UK: If A Claim For Transaction At An Undervalue Is To Succeed The Company Itself Must Have Entered Into The Transaction Which Is Being Challenged

Last Updated: 8 April 2013
Article by Malti Shah

Key points

  • It is essential element of any challenge of a payment made under section 238 of the Insolvency Act 1986 (transactions at an undervalue) that the company actually enters into the transaction being called into question;
  • payment of funds out of the client account of a professional advisor to the relevant company made by someone who did not have actual or ostensible authority to make the payments on behalf of the company was not a transaction at an undervalue.

The facts

Mr Hunt as liquidator of Ovenden Colbert Printers Limited (the "Company") brought claims against Mr Hoskings and others under section 238 of the Insolvency Act 1986 ("section 238") to reclaim into the Company' estate monies received by Mr Hosking (or for his benefit) in the sum total of £224,951.11 from the client account of Scott Temple Wilsher & Co ("STW"), which firm acted as accountants to the Company. The current application was an application by Mr Hosking to strike out the claims against him or for summary judgment on those claims.

The Company had entered into a retainer with STW, of which a Mr Temple was the sole proprietor. The retainer covered audit and other accounting duties. Any work outside of the scope of the retainer would involve additional fees. Pursuant to the retainer, STW could hold money on behalf of the Company in STW's client account on trust for the Company.

On 17 December 2003, the Company entered into a fee agreement in respect of work done by STW in relation to a claim of the Company in the liquidation of CSM Group (the "Fee Agreement"). The Company authorised the liquidators of the CSM Companies (at the time including Mr Hosking) to pay any distribution in respect of the Company's claim to STW's client account. By the Fee Agreement, the Company authorised STW to transfer to STW's office account STW's agreed fees in the sum of 25% of any distribution received in excess of £250,000. The balance was to be held to the Company's order and released only as instructed in writing by the Company, such instructions to include copy board minutes pertaining to such instructions. On 28 January 2005, a variation to the agreement was recorded on the same document, apparently signed by a director of the Company, which stated that due to the additional work performed in relation to the claim against CSM Group, the fee arrangement would be varied such that if the distribution received from the liquidation of CSM Group exceeded £916,667 then STW would be entitled to retain any amount received by way of distribution over and above £750,000. The Company received a total distribution from CSM Group of £1,267,009.39 and accordingly, STW was entitled to retain the sum of £517,009.39 under the Fee Agreement as varied.

STW then made payments allegedly totalling £224,951.11 to or for the benefit of Mr Hosking from its client account from the distribution receipts. Mr Hosking contended that the payments were received by him or for his benefit in repayment of private loans made by him to Mr Temple, the proprietor of STW. The principal amount of the loan was £154,000 which was loaned in stages in cash and by cheque. Although Mr Hosking stated that they had later documented the loan, neither Mr Temple nor Mr Hosking could produce a signed copy. Mr Hosking stated that he was not aware of the source of the funds used to repay the loans to him.

Mr Hunt appeared to be asserting that the payments made from STW's client account for Mr Hosking's benefit were challengeable as transactions at an undervalue as Mr Hosking had not given any value to the Company in return. Alternatively, it was argued that Mr Hosking had been a third party recipient of assets pursuant to a transaction at an undervalue and that an order could therefore be made to affect his property under section 241(2) of the Insolvency Act 1986. Suggestions were also made that the Fee Agreement was entered into based on a misrepresentation or that it was a forgery.

Mr Hosking sought summary judgment on or to strike out the claims made against him on the basis that the payments for his benefit out of the STW client account cannot be challenged under section 238 as the transfers of funds did not constitute transactions by the Company, which was a pre-requisite for challenge under section 238. Rather, the Company had entered into the Fee Agreement, which permitted STW to transfer its fees from funds in the client account. The transfers to Mr Hosking were carried out by STW/ Mr Temple, not the Company and as such were not challengeable under section 238.

Decision

Mr Justice. Peter Smith agreed with the assertions made on behalf of Mr Hosking. He stated that the payments to Mr Hosking had been effected by STW/ Mr Temple, not the Company. Mr Temple did not have actual or ostensible authority to act on behalf of the Company and was therefore making the payments on his own account and not for the Company. Accordingly, there is no challengeable transaction by the Company under section 238.

It could be argued that the transfers made out of the STW client account were simply unauthorised payments away, in which case the liquidator of the Company should bring claims under a different head against STW/ Mr Temple and perhaps be able to trace further in to Mr Hosking's hands. No such claims had been brought under the current proceedings. Additionally, it may be possible to bring claims to challenge the enforceability of the Fee Agreement itself (it had been alleged that the Fee Agreement had been entered into based on a misrepresentation or was a forgery), but no such claims had been brought (and in any case may have been time barred) in the current proceedings. If it is to be suggested that Mr Hosking as liquidator of CSM Group made an inflated distribution to the Company in order to ensure that the debt owed to him by Mr Temple could be repaid, this must be proved; in any event a claim in this regard would be a claim for the benefit of the creditors of CSM Group, not the Company.

Accordingly, the judge concluded that the liquidator's claims as currently formulated were bound to fail and/or had no prospect of success and therefore Mr Hosking's application was allowed.

Comment

Care should be taken as to how claims are formulated, to ensure they are brought against the correct parties under the correct heads of claim. In some cases the court may allow statements of case to be amended, but this case demonstrates that there is a danger that generalised allegations will be seen simply as "mud-slinging" such that claims could be struck out/summary judgment obtained.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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