High Court finds withdrawal of co-operative share capital could not be a transaction at an undervalue

The High Court dismissed a substantial claim by the joint liquidators of a registered society against Co-Operative Group Limited and related entities, finding that the withdrawal of share capital from a registered society did not constitute a transaction at an undervalue (“TUV”) under s.238 of the Insolvency Act 1986: Malcolm Cohen v Co-Operative Group Ltd [2026] EWHC 1228 (Ch)

In reaching that conclusion, the court drew an important distinction between the return of withdrawable share capital in a co-operative society structure and the payment of a dividend by a company — which distinguished the present case from the Court of Appeal's analysis in BTI 2014 LLC v Sequana [2019] EWCA Civ 112 in the context of a dividend. The court also addressed the correct approach to identifying the "transaction" for s.238 purposes where a restructuring involves multiple interlinked steps, rejecting an attempt to carve out and examine individual components in isolation. 

The decision will be of interest to insolvency practitioners and advisers working with registered co-operative and community benefit societies, where returns of withdrawable share capital can operate as a feature of the structure. It is also of broader relevance to practitioners involved in TUV claims arising out of multi-step restructurings where questions arise about the appropriate analysis when defining the relevant transaction, and suggests that the court will look past any attempt to avoid a TUV claim through an artificial structure.

The decision does not, however, close off all avenues of challenge in this area. The court's reasoning turned closely on the specific terms of SSL's rules, which themselves referred to a member's "right to withdraw" and the ability to "suspend" that right, and on the particular features of the restructuring in question. The analysis may not apply in the same way where the rules of a society are differently drafted, or where the steps of a restructuring are less tightly integrated. 

Background

The proceedings were brought by the joint liquidators of The Food Retailer Operations Limited (formerly Somerfield Stores Limited, "SSL"), a registered society under the Co-operative and Community Benefit Societies Act 2014. Subsidiaries of Co-operative Group Limited, the ultimate parent of the Co-operative group ("tCG"), acquired SSL in 2009. Following the acquisition, the group operated SSL's stores as part of its Food Division, with SSL entirely reliant on the group’s financial support to function.

In 2013, tCG faced a significant corporate crisis linked to a shortfall identified in Co-operative Bank's regulatory capital. It devised a restructuring known as "Project Chicago," designed to transfer certain of SSL's valuable assets out of SSL and into other tCG group entities, leaving SSL's onerous lease liabilities behind, before selling SSL to a third party.

Co-operative Group Finance Limited ("CGF"), another tCG group society, held withdrawable share capital in SSL. The mechanics of Project Chicago Phase 1 relied on CGF withdrawing that share capital (approximately £478 million) from SSL, with the withdrawn funds used (via a circular funds flow) to finance the acquisition of SSL's assets by another tCG group vehicle, for stated consideration of approximately £493 million. Phase 1 also included (a) a reorganisation of the SSL pension scheme (including SSL receiving certain releases); (b) release of SSL as a guarantor of tCG’s bank and bond debt; and (c) and a repayment by SSL of an intersociety loan of £15.2m to tCG's ultimate parent. 

After the SSL directors had raised concerns about (1) the risks of the transaction; and (2) the impact on SSL's creditors, in October 2015, the group’s solicitors issued what became known as the "Transaction Demand" — a formal ultimatum stating that tCG would only continue its financial support to SSL if the latter completed (in summary) the Phase 1 steps. Faced with that ultimatum, the SSL directors concluded they had no practical alternative but to proceed. The pension re-organisation and all of the remaining Phase 1 steps were implemented by November 2015.

SSL was sold to a third-party buyer for £1 in July 2016, entered administration in February 2017, and later went into liquidation, with an estimated creditor deficiency of approximately £205 million. The joint liquidators brought proceedings challenging Project Chicago Phase 1 under s.238 of the Insolvency Act 1986 (transaction at an undervalue) and, in the alternative, section 239 (preference).

While the judgment covered various elements of the s.238 claim (which we do not cover in this post), two questions of law were central to that claim:

• whether the relevant "transaction" for s.238 purposes was the overall Project Chicago Phase 1 package, or each of its constituent steps (in particular, the share capital withdrawals) viewed in isolation; and
• whether a withdrawal of share capital from a registered society could be a "transaction for no consideration" under s.238, as a dividend was found to be in the Court of Appeal's decision in Sequana.

