SIMON JAMES BONNEY v GRAHAM LEWIS BARKER

The liquidators brought claims under section 238 of the Insolvency Act 1986 to recover payments of company receipts made to a newly incorporated trading vehicle (Fastfit MK) in the run up to the Company entering administration, and alleged breaches by the director (Mr Barker) of duties under sections 171–175 of the Companies Act 2006. The court held that the receipts paid to Fastfit MK were transactions which the Company had caused to be entered into and that the payments were made at an undervalue for the purposes of section 238 IA 1986.

The court found that the sale and purchase agreement did not account for or validate those payments, that the defence in section 238(5) (good faith and benefit to the company) did not apply, and that the proper remedy was to require Fastfit MK to repay the sums and to be treated as an unsecured creditor for amounts it had discharged. The court also held that Mr Barker breached his duty under section 172 CA 2006 by preferring the interests of the purchaser/new company and his own interest, and that he was not entitled to relief under section 1157 CA 2006.

This is a first instance judgment in liquidation proceedings brought by the joint liquidators of Fastfit Station Limited to recover customer receipts paid into the bank account of Fastfit Station MK Ltd in the period immediately before the Company entered administration and then to enforce director liability.

Parties and background:

• The applicants were the joint liquidators of Fastfit Station Limited. The respondents were the Company’s former director, Mr Graham Barker, and Fastfit Station MK Ltd, a company incorporated shortly before the administration and later the purchaser of the business in a pre-pack sale on 15 April 2014.
• By the relevant time the Company was insolvent and a notice of intention to appoint administrators had been filed. Between 1 and 15 April 2014 receipts totalling £110,345.09 were paid into Fastfit MK’s account (the "April Payments"). The Company entered administration on 15 April 2014 and the business was sold that day under a sale and purchase agreement (the SPA).

Nature of the application and relief sought:

The liquidators sought (i) recovery of the April Payments as transactions at an undervalue under section 238 IA 1986 and (ii) a declaration and orders against Mr Barker for breach of directors’ duties (sections 171–175 CA 2006) and, if liability were made out, an order for him to account, subject to any relief under section 1157 CA 2006.

Issues framed by the court:

1. Were the April Payments transactions "entered into" by the Company?
2. Were the April Payments entered into at an "undervalue"?
3. Could Fastfit MK rely on the statutory defence in section 238(5) IA 1986 (good faith and benefit to the company)?
4. What order should restore the position had the payments not been made?
5. Did Mr Barker breach his duties as a director?
6. If loss is relevant in a fiduciary duty claim, did the Company suffer loss from the April Payments?
7. Was Mr Barker entitled to relief under section 1157 CA 2006?

Court’s reasoning (concise):

• The court concluded that the April Payments were transactions which the Company had "entered into" because the Company, by its employees and acting under the directors’ instructions, caused receipts to be taken on card machines and routed to Fastfit MK; thus the Company was involved in the transactions rather than the transfers being unilateral acts of a third-party trustee/agent. The authority in Hunt (Ovenden) distinguishing payments made by a third party out of client funds was distinguished on its facts.
• The payments were made at no or inadequate consideration from the Company’s perspective and therefore at an undervalue for the purposes of section 238(4) IA 1986. Post‑transaction payments by Fastfit MK to certain creditors and to meet some company liabilities did not convert the April Payments into bona fide consideration for Fastfit MK because the later decision to apply the funds lay within Fastfit MK’s discretion.
• The SPA did not, on its terms or the surrounding circumstances, account for or validate the April Payments. The deferred consideration in the SPA was not shown to have been agreed in respect of those receipts and key SPA clauses expressly excluded the Company’s cash and debts from the assets transferred.
• The statutory defence in section 238(5) was not made out: the court found no reasonable grounds to believe the payments would benefit the Company or that they were made in good faith for the purpose of carrying on the Company’s business; contemporaneous dealings showed the payments were directed to preserve the purchaser/newco’s position and relationships.
• Accordingly the proper remedy was to order Fastfit MK to repay the April Payments and to allow Fastfit MK to prove as an unsecured creditor for liabilities it had discharged; to the extent Fastfit MK did not repay, Mr Barker was ordered to account, secondarily, for the sums misapplied.
• On directors’ duties, the court found that Mr Barker did not give proper consideration to the interests of the Company or its creditors when the Company was irretrievably insolvent and that he acted to further the interests of Fastfit MK and his own interest, in breach of section 172 CA 2006. Relief under section 1157 CA 2006 was refused because reliance on informal pre‑administration advice and lack of inquiry into the actual course of conduct was not reasonable in the circumstances.

The judgment emphasises the court’s role in preserving the pari passu principle and preventing the subversion of the insolvency regime by diverting receipts to an associated purchaser/newco in the immediate pre‑administration period.

This first-instance application succeeded. The court directed that Fastfit MK must repay the April Payments and be treated as an unsecured creditor in the liquidation for amounts it discharged; to the extent Fastfit MK does not repay, Mr Barker must reconstitute the fund and account to the Company, being secondarily liable. Rationale: the April Payments were transactions entered into by the Company at an undervalue under section 238 IA 1986; the SPA did not validate those receipts; the statutory defence in section 238(5) did not apply; and Mr Barker breached his duties under section 172 CA 2006 and was not entitled to relief under section 1157 CA 2006.