Co-op defeats £205M Somerfield liquidator claim over Project Chicago restructure

The Co-operative Group has defeated a £205 million liquidator challenge arising from its 2015 “Project Chicago” restructuring of the former Somerfield Stores business (now known as The Food Retailer Operations), with the High Court holding that the withdrawal of share capital from a registered society is not equivalent to a company dividend or share buyback for transaction at an undervalue purposes.

Project Chicago was a Co-op restructuring exercise implemented in November 2015 after the group concluded that parts of the Somerfield estate did not fit its “True North” convenience-store strategy. The first phase involved transferring freehold and leasehold properties and other assets out of Somerfield to other Co-op entities, with a stated value of approximately £493 million. The acquisition was funded by withdrawals of share capital from Somerfield totalling approximately £478 million and a loan account set-off initially intended to be approximately £15 million.

The restructure left Somerfield with onerous leases and other non-core properties. Fifteen months later, on 10 February 2017, Somerfield entered administration and later liquidation, leaving unsecured creditor claims estimated at approximately £73.99 million plus statutory interest, including approximately £37.13 million in landlord claims.

The liquidators argued that the share-capital withdrawals, or alternatively the wider Project Chicago transaction, were transactions at an undervalue because Somerfield received no consideration. They relied on the Sequana line of authority and Dickinson v NAL Realisations, arguing that the withdrawals were analogous to dividends or a company purchase of its own shares, both of which can be vulnerable as no-consideration transactions.

The Court rejected that analogy. A registered society is structurally different from a company: its members do not hold shares mainly to participate in profits, and withdrawable share capital reflects the bargain struck when the shares were subscribed. The original subscription price was therefore consideration for the later withdrawal. That finding was decisive and meant the section 238 claim failed.

The Court also rejected the liquidators’ attempt to isolate the share-capital withdrawals from the wider restructuring, holding that the relevant transaction was a broader package involving a pension reorganisation, asset sales, withdrawals of share capital and intersociety loan repayment. It would be artificial to separate the withdrawals from the rest of Project Chicago where the steps were intrinsically linked and none would have occurred without the others.

The judgment nevertheless contains important alternative findings. Although the Co-op respondents defeated the transfer at an undervalue claim because the share-capital withdrawals were supported by consideration, the Court held that, if that conclusion was wrong and there had been a transfer at an undervalue, the respondents would not have been saved by the section 238(5) defence. They satisfied the subjective good-faith limb, but failed the objective limb because there were no reasonable grounds for believing Project Chicago would benefit Somerfield, as opposed to the wider Co-op group.

The Court also addressed a point of wider importance on insolvency causation. Although the liquidators accepted that Somerfield was not insolvent before the impugned transaction, the Court found that it became unable to pay its debts “in consequence of” the transaction. The Court said section 240(2) should be given its “ordinary natural meaning,” so insolvency need not occur at the same moment as the transaction. Rather, there has to be a “sufficient causal connection” between the transaction and the company becoming insolvent. The Court noted that sections 238 and 240 define creditor protection by reference to the relevant lookback period, here two years before the insolvency event

The liquidators’ preference claim also failed. The intersociety loan repayment claim fell at the insolvency causation stage. By trial, the amount in issue had been reduced from the originally pleaded figure of approximately £15.3 million to about £4.6 million, and the Court held that a repayment of that size could not, on its own, have caused Somerfield to become unable to pay its debts.

The share capital withdrawal preference claim failed because the respondents overcame the statutory presumption that Somerfield was influenced by a desire to produce the preferential effect. The Court accepted that the Somerfield directors were not motivated by a wish to improve another entity’s position in a future liquidation, but by their belief that they faced a practical choice between approving Project Chicago and risking the withdrawal of group support, with potentially immediate insolvency consequences for Somerfield.

Read the decision here.

James Potts KC, Matthew Parfitt, Jack Rivett and Conor McLaughlin, all of Erskine Chambers, and Andrew Short KC (instructed by Addleshaw Goddard) acted for the respondents.