SIMON JAMES BONNEY v GRAHAM LEWIS BARKER

Payments directed by an insolvent company to an associated third party may be transactions entered into by the company for the purposes of section 238 of the Insolvency Act 1986, even though the third party receives the money directly. The company must have participated in, or been party to, the transaction.

Payments are at an undervalue where the company receives no corresponding consideration. Later payments by the recipient which incidentally discharge company liabilities do not form part of the consideration unless the transactions are properly shown to be a single coordinated scheme. The statutory defence requires good faith, a purpose of carrying on the company’s business and reasonable grounds for believing that the transaction would benefit the company.

The applicants were the liquidators of Fastfit Station Limited. They claimed against the company’s former director, Graham Barker, and Fastfit Station MK Ltd, an associated company, concerning customer receipts paid to Fastfit MK shortly before Fastfit Station entered administration and its business and assets were sold under a pre-packaged sale.

The applicants alleged that the payments were transactions at an undervalue under section 238 of the Insolvency Act 1986 and that Mr Barker breached his statutory and fiduciary duties under the Companies Act 2006. The respondents contended that the payments were outside section 238, were used for the company’s benefit, were reflected in the sale consideration, and were protected by the statutory defences.

The central issues were whether the company had entered into the payments, whether they were at an undervalue, whether the statutory defences applied, what restorative order was appropriate, and whether Mr Barker should be relieved from liability.

1. The April Payments were transactions entered into by the Company. The Company directed customers to pay Fastfit MK and installed new card machines at its premises. Its employees presented those machines to customers. The Company therefore participated in the transactions and caused the payments to be made. The case was distinguishable from Hunt (Liquidator of Ovenden Colbert Printers Ltd) v Hosking, where the impugned payments were made by a trustee from funds over which the company had ceased to have control.
2. The payments were transactions at an undervalue. The Company received no corresponding consideration. The fact that Fastfit MK later paid some Company liabilities did not make those payments consideration for the April Payments. Fastfit MK had complete control over the use of the money, and payments benefiting the Company only incidentally could not be treated as part of a composite transaction.
3. The section 238(5) defence failed. The payments were not made for the purpose of carrying on the Company’s business and there were no reasonable grounds for believing that they would benefit the Company. The evidence showed that payments were selected to benefit Fastfit MK’s future business and relationships, rather than the Company or its creditors.
4. The proper restorative order was repayment. Fastfit MK was ordered to repay the April Payments and could prove in the liquidation as an unsecured creditor for liabilities of the Company that it had discharged. Mr Barker was required to reconstitute the misapplied fund only to the extent that Fastfit MK failed to repay within a reasonable period.
5. Mr Barker breached section 172 of the Companies Act 2006. The Company was irretrievably insolvent and he failed to consider the interests of the Company or creditors as a class. He instead preferred his own interests and those of Fastfit MK.
6. Relief under section 1157 was refused. Although Mr Barker acted honestly, reliance on an informal and qualified earlier discussion about paying essential suppliers was unreasonable. He did not obtain advice on the actual payments or clarify whether they were proper.

The court reserved consequential orders, including interest.