IN THE MATTER OF BROTHERS PRODUCE LIMITED (IN LIQUIDATION)

This is a first‑instance insolvency judgment concerning an assignment of a trading business and related assets after presentation of a winding‑up petition, which the court held to be void under s.127 Insolvency Act 1986. The liquidators sought restitutionary, equitable and proprietary relief against the transferee (and the transferee company) and compensation and contribution from the directors under s.212 IA 1986.

The judge found that the assignment comprised at least the unexpired lease, fixtures and fittings, stock, and goodwill incorporating the business name, customer and supplier relationships, staff continuity and IT records. The sale was not at arm’s length, the goodwill was transferred at an undervalue and the directors sold assets while knowing (or at least being objectively on notice) that the company was insolvent and a petition had been presented, breaching their duties under ss.171 and 172 Companies Act 2006. The transferee had actual (and alternatively constructive) knowledge of those facts and his knowledge was attributable to the transferee company.

Applying restitutionary, equitable and knowing‑receipt principles, the court awarded equitable compensation (and indicated orders under s.212 against the directors). The judge assessed goodwill by an EBITDA multiple, arrived at a goodwill value materially higher than the £5,000 paid, and (subject to submissions on consequential relief and interest) proposed an award of £80,647 (goodwill value less the £5,000 paid) plus interest to be paid jointly and severally by the transferee and its company; directors were to contribute the same figure under s.212 IA 1986 plus interest.

This application by Brothers Produce Limited (in liquidation) and its joint liquidator concerned an assignment dated 12 March 2015 of the company's lease, fixtures and fittings, stock and goodwill to Mr Ercin Tarim and his subsequently incorporated company Tydene (Western) Limited (TWL). The petition for winding up had been presented on 13 February 2015 and the company was wound up on 30 March 2015. The liquidators alleged the assignment was void under s.127 Insolvency Act 1986 and sought: restitutionary relief (damages in lieu of return of goodwill and/or an account of profits), knowing‑receipt and constructive trust remedies against Mr Tarim and TWL; and compensation under s.212 IA 1986 against the directors for breach of fiduciary duties.

The court framed the principal issues as: (1) what assets were transferred; (2) whether the transaction was at arm’s length; (3) whether the goodwill transfer was at an undervalue; (4) whether the directors breached their duties; (5) the state of the transferee's knowledge; (6) attribution of that knowledge to the company; and (7) consequences of those findings.

The judge analysed the transactional documentation, witness evidence, and expert valuation reports. He found the assignment included goodwill (business name, customer and supplier relationships, staff continuity and IT records), stock, fixtures and fittings and the unexpired lease; that the sale was informal and not marketed or negotiated at arm’s length and was concluded in a hurry as insolvency approached; that the directors knew the company was or was likely to become insolvent and that a petition had been presented; and that the transferee had actual knowledge of the petition and of the circumstances making the sale unconscionable (alternative finding of constructive knowledge if actual knowledge were rejected). The judge accepted the EBITDA multiple approach to goodwill valuation (as advocated by the liquidators’ expert), adjusted for net assets, and concluded the goodwill value materially exceeded the £5,000 paid.

The court held that restitutionary and equitable remedies were available for dispositions void under s.127 IA 1986, that knowing receipt was made out against both Mr Tarim and TWL (his directing mind), and that the directors were liable under s.212 IA 1986 for misfeasance and breach of duty. The judge indicated orders for equitable compensation and a s.212 contribution, each in the sum of £80,647 (the goodwill valuation less £5,000) plus interest, and invited submissions on final relief, interest and any technical points such as the availability of restitutionary awards against multiple defendants.

Application allowed in substance. The court found the assignment void under s.127 IA 1986 and made findings of (i) knowing receipt against Mr Tarim and Tydene (Western) Limited such that equitable compensation was payable, and (ii) misfeasance/breach of directors’ duties under s.212 IA 1986 such that the directors should contribute to the company’s assets. The judge valued the goodwill by reference to an EBITDA multiple, held the transfer was at an undervalue and indicated equitable compensation and a s.212 award of £80,647 (goodwill value less £5,000) plus interest, with final relief and interest to be determined on submissions.