Ailyan & Ors v Smith & Ors

For a transaction to be at an undervalue under Insolvency Act 1986, section 339(3)(c), the incoming value must be significantly less than the outgoing value. The court need not assign precise monetary values if that comparison can fairly be made on the evidence. It may adopt values most favourable to the party supporting the transaction.

The value of an intangible right to participate in a pyramid scheme must be assessed by reference to what a rational, reasonably well-informed purchaser would pay with knowledge of the scheme’s true characteristics, including dishonesty and structural insolvency. A transaction may be at an undervalue without proof that the transferor knew of the disparity in value. The court has a wide discretion to make restorative orders.

The applicants were trustees in bankruptcy of Kevin Foster. They sought relief under section 339 of the Insolvency Act 1986 concerning payments exceeding £11 million made into a scheme operated through Infocus Cayman Ltd and Planline.

The applicants alleged that the payments comprised purchases of units and transfers of units or holding-account balances, disguised in part as purchases of artwork. The respondents disputed liability. Three respondents did not attend the trial; the fourth appeared in person.

The principal issues were whether the dealings were transactions by Mr Foster, whether they occurred at a relevant time, who was party to them, whether they were at an undervalue, and what restorative orders should be made.

1. Transactions. The payments were transactions by Mr Foster within section 339. He had received money from investors, incurred liabilities to them, and applied the money to acquire units and account balances in his own name or pseudonyms. This differed from Re Taylor Sinclair (Capital) Ltd, where a company merely passed on specifically identified funds for a third party and had not itself dealt with the recipient.
2. Relevant time. On the balance of probabilities, Mr Foster was insolvent before 1 January 2002. The transactions beginning in June 2002 therefore occurred within the relevant period under section 341.
3. Parties and true nature. The purchase transactions were dealings with the operators of Planline. Infocus and its successors were vehicles or agents for the scheme. The artwork documentation was a sham insofar as it failed to describe the true transaction. The respondents were treated as principals in a partnership-like business operation and parties to the purchase transactions.
4. Undervalue. Applying Ramlort v Reid, the court compared the incoming and outgoing values. Precise figures were unnecessary where the incoming value was plainly significantly less. The artwork had negligible value. The right to participate in Planline also had negligible value, or a value substantially less than the money paid, when assessed by reference to a rational purchaser aware of the scheme’s true characteristics. The scheme’s inherent insolvency, preferential allocation of units, manipulation of balances, concealment and dishonest management cumulatively justified that conclusion.
5. The trustees therefore established that all purchase and transfer transactions were transactions at an undervalue. Section 339 required an order restoring the position as far as appropriate. The first three respondents were ordered jointly and severally to repay just over £5 million for the purchase transactions, subject to a 0.6 per cent allowance for artwork that could not be returned. They were also ordered to repay the admitted benefits personally received from transfer transactions. Mr Stevens was held jointly liable for the relevant purchase transactions, but his liability was limited to £270,000, with an indemnity from the first three respondents.