Avery-Gee v Thompson & Ors

For the purposes of Insolvency Act 1986, section 238(4)(b), the comparison is between the consideration provided by the company and the consideration received by it. Payment by the purchaser to a third party is disregarded unless the payment benefits the company or discharges a legitimate liability of the company. The good-faith and business-benefit conditions in section 238(5) are cumulative. In an insolvent company, benefit is assessed by reference to creditors’ interests rather than employee interests. Under section 241(2), the recipient bears the burden of proving good faith and value. The court retains a broad but exceptional discretion to withhold relief where justice requires. Relief should restore the position that would have existed without the transaction and may be ordered against persons other than the contracting party.

Joint administrators, later acting as liquidators, applied under section 238 of the Insolvency Act 1986 concerning the sale of a company’s business and assets to EMS Waste Services Ltd. The company was insolvent when the transaction was entered into. Part of the consideration was directed to David Thompson in discharge of liabilities owed to him by Jesse Frayne under a Tomlin Order, and Frayne was reimbursed for an earlier payment to Thompson.

The application sought restoration of the company’s position and recovery of payments from Thompson and Frayne. EMS compromised the claim and took no part. The issues included whether the transaction was at an undervalue, whether the statutory protections in section 241 applied, whether particular payments were recoverable, and the proper exercise of the court’s discretion.

1. The asset sale was a transaction at an undervalue under section 238(4)(b) of the Insolvency Act 1986. The relevant comparison was between the value of the assets provided by the company and the consideration received, or due to be received, by the company. Amounts paid by EMS to Thompson did not count as consideration received by the company unless they discharged a legitimate liability of the company or otherwise enured to its benefit.

2. The requirements of section 238(5) were cumulative. The company had not entered into the transaction for the purpose of carrying on its business, since it sold its entire business and assets. Further, because it was insolvent, the relevant benefit had to be assessed by reference to creditors. Preserving employees’ jobs did not provide reasonable grounds for believing that diverting consideration from the company would benefit it.

3. The presumption in section 241(2A) was unavailable. It required notice both of the relevant surrounding circumstances and of the relevant proceedings. The respondents had no notice of the relevant proceedings when the transaction occurred, and the court would not read additional words into the provision.

4. Under section 241(2), the burden of proving good faith and value rested on the recipient. Thompson gave value by accepting payments in discharge of Frayne’s pre-existing liability, but failed to establish good faith. Once he knew of the company’s insolvency and suspected a sale of its assets, he should have inquired into the basis on which EMS made the payments. Frayne gave no value and could not establish good faith.

5. The court retained a broad discretion not to order relief where justice exceptionally required it, but there was no basis for exercising that discretion here. Thompson was ordered to pay £44,687.50, representing the five payments made between April and August 2016. The earlier £30,000 payment and the February and March payments were not recoverable from him. Frayne was ordered to pay £92,562.50, comprising the reimbursed £30,000 and all seven payments to Thompson.

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