Stanley & Anor (As the Joint Liquidators of New Grass of Manchester Ltd) v TMK Finance Ltd & Anor

In assessing whether a company entered into a transaction at a significant undervalue under Insolvency Act 1986, the court must determine the value of the consideration at the transaction date. The applicant bears the burden of proving undervalue. Subsequent events may be considered where they provide reliable evidence of the earlier open-market value, rather than merely valuing an earlier contingency with hindsight. A later arm’s-length sale is useful only if market conditions are sufficiently comparable and the sale circumstances show that the purchasers acted knowledgeably and prudently. General regeneration prospects and emerging planning policies do not themselves establish hope value. The claim was dismissed because the evidence did not show that the property’s value materially exceeded the price paid.

The joint liquidators of New Grass of Manchester Ltd claimed relief under sections 238 and 241 of the Insolvency Act 1986 concerning the company’s sale of a freehold property to an associated company. They alleged that the price of £2,279,331 was approximately £1 million below market value and sought further relief against the purchaser’s holding company.

The parties agreed that the only substantive issue was whether the sale was at a significant undervalue and, if so, the amount of the undervalue. The central disputed legal question was whether the court could use a later sale of the property, in October 2006, when assessing its market value in May 2005.

1. Outcome. The application was dismissed. The liquidators failed to establish that the property had been sold at a significant undervalue.
2. Under section 238, the applicant bears the burden of proving undervalue. The relevant consideration is valued at the date of the transaction. The court assesses what the property would have been worth in money or money’s worth to a rational and reasonably well-informed purchaser.
3. Subsequent events are not excluded merely because the valuation date is earlier. The court may consider a later transaction where it sheds reliable light, by inference, on the earlier open-market value. This is distinct from using hindsight to value an earlier contingency. The court must establish both that market conditions were materially comparable, subject to quantifiable changes, and that the later sale was a reliable market transaction.
4. The October 2006 sale did not provide a sufficiently reliable indication of value in May 2005. The purchasers relied on local knowledge without investigating planning prospects, remediation costs or permitted uses. They therefore could not be treated as knowledgeable and prudent hypothetical purchasers.
5. The evidence established an existing-use value within approximately £2 million to £2.25 million. There was no significant hope value. The prospects of substantial residential development were highly uncertain, and the emerging local development framework and regeneration policies were too preliminary to support a material value increase. The Tesco development did not materially enhance the property’s residential value.
6. The alternative argument based on the purchaser’s subsequent accounting revaluation also failed. There was no proper basis for the revaluation, and an opportunity to record an unjustified book-value increase was not consideration having monetary value.