“(1) This section applies in the case of a company where— (a) the company enters administration, or (b) the company goes into liquidation; and ‘the office-holder’ means the administrator or the liquidator, as the case may be. (2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section. (3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction. (4) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if— (a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or (b) the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company. (5) The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied— (a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and (b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.”
“As mentioned earlier, the pari passu principle is one of the most fundamental principles of corporate insolvency law. All unsecured creditors are required to share and share alike in a common pool of assets and realisations. This principle, formerly confined to winding-up, now applies also to administrations in which a distribution is made. Arrangements that would have the effect of distributing an asset of a company in liquidation (or in a distributing administration) other than in accordance with the statutory provisions for rateable distribution are to that extent to be treated as ineffective. This is the common law pari passu rule, which as stated above, is distinct from the anti-deprivation rule. As we shall see, the pari passu rule applies irrespective of whether insolvency proceedings are the trigger for the operation of the impugned provision, and the fact that the arrangement was a commercially sensible one entered into in good faith will not insulate it from the invalidating effect of the rule.”
“The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”
“(a) Where the duty extends to consideration of the interests of creditors, their interests must be considered as “paramount” when taken into account in the directors’ exercise of discretion (per Mr Leslie Kosmin QC in the Colin Gwyer case (above) at [74]). Although I note the contrary view expressed by Owen J. in the Supreme Court of Western Australia that although ‘the directors must “take into account” the interests of creditors [i]t does not necessarily follow from this that the interests of creditors are determinative’ (Bell Group Ltd v Westpac Banking Corp [2008] WASC 239 at [4438]–[4439], applying the judgment of Mason J. in Walker v Wimborne [1976] HCA 7; (1976) 137 C.L.R. 1), so far as English law is concerned I respectfully agree with Mr Kosmin QC that his use of ‘paramount’ was consistent with the judgment of Nourse L.J. in Brady v Brady (1987) 3 B.C.C. 535 (CA) at 552, where he observed that ‘where the company is insolvent, or even doubtfully solvent, the interests of the company are in reality the interests of existing creditors alone’. I also note that this passage from Mr Kosmin QC’s judgment was cited with apparent approval by Norris J. in Roberts (Liquidator of Onslow Ditchling Ltd) v Frohlich[2011] EWHC 257 (Ch) ; [2012] B.C.C. 407 at [85]. (b) As Miss Leahy submitted, the subjective test only applies where there is evidence of actual consideration of the best interests of the company. Where there is no such evidence, the proper test is objective, namely whether an intelligent and honest man in the position of a director of the company concerned could, in the circumstances, have reasonably believed that the transaction was for the benefit of the company (Charterbridge Corp Ltd v Lloyds Bank Ltd[1970] Ch. 62 at 74E–F, (obiter), per Pennycuick J.; Extrasure Travel Insurances Ltd v Scattergood [2003] 1 B.C.L.C. 598 at [138] per Mr Jonathan Crow). (c) Building on (b), I consider that it also follows that where a very material interest, such as that of a large creditor (in a company of doubtful solvency, where creditors’ interests must be taken into account), is unreasonably (i.e. without objective justification) overlooked and not taken into account, the objective test must equally be applied. Failing to take into account a material factor is something which goes to the validity of the directors’ decision-making process. This is not the court substituting its own judgment on the relevant facts (with the inevitable element of hindsight) for that of the directors made at the time; rather it is the court making an (objective) judgment taking into account all the relevant facts known or which ought to have been known at the time, the directors not having made such a judgment in the first place. I reject the respondent’s contrary submission of law.”
