Manolete Partners Plc v David Smith

A company’s payment of a shareholder’s personal acquisition price may be a transaction at an undervalue where the company receives only a promise of repayment from an assetless or illiquid acquisition vehicle. The value of that promise must be assessed from the company’s perspective, including the commercial reality and, where appropriate, subsequent events resolving uncertainty at the transaction date. The statutory defence requires good faith, a business purpose and reasonable grounds for believing that the transaction would benefit the company. It is unavailable where company assets are used to discharge shareholders’ private obligations without proper consideration of the company’s financial position and creditors’ interests.

A & D Joinery Limited’s administrators assigned the company’s claims to Manolete Partners plc. Manolete sought relief against David Smith, the former sole director and shareholder, concerning payments made from the company’s cash to discharge the purchase price owed to him by A&D MTE Ventures Limited under a share purchase agreement.

The claim relied primarily on the Insolvency Act 1986, s.238, alleging transactions at an undervalue. Alternative claims alleged breach of Mr Smith’s statutory and fiduciary duties, and knowing receipt in respect of later payments. The central issues were the value of Ventures’ repayment obligation, the company’s insolvency, the statutory defence, and Mr Smith’s duties when authorising the payments.

1. Transaction at an undervalue. Each payment by the company to Mr Smith was a transaction with him, referable to Ventures’ obligations under the share purchase agreement. Whether analysed as the payments alone or together with the automatic creation of the company’s reciprocal right against Ventures, the relevant consideration was Ventures’ repayment obligation.
2. The obligation had no immediate liquidity and could be satisfied only through uncertain future borrowing, a sale of the shares or dividends. Its value was therefore significantly below the cash paid. The absence of interest further reduced its value. Applying Phillips v Brewin Dolphin Bell Lawrie Ltd and Re Thoars, Deceased, the court was entitled, and in the circumstances required, to take account of subsequent events. By 2 November 2021 Ventures had paid nothing and could not pay; the consideration was valued at zero.
3. Insolvency. The company was balance-sheet insolvent at each payment date because the Ventures debt was irrecoverable and could not properly be treated as a full-value asset. It was also cash-flow insolvent as a result of the payments. Manolete therefore proved insolvency without relying on the connected-party presumption.
4. Statutory defence. The defence in s.238(5) failed. The company had no reasonable grounds to believe that paying Ventures’ liabilities would benefit it, and the transaction was not undertaken in good faith for the purpose of carrying on its business. Cash needed for the business was exchanged for an interest-free promise from a company with no liquid assets and compromised share value.
5. Breach of duty. The 27 July payments breached Mr Smith’s duties under ss.171–175 Companies Act 2006. The duty to have regard to creditors’ interests had arisen. Mr Smith relied on assumptions, obtained no sufficiently informed advice and failed to consider the consequences of extracting the company’s cash for his own benefit. The application succeeded on the transaction-at-undervalue claim and on the partial alternative breach-of-duty claim. The knowing-receipt claim did not require determination. Consequential orders were left for agreement.