SATYAM ENTERPRISES LIMITED v JOHN VINCENT BURTON & Anor.

The claim concerned whether the transfer on 12 October 2012 of three properties containing 12 flats (the "Croydon Properties") from JVB Five Limited (later Satyam Enterprises Limited) to JVB Seven Properties Limited was an unlawful return of capital (an unlawful distribution) and, if so, the quantum of loss. The Court applied the established principles on unlawful distributions (see Progress Property Co Ltd v Moore and authorities such as Aveling Barford and In Re Halt Garage) and the Duomatic principle (In re Duomatic Ltd and Ciban Management) to the agreed factual matrix remitted by the Court of Appeal.

The judge accepted that JVB7 agreed to assume JVB5's liabilities relating to the Croydon Properties and analysed the value of the assets and the value of the consideration. Valuation evidence was preferred from the Claimant's expert (with allowance for bulk-sale discount and a conservative position in the range of values) producing a market value of about 1,335,000 as at 12 October 2012. The Court found the value of the consideration actually provided to JVB5 to be 1,258,190 after crediting assumed liabilities and sums receivable by JVB5 (notably rent and a solicitor's surplus), producing an undervalue of roughly 77,000 (about 5.75%).

Applying the legal tests, the Court concluded that although the Transfer was at an undervalue it was not an unlawful return of capital: the transaction was genuinely intended as a commercial sale to enable refinancing (and to meet liabilities), not an improper extraction of value by the pretence of an arm's length sale. On that basis the claim against Mr Burton was dismissed.

Background and procedural posture:

• The claim arose from the October 2012 transfer of three properties (12 flats) from JVB5 to JVB7. JVB5 alleged the transfer was at a significant undervalue and sued its then director, Mr Burton, for the consequent loss. The matter has already undergone an eight day trial and an appeal to the Court of Appeal. The Court of Appeal remitted two discrete issues back to this Court by order dated 8 March 2021: (a) whether the Transfer amounted to an unlawful return of capital so it could not be authorised by the Duomatic principle; and (b) if so, the damages payable having regard to true value and credits.

Nature of claim and relief sought: JVB5 sought damages for loss arising from the alleged transfer at an undervalue. A separate claim for unpaid purchase price against JVB7 had been dismissed previously and was not live.

Issues framed:

1. What were the agreed terms of the Transfer?
2. What was the market value of the Croydon Properties as at 12 October 2012?
3. What was the value of the consideration provided to JVB5 under the Transfer?
4. Did the Transfer amount to an undervalue and, if so, was it an unlawful return of capital (i.e. not capable of being validated by Duomatic)?
5. If the director's state of mind were unclear, whether it was objectively reasonable to characterise the transaction as a genuine sale rather than a disguised distribution.

Evidence and credibility findings: The Court accepted and applied the factual findings made by the original trial judge except where the Court of Appeal had ordered rehearing of the two remitted issues. The judge criticised parts of Mr Burton's evidence as unreliable and found some documentary material fabricated, but did not entirely discount Mr Burton's evidence. Documentary material (board resolutions, TR1s, an agreement dated 11 October 2012) and contemporaneous records supported the conclusion that JVB7 agreed to assume JVB5's liabilities in respect of the Croydon Properties.

Valuation and consideration: The Court preferred the claimant's expert approach (subject to adjustments): starting point c. 1,561,600 based on one expert then applying a 10% bulk-sale discount and adopting the lower end of the expert's range produced a concluded market value of c. 1,335,000 as at 12 October 2012. The value of the consideration was analysed by reference to the liabilities assumed and credits: principal items included repayment to Mr Almana 365,000, Fincorp interest and fees up to transfer date 33,993.99, payment to Aulakh 125,000, and smaller items (Madhu 2,500, furniture invoice 375, three months insurance 631.23 and a small repairs allowance). Rent collected during JVB5's period (net of 15% commission) and a solicitor's surplus were credited. The concluded value of consideration was c. 1,258,190.

Court's reasoning on law and outcome: The Court applied the Progress Property framework: ask whether the sale was a genuine arm's length transaction or an improper attempt to extract value. Although the Transfer was undertaken to facilitate refinancing (and involved dishonest conduct in relation to an attempted mortgage fraud as found at first instance), the judge concluded Mr Burton did not know the Transfer was an improper extraction of value from JVB5; the transaction was commercially intended to refinance and to discharge liabilities. On that basis there was no unlawful return of capital, Duomatic did not need to be excluded, and JVB5's claim against Mr Burton was dismissed.

Wider context: The judgment confirms that a finding of undervalue does not automatically equate to an unlawful distribution; the Court must examine purpose, substance, motive and the realism of the belief of those orchestrating the transaction.

The claim is dismissed. The court found that although the Transfer was at an undervalue (asset value c. 1,335,000; consideration c. 1,258,190; undervalue approx. 77,000), the Transfer was not an unlawful return of capital. Applying the Progress Property approach, the transaction was held to have been a genuine commercial sale intended to enable refinancing and discharge of liabilities rather than an improper attempt to extract company capital; accordingly there was no liability on the part of Mr Burton.

The matter proceeded to an eight day trial and was then the subject of an appeal to the Court of Appeal. The Court of Appeal set aside the original dismissal to the extent that factual findings were relied on which had not been pleaded and remitted two discrete issues to this Court by order dated 8 March 2021: (a) whether the Transfer was an unlawful return of capital such that Duomatic could not validate it; and (b) if so, the appropriate measure of damages taking account of the Croydon Properties' value and credits. This judgment resolves those remitted issues at first instance. Neutral citation for the Court of Appeal decision is not given in this judgment.