“30. During the24 March 2014 meeting, Mr Dickinson advised that we should expect to be able to buy the business back for£40,000 -£50,000 , and also suggested that there would be a turnover charge of approximately 1% to 2% for a year. Crucially, Mr Dickinson made it abundantly clear that once Fastfit’s bank (at this point, RBS) were notified of the move towards Administration, they would automatically freeze Fastfit’s bank account. He explained that the natural consequence of this would be that suppliers and staff could not be paid from the RBS account and, because Fastfit had no other money or credit available, those individuals and businesses would go unpaid. This would have had a disastrous effect on the business. 31. We discussed with Mr Dickinson how card payments might be collected at Fastfit’s branches, as the majority of customers paid their bills by card, and that these would ordinarily flow through streamline (our card terminal machine provider) into Fastfit’s RBS account. We relied on Mr Dickinson’s experience and knowledge and followed the advice that he gave. 32. On25 March 2014 , the quarterly rent fell due on the three sites operated by Fastfit. I recall asking Mr Dickinson whether the landlords should be paid. Mr Dickinson advised me that where possible, Fastfit should continue to pay things as they become due, and suppliers should be paid sufficiently to maintain essential supplies. Mark and I negotiated with Fastfit’s landlords to pay the rent for only one month. I understood that Mr Dickinson was advising us to take these steps to protect the business and to allow an administration that would be preferable to a liquidation.”
“We’re concerned as to how takings are going to be handled after the bank are notified. Virtually all of our takings come through the credit card machines and are credited to the RBS account 2 working days later. If the account is frozen, we are not going to be able to control any takings for around 8 days, which could be£70k . Where will this money go? How do we get around this? We will need some working capital.”
“With that timing, however, cash flow will then be too tight to pay the wages on 15th, so we could do with some clarification from you on whether any of the takings during the bank freeze period can be used please.”
“We can work something out re the takings. An NOI will notify the bank. How are you getting on with the finance Co’s”
“Mr Barker: At what point should I start looking at, to be taking money into a different company then? Mr Dickinson: At the moment we do the NOI. We serve the NOI you know and the flag comes down on the bank really at that point. That’s what I can advise you, alright. I can’t advise you to do it any other way. If you choose to so something else, then that’s up to you guys.”
“At the time, I took ‘we will take a percentage’ to mean that Mr Dickinson would look to take a percentage of the April payments, representing the net profit for that period. Mr Dickinson never actually clarified what he meant by ‘percentage’. It was not discussed again and at no point during the administration did he mention an intention to collect any part of those takings.”
“Mr Dickinson: and have you dealt with the finance companies? Mr Barker: I have spoken to the one that we want to keep the SME one yeah. They didn't seem to have any objections to it. I’ll follow it up and get it.”
“12.4 The Buyer further acknowledges and agrees that it shall be solely responsible for payment of all wages and salaries due and related PAYE and National Insurance contributions and deductions in respect of the Employees for all periods after1 April 2014 .”
“1. Trading for the period2 April 2014 to14 April 2014 2. Directors Loan Account 3. Trading Premises Leases”
“The Directors diverted all funds away from the Company and into the account of NewCo. We will look to make to retrieve these monies. Circa£40k ”
“ Detail Notes 1. Wrongful trading during the period between the Notice of Intention to Appoint an Administrator and the date of filing the Notice of Administration. During the period between3 April 2014 and14 April 2014 the Directors sought to divert business from the Company to [Fastfit MK].”
“We understand from discussions with the former Joint Administrators that trading revenues were paid to [Fastfit MK] prior to the company’s business and assets being sold on15 April 2014 .”
“By way of explanation, at the time that [the Company] first engaged Carter Backer Winter, there was a concern that [the Company]’s bank account may be frozen. Therefore, following discussions with John Dickinson and with his agreement, future customer receipts were paid into [Fastfit MK]’s bank account. The receipts were then used for [the Company]’s purposes, to pay outgoings of the Company. A schedule of payments made is attached. You will see that£57,159.26 was paid in relation to wages alone. Please note that there are additional creditors that [Fastfit MK] itself has paid and [Fastfit MK] will seek to be subrogated to the creditors’ claims. [Fastfit MK] will also seek to set off amounts due against any sums due to FFS. Details and a proof of debt will follow.”
“The Letter from Pitmans suggests that you agreed that customer receipts of the Company could be paid into [Fastfit MK]’s bank account prior to the Administration and the sale of the business and assets due to concerns that the Company’s bank account may be frozen. I’d be grateful if you would confirm whether this is correct as I would have thought a validation order would have been the recommended route and we are concerned that [Fastfit MK] are trying to use you to avoid culpability.”
