The strange case of the unintentional gifts—Hampton v Elite

What happens when a party unintentionally offers payment as a gift? Siward Atkins, barrister at Maitland Chambers and representative of the claimants in Hampton v Elite, explains that companies have to be aware that they are offering a gift if they are to be prosecuted under section 238 of the Insolvency Act 1986 (IA 1986).

Original news

Re Hampton Capital Ltd Murphy and another v Elite Performance Cars Ltd and others; Hampton Capital Ltd v Elite Performance Cars Ltd and others [2015] EWHC 1905 (Ch), [2015] All ER (D) 118 (Jul)

The Companies Court held that a company in administration was entitled to restitution to some degree in respect of payments made out of the company to the defendants. The court dismissed an application by the joint administrators of the company, under IA 1986, s 238, which alleged that the payments to the defendants amounted to transactions at an undervalue, where there was no evidence that the company had ‘dealt’ with the defendants or had entered into a transaction with them, within the meaning of IA 1986, s 238(4).

Briefly, what was the background to this case?

The claimant company, Hampton Capital (Hampton), had been lent £1.4m by a company called Tolent Construction (Tolent) for the purposes of a redevelopment project in County Durham. The project fell through and the money was lost. Tolent put Hampton into administration so that administrators could go in to find out what had happened to the money. It transpired that a shadow director of Hampton, Alick Mayweather, had duped its two official directors into paying out all the money for his benefit. Some of it was used to buy him luxury cars, some of it to buy him gambling chips, the rest to pay his debts. Mr Mayweather had persuaded the directors to make these payments by saying they were for the redevelopment project. They did not question what he said and so made the payments as instructed.

The company and the administrators then brought this claim to recover as much of the money as they could. The four defendants were four of the recipients of the money. The rest could not be traced or were not worth suing.

What were the legal issues that the judge had to decide in this application?

The company’s claim was based in restitution. Its case was that the money had been stolen from it and so had to be returned. The administrators’ claim was that all the money had been paid for no consideration to the company and so the payments were all transactions at an undervalue for the purposes IA 1986, s 238. Various defences were raised. A common theme was that all the payments had been approved by the official directors and the company got some benefit from them in any case.

What did the judge decide and why?

In the event, only the third defendant appeared at trial to contest the claim. The claim had been settled against the second defendant. The fourth defendant was in prison and, since it was not clear whether he knew about the trial, the claim was adjourned. The first defendant simply did not turn up and so its defence was struck out and the claim proceeded accordingly.

The judge found that the company’s claim succeeded in full against the first defendant. This defendant had received money stolen from the company and put forward no basis for keeping it. The company’s claim succeeded in part against the third defendant. This was because he had established a change of position defence to part of the claim against him. He had received a number of payments from the company, which he used to buy gambling chips for Mr Mayweather. The judge found that he had received the first payment and used it to buy gambling chips for Mr Mayweather without knowing that it had come from the company. For that reason, it would not be fair to make him return that payment to the company now. The same could not be said for the rest of the payments, however, as he knew they had come from the company when he received them. Furthermore, although he had not acted in bad faith, he knew enough about why he should not have taken them to make it fair that he should have to return them to the company.

The administrators’ claim failed because the payments were not caught by IA 1986, s 238. The company made no transactions for the purposes of the section with either of the live defendants, because they dealt with Mr Mayweather and he had no authority to act for the company. The payments made by the company were not gifts for the purposes of the section either, as it had never been the company’s intention to make any gift of the payments. On the contrary, the company made the payments believing they were for the redevelopment project.

To what extent is the judgment helpful in clarifying the law in this area?

The case is important for two reasons. First, it tells us the test to be applied on a change of position defence where the defendant did not act in bad faith but he knew something about why he should not have had the money he was receiving. The test to be applied, by analogy, is the one applicable to claims for knowing receipt against constructive trustees.

Second, the case decides that a gift for the purposes of IA 1986, s 238 has to be one that the company intends to make. I argued that a gift is simply something given and so there is no reason why IA 1986, s 238 cannot catch any payment for no consideration—whether the company had any intention to make a gift is irrelevant because the purpose of IA 1986, s 238 is to preserve the net asset position of the company by making sure that any payment made was for full consideration. It does not matter whether the company intended to make the payment as a gift or not. What matters is whether the company got any consideration for it. As none of the payments in this case were made for any consideration to the company, they were all caught by IA 1986, s 238. The judge however rejected that argument. The company has to intend to make a gift for it to be caught by section IA 1986, s 238.

Interviewed by Nicola Laver.

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

Further Reading

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What are the risks of accepting payment from a company that is likely to enter into a formal insolvency process and what can be done to mitigate those risks?

Can a liquidator/administrator challenge/unwind transactions entered into by the company before it was wound-up/enters administration?

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First published on LexisPSL Restructuring and Insolvency

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