IN THE MATTER OF BROTHERS PRODUCE LIMITED (IN LIQUIDATION)

A disposition of company property made after presentation of a winding-up petition is void under Insolvency Act 1986, section 127, unless validated by the court. The absence of notice or bad faith does not preserve the transaction. The recipient may be liable under restitution, constructive trust principles and knowing receipt. Unjust enrichment requires enrichment, enrichment at the claimant’s expense, unjustness and the absence of a defence. In a corporate insolvency case, enrichment through a section 127 disposition is necessarily unjust, and the statutory good-faith defence available in bankruptcy is unavailable. Goodwill may have substantial value despite cash-flow insolvency or an impending liquidation. Directors who dispose of company assets at a known undervalue for an improper purpose, without regard to creditors’ interests, may be liable for misfeasance.

The company and its liquidator sought relief against the purchasers and the company’s directors after the company assigned its lease, fixtures, goodwill and associated business assets following presentation of a winding-up petition. The assignment was completed for £35,000 and the company was subsequently wound up.

The purchasers accepted that the assignment was void but resisted financial relief. The liquidator alleged undervalue, breach of directors’ duties, knowing receipt, unjust enrichment and constructive trust. The central issues included the assets transferred, the value of the goodwill, the directors’ duties, the purchasers’ knowledge and the attribution of that knowledge to the purchasing company.

1. Section 127. The assignment was void because it was made after presentation of the winding-up petition. The court had not made a validation order. Section 127 contains no equivalent to the bankruptcy protection for a person acting in good faith, for value and without notice.
2. Assets and valuation. The transfer included the lease, fixtures and fittings, stock and goodwill. The goodwill included the business name, reputation, customer and supplier relationships and information, staff continuity, and IT systems. The appropriate valuation method was EBITDA-based valuation of a profitable going concern, rather than liquidation or equitable value. Applying a 2.5 multiplier and deducting adjusted net assets, the goodwill was valued at £85,647. The £5,000 price was therefore an undervalue.
3. Directors’ duties. The directors knew that the company was insolvent, that a petition had been presented and that liquidation was imminent. They acted for an improper purpose and in breach of the duty to creditors under sections 171 and 172(3) of the Companies Act 2006. The misfeasance claim succeeded.
4. Knowing receipt. The purchasers received and benefited from company property with actual or constructive knowledge of the breach. Retention was unconscionable. The sole director’s knowledge was imputed to the purchasing company. The purchasers were jointly and severally liable for equitable compensation representing the goodwill’s value less the £5,000 paid, provisionally £80,647, with interest to be determined.
5. The applicants also established, subject to a possible issue concerning the direct-providers-only rule, a restitutionary claim for damages in lieu of return of the goodwill. The remaining constructive-trust relief was unnecessary to decide. Consequential relief was adjourned for further submissions.