“We did not, verbally or written, agree that customer receipts during the period leading up to the administration should be paid to the account of [Fastfit MK] with Metro Bank. We had made arrangements with RBS that the Company account remain open for customer receipts and that no funds be paid out of the account. During this period we had suspicions that they had sought to divert the sales of the Company to [Fastfit MK] and this was one of the key areas we had identified for further investigations. As you would have noted from our handover, we did bring this to the attention of the Directors and that we would be investigating this further.”
“Mr Dickinson’s view was that funds should be paid into the new company’s account and that to the extent that the Company had outgoings that it needed to pay then these should be paid. The directors didn’t understand the process but found Mr Dickinson to be unconcerned about the problem and proposed solution.”
“I have listened to the recording which you have provided. It is apparent that it was made clear in that conversation that if payments were to be made into [Fastfit MK]’s bank account, then that would be on the basis that there would need to be some provision as to how they were treated in the SPA. Clearly, these funds belong to the Company and your client must account for them and repay such sum as he received less any genuine deductions. Unfortunately, as your client has been unwilling to provide the bank statements, we are unable to clarify any genuine deductions.”
“(1) If at the time of a relevant transfer the transferor is subject to relevant insolvency proceedings paragraphs (2) to (6) apply. (2) In this regulation ‘relevant employee’ means an employee of the transferor— (a) whose contract of employment transfers to the transferee by virtue of the operation of these Regulations; or (b) whose employment with the transferor is terminated before the time of the relevant transfer in the circumstances described in regulation 7(1). (3) The relevant statutory scheme specified in paragraph (4)(b) (including that sub-paragraph as applied by paragraph 5 of Schedule 1) shall apply in the case of a relevant employee irrespective of the fact that the qualifying requirement that the employee’s employment has been terminated is not met and for those purposes the date of the transfer shall be treated as the date of the termination and the transferor shall be treated as the employer. (4) In this regulation the ‘relevant statutory schemes’ are— (a) Chapter VI of Part XI of the 1996 Act; (b) Part XII of the 1996 Act. (5) Regulation 4 shall not operate to transfer liability for the sums payable to the relevant employee under the relevant statutory schemes. (6) In this regulation ‘relevant insolvency proceedings’ means insolvency proceedings which have been opened in relation to the transferor not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner. (7) Regulations 4 and 7 do not apply to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.”
“For the special insolvency regimes in reg.8(6) or 8(7) to apply, prior to the transfer the insolvency proceedings must have been “opened” (reg.8(6)) or “instituted” (reg.8(7)) in relation to the transferor. Where the transfer is effected without awaiting this event, the special insolvency protection will not apply. The EAT has suggested (in Slater) that one course to avoid this risk is for any sale pending the appointment of a liquidator to be provisional and conditional upon that appointment and subsequent agreement of the liquidator.”
“However if responsibility for the business passes in the meantime, there is liable to be found to have been a transfer notwithstanding the provisional nature of a sale: see Celtec Ltd v Astley.”
“31. The requirement that the company has itself entered into a transaction is an essential part of any claim under s.238 and comprises two interrelated elements: first, that there is a transaction; and second, that the transaction is something which the company has itself entered into. 32. As I have explained, the term ‘transaction’ is widely defined in s.436 as including a gift or arrangement. If it were necessary for the purposes of this decision, I would therefore be disposed to find it is broad enough to encompass a payment made by a company or by an agent of the company acting within the scope of his authority. But to focus unduly on the term ‘transaction’ risks obscuring the need for the second and vital element, namely the requirement that the transaction be something that the company has ‘entered into’. This expression connotes the taking of some step or act of participation by the company. Thus the composite requirement requires the company to make the gift or make the arrangement or in some other way be party to or involved in the transaction in issue so that it can properly be said to have entered into it, and of course it must have done so within the period prescribed by s.240.”
