Liquidators’ challenge to Co‑op restructuring fails: Key lessons on undervalue and preference claims

Liquidators challenged a 2015 restructuring that stripped assets out of Food Retailer Operations Limited (FRO) before its insolvency, arguing undervalue and preference. The court had to determine the nature of the transaction and whether:

• share capital withdrawals involved consideration
• the company was insolvent
• the statutory tests under ss.238 and 239 of the Insolvency Act 1986 were satisfied.

Project Chicago

FRO, formerly known as Somerfield Stores Limited before 18 March 2016, formed part of a wider corporate group connected to the Co‑operative Group (Co-op).

Following serious financial difficulty, FRO transferred assets in the region of £493 million to other group entities in November 2015. This restructuring was known as Project Chicago. Project Chicago involved a number of interlinked transactions to which FRP was a party to three of them:

1. The transfer of property and other assets to Co-operative Food Stores Limited (CFS)
2. The repayment to Co-operative Group Limited (CGL) of the intersociety loan
3. The return of share capital in FRO to Co-operative Group Food Limited (CGF) through the withdrawal of share capital.

The aim of Project Chicago was to re-organise the FRO’s assets, liabilities, and capital across multiple entities in an attempt to sustain the business.

Project Chicago was mainly funded by withdrawals of share capital worth £478 million and a smaller loan account set-off. Following the restructuring of FRO, it was left with less valuable assets and 15 months later, on 10 February 2017, FRO entered administration. The company subsequently went into liquidation leaving unsecured creditors estimated, by Malcolm Cohen and Shane Crooks (the joint liquidators), to amount to almost £74 million. The figure was exclusive of statutory interest, of which over £37 million comprised landlord claims as of 1 March 2026.

Claims

The joint liquidators stated that the restructuring had a negative impact on FRO and harmed its creditors because:

• value had effectively been moved out of FRO as part of the restructuring
• entities within the Co‑op group had benefited at FRO’s expense
• FRO was left in a worse financial position.

The joint liquidators sought relief by claiming that the restructuring under Project Chicago amounted to (1) transaction at an undervalue and (2) preference, respectively under sections 238 and 239 of the Insolvency Act 1986 (the Act).

The central allegations by the joint liquidators are:

• the withdrawals of share capital involved a transaction at an undervalue within the meaning of s.238 of the Act, because there was no consideration for it; or
• in the alternative, the withdrawals of share capital and the loan account set-off amounted to preferences within the meaning of s. 239 of the Act, namely that it put certain group companies in a better position that other creditors.

Was there a transaction at an undervalue?

The court held that the withdrawal of share capital in a registered society is not a ‘transaction at an undervalue’.

The withdrawal was not a disposition of assets for inadequate consideration; it reflected members’ rights being lawfully exercised and additionally provided indirect sufficient benefits leaving the corporate structure in a better position.

The judge held that the share withdrawals were not done for ‘nothing’. When the shares were originally issued, money (capital) had already been paid for them, which counts as the value given in return.

Was there a preference?

The court held that there was no preference in the transactions and the claim failed.

From the respondents’ submission, the court found that the directors of FRO did not, at any time, have a desire to improve the position of CGF and CGL and cause the company to go along with Project Chicago. Instead, it was influenced by a desire to improve the position in the event of an insolvent liquidation of the company.

This decision highlights the difficulties faced by liquidators in challenging complex group restructurings, particularly where transactions can be characterised as legitimate exercises of corporate structure.

For advice on a complex restructuring or insolvency dispute, contact our insolvency team to discuss your options.