Bringing a successful transaction at an undervalue claim

19 Nov 2013

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When will a transaction constitute a transaction at an undervalue under section 238 of the Insolvency Act 1986? The case of Ovenden Colbert Printers Ltd Hunt v Hosking [2013] EWCA Civ 1408, [2013] All ER (D) 188 (Nov) looks at this, where the Court of Appeal upheld a decision that the first defendant (Mr Hosking) had been entitled to have a claim brought against him by the liquidator of Ovenden Colbert Printers Ltd (Mr Hunt) under section 238 of the Insolvency Act 1986 (IA 1986) as a transaction at an undervalue struck out.The Court of Appeal decided the judge at first instance, Mr Justice Peter Smith, was correct to find that the relevant transactions complained of had not been transactions entered into by the insolvent company.

What happened in the case?

In 2002, Mr Hosking was appointed joint liquidator of two connected companies (CSM). CSM were indebted to Ovenden and, accordingly, Ovenden had been entitled to a substantial dividend from the liquidation of CSM.

In 2003, Ovenden entered into a fee agreement (the 2003 agreement) with its then accountant (T). It was said the purpose of the 2003 agreement was to reward T for the work he had carried out for Ovenden in formulating its claim in the liquidation of CSM. The 2003 agreement authorised T to:

receive any distributions from the liquidation of CSM
hold those distributions in an account to the order of Ovenden, and
to transfer to his own account agreed fees

On the same day, Ovenden authorised Mr Hosking, as liquidator of CSM, to pay the dividends due to the company into a client account maintained by T.

In 2005, the 2003 agreement was varied to amend the fees that T was able to retain out of the dividends of CSM (the 2005 variation). Between November 2004 and May 2005, distributions were made from CSM in favour of Ovenden and paid into the client account by T. Further, between December 2004 and October 2005, T made a series of payments out of that client account, a proportion of those payments being made to Mr Hosking.

In April 2006, Mr Hosking and one of his partners were appointed joint administrators of Ovenden and it was subsequently placed in creditors' voluntary liquidation. In due course, Mr Hunt was appointed the liquidator of Ovenden. Mr Hunt issued proceedings under IA 1986, ss 238 and 241 and alleged that the payments received by the defendant had been payments at an undervalue. Mr Hunt submitted that the payments to Mr Hosking had either been:

transactions between Ovenden and Mr Hosking, or
had been transactions between Ovenden and T and the court had power to make an order against Mr Hosking as a third party who had received benefits from those transactions

What did the court say at first instance?

Smith J found that each limb of Mr Hunt's case was unarguable. He decided the payments made to Mr Hosking had not been transactions that, for the purposes of IA 1986, s 238 Ovenden had entered into, as they were either payments T had been authorised to make or they were not payments that he had been authorised to make. In the former case, they could not have been attacked unless the agreements were themselves challenged, which Mr Hunt had not done, and in the latter case, the payments had constituted a breach of trust and so could not have been attributed in any way to Ovenden. The claim was struck out.

Mr Hunt submitted that:

the payments made by T out of the client account had been transactions within the meaning of IA 1986, s 238 between Ovenden and T
T had no contractual entitlement to any of the money taken from the client accounts
the court had been entitled to make an order against the defendant under IA 1986, s 241 (2) in so far as he had received a benefit from the transaction

Mr Hunt therefore appealed.

What did the Court of Appeal say?

The Court of Appeal dismissed the appeal and upheld the first instance decision of Smith J to dismiss the claim.

The court decided:

A claim under IA 1986, s 241 could only succeed if a claim under IA 1986, s 238 was first established. The requirement that the company had itself entered into a transaction was an essential part of any claim under IA 1986, s 238 and comprised two interrelated elements, that there was a transaction, and that the transaction was something into which the company had itself entered
The expression 'entered into' connoted the taking of some step or act or participation by the company. Therefore, the composite requirement required the company to have made the gift or to have made the arrangement or in some other way have been party to or involved in the transaction in issue so that it could properly be said to have entered into it, and to have done so within the period prescribed by IA 1986, s 240
In this case, the improper withdrawal by T of the funds that he had held on trust, if that was what he had done, had not constituted a dealing between him and Ovenden. It could also not be said that T had been acting as agent for Ovenden in making the impugned payments. T had been a trustee of the funds, but a trustee in English law was not an agent for his beneficiary. He had contracted in his own name with a right of indemnity against the beneficiary for the liabilities that he had incurred. Further, when T had taken the funds from the client account and paid them over to Mr Hosking, it had required no further act or step by the company beyond the 2003 agreement and the 2005 variation, and neither of those was said to have constituted or formed part of a relevant transaction. The payments themselves had not been a gift by Ovenden to T, nor had it entered into a further transaction of any kind with him. It had followed that the actions of T in withdrawing the funds from the client account and paying them over to Mr Hosking had not been transactions entered into by the company

Therefore, and for the reasons above, the Court of Appeal dismissed Mr Hunt's application and upheld the decision of the judge at first instance.

What does this mean for lawyers?

This case is a useful rehearsal of some of key ingredients needed in order to bring a successful transaction at an undervalue claim. As the Court of Appeal clearly set out, a claim under IA 1986, s 241 will only succeed if a claim under IA 1986, s 238 is first established and also, an essential ingredient of any claim under IA 1986, s 238 is that there has to be a transaction and the company itself enters into the transaction. The expression 'entered into' means the taking of some step or act of participation by the company.

For further reading on transactions at an undervalue, see: Can a liquidator/administrator challenge or unwind transactions entered into prior to the company's insolvency?