Kiss Cards Ltd, Re Smith & Ors v Lawson & Anor

For a transaction at an undervalue under Insolvency Act 1986, the liquidators must first establish the payment and the absence, on the available evidence, of sufficient consideration. The recipient may then need to explain the transaction where the relevant facts are within their knowledge. Payment into a joint account does not necessarily constitute a transaction with every account holder. The court must examine the surrounding circumstances and identify the actual recipient or recipients. Where remuneration includes benefits in kind, the assessment must compare the value of the employee’s whole remuneration package with the value of the services provided. Individual benefits cannot be isolated and condemned merely because they were not required for the employment. A claimed credit against recoverable payments must be supported by a reliable reconciliation of all relevant transactions.

The joint liquidators of Kiss Cards Ltd applied for declarations and repayment orders under section 238 of the Insolvency Act 1986 concerning payments made into a joint account held by the respondents. The company had entered administration and later liquidation. Claims against the first respondent were discontinued following his voluntary arrangement. The remaining dispute concerned whether payments were transactions at an undervalue with the second respondent, whether payments represented remuneration or expenses, and whether unexplained payments or claimed credits should be attributed to her.

1. The application succeeded in part. The second respondent was ordered to repay £12,700, representing one half of £9,000 in rent payments and £16,400 in unexplained lump-sum payments found to be transactions at an undervalue.
2. Under section 238 of the Insolvency Act 1986, the liquidators bore the initial burden of showing a transaction and that the value of the consideration received was significantly less than the value provided. Given their limited access to the company’s affairs, evidence that payments were made and remained unexplained in the books and records could satisfy that initial burden. The recipients, who had direct knowledge of the circumstances, then had to establish the consideration relied upon.
3. Payment into a joint account did not necessarily create a transaction with both account holders. The court had to examine the surrounding circumstances and identify whether the payment was a transaction with one holder, both holders, or neither. The approach in Re Taylor Sinclair (Capital) Ltd (in liquidation); Knights v Seymour Pierce Ellis Ltd [2001] 2 BCLC 176 was applied: a payment made for another person’s benefit did not itself establish mutual dealing with the account holder receiving it.
4. The alleged car and motoring payments could not be assessed in isolation. Even if the second respondent was contractually entitled to a car as part of an oral remuneration package, the relevant comparison was between the whole package and the whole value of her services. There was insufficient evidence to conclude that the package substantially exceeded that value.
5. The unexplained £8,900 and £2,500 payments, and the £5,000 payment unsupported by the respondent’s account, were treated as gifts to both joint account holders. The rent payments were transactions at an undervalue because the explanations were unsupported by reliable evidence.
6. A claimed credit could not be established merely by identifying payments made into the company’s account. In the absence of a full reconciliation showing that the payments had not already been reimbursed or otherwise accounted for, no credit was allowed.