“36. I come then to apply these principles in the context of the present case and in doing so I must consider the two ways the case can be put. The first and primary argument advanced by Mr Davenport on Mr Hunt’s behalf is that Mr Temple has misappropriated the funds he held on trust for Ovenden because he had no right to take the moneys and make the payments to Mr Hosking. But here Mr Hunt faces precisely the difficulty encountered by Mr Manson in Manson v Smith (above). The improper withdrawal by Mr Temple of the funds he held on trust, if that is what it was, did not constitute a dealing between him and Ovenden. 37. Nor can it be said that Mr Temple was acting as agent for Ovenden in making the impugned payments. Mr Davenport disclaimed any such contention and he was right to do so. Mr Temple was a trustee of the funds but, as Lord Hoffmann explained in Ingram v Inland Revenue Commissioners [2000] 1 A.C. 293 at p.305, a trustee in English law is not an agent for his beneficiary. He contracts in his own name with a right of indemnity against the beneficiary for the liabilities he has incurred. 38. That brings me to the second way the case can be put, namely that Mr Temple was in some way authorised or entitled to make the impugned payments, albeit that they were made for no or inadequate consideration. However, in my judgment this argument also faces an insuperable difficulty. When Mr Temple took the funds from the client account and paid them over to Mr Hosking it required no further act or step by Ovenden beyond the 2003 agreement and the 2005 variation, and, as I have said, neither of these is said to constitute or form part of a relevant transaction. The payments themselves were not a gift by Ovenden to Mr Temple, nor did it enter into a further transaction of any other kind with him. It follows that the actions of Mr Temple in withdrawing the funds from the client account and paying them over to Mr Hosking were not transactions entered into by Ovenden, just as the transfers of land were not entered into by the bankrupt in Re Brabon.”
“If the creditor requests the debtor to pay the debt to a third party, such a payment is equivalent to payment direct to the creditor, and is a good discharge of the debt.”
“The benefits given and received by the company must be valued as at the time of the transaction. Where one of those values is uncertain, the court may have regard to subsequent events in order to test the accuracy of the value ascribed to the benefit in question at the time of the transaction.”
“20… [S238(4)(b)] does not stipulate by what person or persons the consideration is to be provided. It simply directs attention to the consideration for which the company has entered into the transaction. The identification of this ‘consideration’ is in my opinion, a question of fact. It may also involve an issue of law, for example, as to the construction of some document. But if a company agrees to sell an asset to A on terms that B agrees to enter into some collateral agreement with the company, the consideration for the asset will, in my opinion, be the combination of the consideration, if any, expressed in the agreement with A and the value of the agreement with B. In short, the issue in the present case is not, in my opinion, to identify the section 238(4) ‘transaction’; the issue is to identify the section 238(4) ‘consideration’. … 26 Mr Mitchell submitted that these ex post facto events ought not to be taken into account in valuing PCG’s sublease covenant as at10 November 1989 . I do not agree. In valuing the covenant as at that date, the critical uncertainty is whether the sublease would survive for the four years necessary to enable all the four£312,500 payments to fall due, or would survive long enough to enable some of them to fall due, or would come to an end before any had fallen due. Where the events, or some of them, on which the uncertainties depend have actually happened, it seems to me unsatisfactory and unnecessary for the court to wear blinkers and pretend that it does not know what has happened. Problems of a comparable sort may arise for judicial determination in many different areas of the law. The answers may not be uniform but may depend upon the particular context in which the problem arises. For the purposes of section 238(4) however, and the valuation of the consideration for which a company has entered into a transaction, reality should, in my opinion, be given precedence over speculation.”
“Lord Scott’s speech has generated much debate on the use of hindsight to determine a value at the time of the transaction. But it seems clear that Lord Scott was not in truth applying a hindsight test; rather he was relying on evidence of subsequent events to show that from the outset the covenant under the sub-lease was so precarious and its value so speculative that even at the time it was entered into a bank or finance house with knowledge of the surrounding circumstances would not have attributed any value to the sub-lease covenant”