Cartwright v Panelform Ltd & Ors

Transactions may be treated as a single arrangement, or as separate transactions, where business assets are transferred or made available to another entity at an undervalue. Section 423 of the Insolvency Act 1986 requires an undervalue transaction and a purpose of putting assets beyond creditors’ reach or prejudicing their interests. The court may act even where the precise legal character of individual steps is uncertain.

The trustee in bankruptcy has standing where the bankrupt made the transactions personally. He may also qualify as a victim where the transactions were entered into on behalf of a partnership and prejudice the interests of the bankrupt’s separate creditors. The court’s remedial power is broad and may restore transferred assets, terminate rights of use, require delivery of records, and order an account of benefits obtained.

Richard Paul Rendle, trustee in bankruptcy of Peter Thomas Cartwright, applied under sections 423 to 425 of the Insolvency Act 1986. The application concerned the transfer or use by Panelform Ltd of the business, assets, premises, goodwill, stock, intellectual property and receivables of Panelcraft Access Panels.

Mr Cartwright had been adjudged bankrupt following an HMRC petition. The business had previously been carried on by him as a sole trader or by a partnership comprising him and members of his family. The central issues were whether the arrangements constituted transactions at an undervalue, whether they were entered into for the statutory purpose, whether the trustee had standing, and what restorative orders were appropriate.

1. Application granted. The arrangements transferring or making available the business and its assets to Panelform Ltd constituted a transaction, or transactions, within section 436 of the Insolvency Act 1986. The court could consider the arrangements globally, while also treating individual sales, novations, asset-use arrangements, collection of receivables and lease arrangements as separate transactions where appropriate.
2. The court proceeded on the basis that the business had been partnership property at least until 31 March 2020, although it was unnecessary finally to determine whether Mr Cartwright acted personally or on behalf of the partnership. If he acted personally, the trustee had standing under section 424(1)(a). If he acted for the partnership, the trustee was a victim because the arrangements could prejudice the participation of the bankrupt’s creditors in partnership assets or the partnership creditors’ claims against the separate estate.
3. The consideration received was significantly less than the value of the assets transferred or made available. The machinery was valued at £132,000 against a stated price of £55,250, and the equity values of the financed machines also substantially exceeded the consideration. Other assets were transferred or used for no identifiable consideration. The arrangements were therefore transactions at an undervalue under section 423.
4. The statutory purpose was established. The arrangements were made shortly before and after the bankruptcy, with the evident purpose of keeping assets and business operations beyond the trustee’s control or making realisation difficult, expensive or uncertain. The alleged payment of some business creditors did not answer the statutory test, particularly because HMRC and insolvency expenses were not intended to be paid through the collective process.
5. Under section 423(2), read with section 425, the court had a wide power to restore the counterfactual position and protect victims. Orders were made revesting transferred interests, ending the Company’s rights to use or retain assets, vesting lease and hire-purchase interests in the insolvent estates, stopping the Company’s trading representation, requiring delivery of records, giving the claimant sole rights to recover business receivables, and requiring an account of benefits obtained.

The judgment was a first-instance decision of the High Court. It followed the bankruptcy order made on 7 May 2020, the trustee’s appointment on 27 May 2020, the appointment of the trustee as provisional liquidator of the partnership on 30 June 2020, and the partnership winding-up order made on 18 August 2020.