Manolete Partners Plc v Austin Bell & Ors

This was a first instance hybrid Part 7 claim and an application under section 238 of the Insolvency Act 1986. The court applied the statutory provisions in the Insolvency Act 1986 (notably sections 238, 239 and 240) and the duties of directors under the Companies Act 2006 (notably section 172) when insolvency is, or is likely to be, imminent. The judge found that BSS LED [R&D] Limited (BSS) was insolvent from early 2018 and had ceased to trade by the end of October 2018.

Applying the relevant statutory tests, the court concluded that various transfers and payments effected while the company was insolvent or in the relevant period were unlawful: the sale of plant and equipment to MSV Engineering Limited (Engineering) was at an undervalue (transaction at an undervalue under section 238) producing a shortfall of £65,000; intercompany transfers and payments to BSS LED Manufacturing Limited (Manufacturing) and other dispositions (including stock and office equipment transfers, foreign-exchange and travel payments, payments to the director Mr Steven Bell, and sums advanced to or left outstanding with BSS Australia) were either transactions at undervalue or preferences, or otherwise breaches of the director’s duty to have regard to creditors when insolvent.

The judge rejected key parts of the defendant’s evidence where unsupported by contemporaneous records, excluded unsigned or inadmissible opinion evidence, accepted the liquidator’s inability to locate certain company records and hard drives, and found Mr Bell liable to pay compensation in the amounts claimed in respect of the items pursued at trial (save for parts in respect of Christian which were no longer pursued).

Background and parties: Manolete Partners plc, having obtained assignments of causes of action from BSS LED [R&D] Limited's liquidator, brought a hybrid Part 7 claim together with an application under section 238 of the Insolvency Act 1986. The claim and application alleged that while BSS was insolvent or likely to become insolvent, Mr Steven Bell, its director, caused the company to enter into undervalue transactions, give preferences and otherwise breach duties owed to creditors. The application initially named other respondents (Austin and Christian Bell and MSV Engineering Limited) but the claims against Austin and Christian were settled and Engineering was dissolved; the substantive trial proceeded against Mr Bell alone.

Nature of the relief sought: Declarations and consequential orders under section 238 (transaction at an undervalue), recovery of sums as damages or account of profits for breach of directors’ duties, payment of sums said to be due as debts or repayments, and alternatively unjust enrichment remedies in respect of certain payments.

Issues framed:

• Whether and from when BSS was insolvent and when it ceased to trade;
• Whether particular transfers and payments fell within section 238 (transactions at an undervalue) or section 239 (preferences) of the Insolvency Act 1986, or otherwise constituted breaches of the director’s duties under section 172 Companies Act 2006 when creditors’ interests were paramount;
• Valuation of the assets sold to Engineering and admissibility/reliability of valuation and opinion evidence put forward by the defendant;
• Whether payments to connected parties and transfers of assets were carried out in good faith for the purpose of carrying on business or were improper dispositions to the prejudice of creditors.

Court’s reasoning and findings:

• The judge analysed account and bank records, correspondence, the statement of affairs and other contemporaneous documents and concluded that BSS was insolvent by the first part of 2018 and had ceased to trade by the end of October 2018. Returned direct debits, rent arrears, creditor correspondence and a judgment for rent supported insolvency.
• The court applied the statutory tests in sections 238–240 for transactions at an undervalue and in section 239 for preferences, and the duty in section 172 CA 2006 as it applies where insolvency is known or ought to be known. The court treated the director’s duty to creditors as paramount in those circumstances and accepted the authorities on subjective and qualified objective tests of director conduct as set out in the judgment.
• The sale of plant and machinery to Engineering in June 2018 was found to have been at an undervalue; the lease shortly afterwards stated an approximate value of £120,000 and the evidence showed a material reduction in the company’s plant and machinery value. The undervalue was assessed at £65,000 and Mr Bell was held liable for compensation for that loss.
• Intercompany transfers and payments to Manufacturing (net transfers identified), the sale/transfer of stock and office equipment without proper payment, foreign-exchange and travel payments and payments to Mr Bell personally were found to have been made without proper consideration of creditors’ interests and in breach of duty; the court treated some transfers as preferences (payments to a person connected with the company) and others as unlawful dispositions for creditors’ benefit.
• Evidence reliability was carefully scrutinised: unsigned witness statements and impermissible opinion evidence were given little or no weight; the judge found Mr Bell’s oral evidence inconsistent and rejected assertions unsupported by contemporaneous records (for example, alleged delivery of hard drives to the liquidator, explanations of 'strategic' rent non-payment).
• On the narrower factual issues, the court accepted the liquidator’s record-based reconciliations and found the claimed sums recoverable against Mr Bell. The claimant’s claim therefore succeeded and the court ordered judgment against Mr Bell for the amounts claimed, save in respect of parts relating to Christian which were no longer pursued; consequential matters, including interest, were to be determined or agreed.

This is a first instance judgment. The court held that the claimant’s case succeeds. The judge found that BSS was insolvent from early 2018 and had ceased trading by the end of October 2018, that the sale of equipment to Engineering was at an undervalue (producing an assessed loss of £65,000) and that a range of transfers and payments to Manufacturing, to the director and to associated entities were unlawful dispositions or preferences made without proper consideration of creditors’ interests. Mr Steven Bell was held liable to pay compensation in the amounts claimed in respect of the transactions and payments pursued at trial (save for parts relating to Christian which were no longer pursued). The court rejected key parts of Mr Bell’s evidence and excluded inadmissible opinion evidence when assessing value and motive. Consequential matters, including interest, were reserved for determination if not agreed.