the first to delve into the precise meaning of becoming insolvent “in consequence of” a transaction. The court found that the concept is one of causation, not mere timing: there must be a sufficient causal connection between the transaction and the insolvency. The court also considered that the relevant window for assessing that causal connection was two years, in line with the look-back period for a TUV claim.

Demonstrating a ‘desire to prefer’ remains a sticking-point

The preference claim failed because the court was not satisfied that FROL was influenced by a desire to prefer TCG entities. Instead, the directors were found genuinely to have considered the restructuring the least-worst option in circumstances where they believed group support would otherwise be withdrawn. The case is another reminder of the difficulty of proving the subjective element required by section 239.