Manolete Partners Plc v Trevor Howarth

Payments made under a salary-and-loan arrangement do not constitute a preference merely because they reduce a director’s loan account. The court must assess whether the creditor was placed in a better position than without the payments and whether the company was influenced by a desire to produce that result.

A transaction is not at an undervalue where the company received equivalent value, including the saving of PAYE and NIC, or where the statutory good-faith and reasonable-benefit defence applies. A CVA is a statutory contract. Its terms must be construed by ordinary contractual principles and may leave a creditor unimpaired while treating other creditors differently.

One Legal Services (trading as One Legal) Limited entered a trading CVA in February 2019 and later entered administration. Manolete Partners Plc, as assignee of the company’s claims, sought orders against Trevor Howarth under sections 238 and 239 of the Insolvency Act 1986 concerning payments totalling £101,000.

Mr Howarth was a director and creditor on the company’s loan account. During the CVA he stopped receiving salary and received payments reducing that loan instead. He contended that this arrangement was advised by the CVA supervisor, saved the company PAYE and NIC, and left him no better off than salary payments would have done. The central issues were whether the payments were transactions at an undervalue or preferences.

1. Application dismissed. The Applicant failed to establish either a transaction at an undervalue or a preference. The court also held that the statutory defence in section 238(5) would have applied in any event.
2. The CVA operated as a statutory contract under section 5(2) of the Insolvency Act 1986. Applying ordinary contractual interpretation, paragraph 15 of the CVA left the Respondent’s director’s loan unimpaired. It did not waive or defer the debt. The CVA could lawfully treat different creditor classes differently.
3. The evidence established that the Respondent stopped receiving salary from April 2019 and received loan repayments broadly equivalent to his net salary. The arrangement saved the company approximately £55,000–£56,000 in PAYE and NIC. The Respondent acted on specialist insolvency advice and the arrangement was transparent in the company’s records.
4. The section 238 claim failed because the Applicant did not prove the alleged loan balance of £89,159.68 or any transaction at an undervalue. The evidence instead supported a balance of at least £97,445 plus 8% interest. Further, the company acted in good faith, for the purpose of carrying on its business, and with reasonable grounds for believing that the arrangement would benefit it.
5. The section 239 claim failed because there was no preference in fact. The Respondent was not better off than he would have been had he remained on salary; he was marginally worse off. In any event, the statutory presumption of a desire to prefer was rebutted. The company’s purpose was to save PAYE and NIC, not to improve the Respondent’s position in an insolvency.
6. The court assessed the documentary and oral evidence in the round. Contemporary documents were important, but absence of documents did not create an automatic liability. The Applicant’s failure properly to investigate, preserve and disclose relevant records materially weakened its case.

The court dismissed the application and reserved costs and consequential matters for further submissions.