Court grants liquidators relief for transaction at an undervalue (Re Whitestar Management Limited and others v Thompson and others)

Eleanor Temple, barrister of Kings Chambers, examines a Companies Court decision to grant relief under section 238 of the Insolvency Act 1986 (IA 1986) to the applicant joint liquidators of a company because a sale of the company's business constituted a transaction at an undervalue. The sale in question was under an asset sale agreement between the company and the second respondent company less than five months before the initial appointment of joint administrators to the company.

Re Whitestar Management Ltd; Conn and another v Thompson and others [2018] EWHC 743 (Ch), [2018] All ER (D) 173 (Jan)

What are the practical implications of the judgment?

The judgment is a useful reminder of the test under IA 1986, s 238, where in a transaction some consideration is provided to a company which subsequently becomes insolvent at a relevant time, but the value in money’s worth received by the company is less than the value provided by it.

The decision also contains useful analysis of the requirements of the ‘good faith and for value’ exception contained within IA 1986, s 241(2), and how stringently the courts will apply that provision.

The case is consistent with the current theme in insolvency litigation of seeking to prevent asset stripping from companies by connected parties and directors, however complicated the arrangements to do so may appear at first blush.

The essence of the test for a claim under IA 1986, s 238, as displayed by this case, is that value which ought to have been received by the company but has been diverted elsewhere should be restored to the company by the recipients of that value.

The questions to consider when looking at a potential claim of transaction at undervalue involving a company are:

  • whether the company received any consideration for the transaction
  • if it did, whether that consideration was enough, in money’s worth, in comparison with the value of the asset transferred by the company

If it was not, then this case is a useful reminder of the tools that are available to an office holder and the court to recover that lost value for the benefit of the general body of unsecured creditors of the company.

What was the background?

When the first and third respondents were the company's two directors and shareholders, a dispute had arisen between them. The first respondent presented an unfair prejudice petition under section 994 of the Companies Act 2006. The petition was compromised by a Tomlin order, which provided for the first respondent to transfer his shareholding to the third respondent and to resign as a director. In return, the third respondent was to pay the first respondent £244,500, of which £30,000 was to be paid by 4pm on 4 January 2016 and the balance of £214,500 was to be payable by 24 monthly instalments of £8,937.50 payable by 4pm on the fifteenth day of each succeeding month, the first of such instalments to be paid on or before 15 February 2016.

Unknown at the time to the first respondent, the third respondent had also agreed, in principle, with the second respondent to sell the company's business and assets for £395,000. That asset sale agreement was concluded on 29 March 2016.

Payments were made to the first respondent up to 15 August 2016. Thereafter, the company was placed into administration and the applicants, as administrators, entered into a deed of variation with the second respondent whereby future instalment payments under the asset sale agreement were to be made to the company rather than to the first respondent.

The applicants then brought the instant proceedings to recover instalments of the purchase price under the asset sale agreement made prior to the deed of variation.

What did the court decide?

The court accepted that the transaction had been entered into less than five months before the appointment of the joint administrators so it had been at ‘a relevant time’, within the meaning of IA 1986, s 240.

The court held that this was clearly a transaction at an undervalue because the company received, or was due to receive, and would but for the deed of variation have received, at least £187,615 less than the value attributed to the value of the company's assets by the second respondent.

Moreover, for the purposes of IA 1986, s 238(5), the company did not enter into the transaction for the purpose of carrying on its business, because the transaction involved the sale of all of the company's business and assets, thereby disabling it from continuing to carry on its business.

Further, at the time the company entered into the asset sale agreement, there were no reasonable grounds for believing that the transaction would benefit the company.

The court held that the first respondent had shown that he had received value for the payments, but it was not satisfied that he or the third respondent had discharged the burden of proving that he acted in good faith and that the third respondent did not provide any value for the payments at all. The court distinguished between a payment made to the first respondent by the third respondent and not by the second respondent before the first respondent had any notice of the second respondent's potential involvement. It therefore concluded that there was a transaction at an undervalue and that, except in the case of the first respondent and the £30,000 payment, neither the first respondent nor the third respondent could rely on the provisions of IA 1986, s 241(2).

The court ordered the first respondent to pay £44,687.50 to the applicants, representing five payments made to him from the second respondent between April and August 2016, but not the earlier payments made to him personally by the third respondent under the Tomlin order and by the second respondent prior to the asset sale agreement.

The court ordered the third respondent to pay the sum of the £30,000 that he had previously paid to the first respondent, which was reimbursed to him into his bank account on 29 March 2016, together with the sum of £62,562.50 referable to the benefits he had received at the expense of the company on the asset sale agreement.

Put simply, the court held that the first and third respondents had received a benefit in terms of payments that should properly have been received by the company upon the sale of its business to the second respondent and there was no proper basis for withholding relief to the applicants.

If you are a LexisPSL subscriber, click the link below for further information:

Can a liquidator or an administrator challenge or unwind transactions entered into by the company before it was wound up or entered into administration? (subscriber access only)

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Relevant Articles
Area of Interest