Decision

Cawson J dismissed the claim in its entirety.

What is the relevant "transaction" for s.238 purposes?

The liquidators pleaded the relevant transaction in two ways. Their primary case was that the transaction was the entirety of Project Chicago Phase 1: the pension scheme reorganisation, the sales of SSL's assets, the withdrawals of share capital by CGF, and the intersociety loan repayment. They also pleaded, as an alternative, that the withdrawals of share capital taken alone constituted a TUV. However, by the time of trial, the liquidators elevated that alternative to their primary position.

The court rejected this alternative argument. Drawing on the judgment in Credit Suisse v Softbank [2025] EWHC 2631 (Ch), Cawson J confirmed that the court must take a common-sense view of what constitutes the relevant transaction, looking at the substance and reality of the arrangements and resisting the artificial carving out of individual steps from an integrated scheme. He also noted that it was possible for a transaction to comprise or include arrangements to which the debtor was not a party. Applying that approach, the judge held it was "wholly artificial" to isolate the withdrawals. None of the Phase 1 steps would have proceeded without all of the others: the Transaction Demand itself made this explicit, conditioning tCG's continued support on the completion of the asset sales, the intersociety loan repayment, and the withdrawal of share capital by CGF as a single, simultaneous package. The relevant "transaction" was accordingly Project Chicago Phase 1 as a whole, as originally pleaded.

The court went further and held that SSL's releases from significant group guarantee obligations, including as statutory employer of the SSL Pension Scheme and as a guarantor of the group’s banking and bond arrangements, also formed part of the overall transaction and constituted part of the consideration SSL received. Those releases arose pursuant to documentation that formed part of the same Phase 1 package and represented a genuine and quantifiable benefit to SSL.

Was the withdrawal transaction for "no consideration"?

The liquidators argued that the position was directly analogous to the Court of Appeal's analysis in Sequana. In that case it was held that a company's payment of a dividend is a transaction for "no consideration": the shareholder has no pre-existing legal entitlement to any particular dividend, and the original subscription of shares constitutes past consideration which cannot be brought into account. The liquidators pointed to the "absolute discretion" language in Rule 13 of SSL's rules (under which the SSL board could approve or refuse any withdrawal request without giving reasons) as the functional equivalent of the board's discretion to declare a dividend – meaning that the CGF withdrawal was an act of discretion rather than the discharge of a legal obligation, so no consideration was received by SSL.

The court rejected this argument. It held that the withdrawal of share capital in a registered co-operative society is fundamentally different from the payment of a dividend by a company. Its reasoning operated on several levels. 

First, and most importantly, it focused on the nature of the rights conferred at the point of subscription. When CGF subscribed for shares in SSL, it obtained the right to withdraw the shares and obtain back the capital introduced. That right was the central commercial bargain. This distinguished the position from a company shareholder, who acquires no right to any particular dividend payment, but only a hope of future distributions from profits. 

Second, the court attached considerable weight to the specific language of SSL's own rules: Rule 13 used the phrase "the right to withdraw" and provided for that right to be "suspended" — language which itself presupposes the existence of an underlying right, not a mere expectation of a discretionary benefit. 

Third, drawing on Chalcot Training v Ralph [2021] EWCA Civ 199 and Equitable Life v Hyman [2002] 1 AC 408, the court noted that the existence of a board discretion does not automatically render the benefit conferred gratuitous. Where the discretion operates as a gating or suspension mechanism over a pre-existing right, rather than as the source of an entirely new and voluntary payment, the original subscription remains live and relevant consideration.

On this basis, the court held that the consideration for each withdrawal of share capital was the original subscription of capital by CGF in the same amount. The withdrawals were not transactions "for no consideration" within s.238(4)(a), and the Sequana dividend analysis did not transpose to this context. The s.238 TUV claim therefore failed.

The preference claim

The preference claim under s.239 only fell to be considered on the assumption that the court was wrong on the TUV issue. Cawson J held that, while the other elements of a preference were established in respect of the withdrawals, the respondents successfully rebutted the statutory presumption of a desire to prefer (found in s.239(5) IA): the relevant decisions had been made for commercial rather than preferential reasons. The court accepted the SSL directors’ evidence as to no desire to prefer, which had not been challenged by the liquidators in cross examination. 

HSF Kramer represented the former directors of SSL in respect of these proceedings.