Clements (Liquidator of HHO Licensing Ltd) v Henry Hadaway Organisation Ltd

For the purposes of the insolvency provisions concerning transactions at an undervalue, a contract is unnecessary. The statutory concept of a transaction is broad, but requires mutual dealing or an arrangement between the parties, other than a mere gift.

The court must compare the value in money or money’s worth of the consideration received with the value of what the company provided. A precise valuation is unnecessary where the incoming value is clearly significantly less than the outgoing value. Charges between connected companies require a rational and logically explained assessment of the services supplied. A connected-company preference attracts the statutory presumption of a desire to prefer.

The liquidator of HHO Licensing Limited sought relief under the Insolvency Act 1986 in respect of charges and appropriations made by Henry Hadaway Organisation Limited, a connected company controlled by the same director.

The Company’s royalties were received into Organisation’s bank account. Organisation appropriated substantial sums as management charges for two periods. The issues were whether those arrangements were transactions at an undervalue, whether the statutory good-faith and benefit exception applied, and whether the presumption of a desire to prefer Organisation had been rebutted.

1. Relief granted. The decisions taken in December 2000 and the subsequent appropriations were transactions at an undervalue and preferences. The liquidator was entitled to the declarations and other orders sought.
2. For section 238 purposes, a contract between the parties is unnecessary. The word transaction is intended to cover a wide range of mutual dealing. It nevertheless ordinarily requires some element of dealing between the parties; it is not limited to an enforceable contract. The court applied the reasoning in Re Taylor Sinclair (Capital) Ltd (in liquidation) [2001] 2 BCLC 176.
3. The relevant comparison was between the money or money’s worth of the incoming value and the totality of the outgoing value. The court did not need to attribute a precise figure to either. It was sufficient that the value of the services provided was, on any view, significantly less than the charges imposed.
4. The management charges lacked a proper evidential basis. The calculations were suspect, the Company was not independently advised or represented, and the business could have been operated with a small full-time staff supplemented by occasional assistance. A proper charge would require a rational assessment of staff costs, supplementary services and the central services used by the group. Some imprecision was permissible, but the calculation had to be logically explained and justifiable.
5. The statutory exception did not apply. The court found that the transactions were not made in good faith and that there were no reasonable grounds for believing that they would benefit the Company. The connected-company presumption that the preference was influenced by a desire to improve Organisation’s position was not rebutted.
6. The authenticity of the document said to record the later agreement was unnecessary to decide the claims. The court therefore expressed only provisional views on its provenance and made no conclusion on the expert evidence.

First instance decision. No prior appellate decision is stated in the judgment.