Factual and Procedural Background
This appeal arises from an order made by Judge Smith on 22 February 2013 striking out a claim brought by the Plaintiff, the liquidator of Company A, against the Defendant. The claim was made under sections 238 and 241 of the Insolvency Act 1986. The Plaintiff alleged that the Defendant received payments from Company A which constituted transactions at an undervalue entered into within two years before insolvency. The Defendant acknowledged receipt of certain payments but argued that these payments were not the result of transactions entered into by Company A in the relevant period, and therefore the claim must fail. The judge agreed and struck out the claim. The Plaintiff appeals, contending there are substantial factual issues unsuitable for summary disposal.
The relevant background involves the Defendant, a licensed insolvency practitioner, who was previously joint liquidator of two connected companies that owed Company A a significant sum. Company A entered into a fee agreement in 2003 with its accountant, who was authorised to receive distributions from the liquidation of those companies and to deduct fees. This agreement was varied in 2005. Distributions were paid into a client account controlled by the accountant, who then made payments, including to the Defendant. The Plaintiff challenges payments made to the Defendant as transactions at an undervalue, asserting the agreements were without consideration and involved fraudulent misrepresentations and forgery.
After Company A entered administration and liquidation, the Plaintiff was appointed liquidator following a court order deferring dissolution. The Plaintiff now advances claims under sections 238 and 241 of the Insolvency Act 1986 against the Defendant based on the payments made.
Legal Issues Presented
- Whether the payments made to the Defendant constitute transactions at an undervalue entered into by Company A within the relevant two-year period under section 238 of the Insolvency Act 1986.
- Whether an order can be made against the Defendant under section 241 as a third party who has received benefits from such transactions.
- Whether the claim is suitable for summary determination or whether there are substantial factual issues requiring trial.
Arguments of the Parties
Appellant's Arguments
- The payments made by the accountant out of the client account were transactions between Company A and the accountant, including payments to the Defendant.
- The accountant had no contractual entitlement to these payments, rendering the transactions at an undervalue.
- The Defendant received benefits from these transactions and was not acting in good faith, justifying an order under section 241.
- The factual complexity and ongoing investigations make the case unsuitable for summary disposal.
Respondent's Arguments
- The claim under section 241 can only succeed if a claim under section 238 is first established, which requires that Company A itself entered into the transactions.
- The payments made by the accountant from the client account were not transactions entered into by Company A.
- The accountant’s withdrawal and payment of funds did not constitute a dealing between him and Company A.
- The Defendant was entitled to rely on the payments as within the scope of the accountant’s authority and the claim must fail.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Re Brabon, Treharne v Brabon and others [2001] 1 BCLC 11 |
Definition of "entered into" a transaction under insolvency law |
Held that a transaction must be one the company itself entered into; transfers by a mortgagee were not entered into by the bankrupt company. |
| Manson v Smith [1997] 2 BCLC 161 |
Misappropriation of assets does not constitute a dealing between director and company |
Confirmed that improper withdrawals by a director do not amount to dealings with the company for set-off purposes. |
| Smith (Administrator of Cosslett (Contractors) Ltd v Bridgend County Borough Council) [2001] UKHL 58 |
Approval of Manson v Smith principle regarding misappropriation and dealings |
Lord Hoffmann cited Manson v Smith with approval, reinforcing the principle that misappropriation is not a dealing. |
| Stone & Rolls Ltd (in liquidation) v Moore Stephens [2009] UKHL 39 |
Acts of a managing director in dishonestly transferring company funds are not attributed to the company |
Confirmed that dishonest acts of a managing director are not treated as acts of the company. |
| Ingram v Inland Revenue Commissioners [2000] 1 AC 293 |
A trustee is not an agent of the beneficiary in English law |
Explained that trustees contract in their own name with a right of indemnity, not as agents of the beneficiary. |
Court's Reasoning and Analysis
The court analysed the claim in light of the statutory requirements under sections 238 and 241 of the Insolvency Act 1986. It emphasised that a fundamental element of a claim under section 238 is that the company itself must have entered into the transaction alleged to be at an undervalue within the relevant period. While the term "transaction" is broadly defined, the court stressed the importance of the company’s active participation or consent in the transaction.
Applying established case law, the court held that misappropriation or unilateral acts by a third party, such as the accountant’s withdrawal and payment of funds, do not constitute transactions entered into by the company. The payments made by the accountant to the Defendant were either authorised under existing agreements or constituted breaches of trust by the accountant personally, but in neither case were they transactions entered into by Company A.
The court rejected the argument that the accountant acted as agent for Company A when making the payments, citing authority that trustees are not agents of beneficiaries. It also found no basis to treat the payments themselves as relevant transactions distinct from the underlying agreements, which were not challenged as transactions at an undervalue.
Consequently, since the essential element of a transaction entered into by the company was absent, the claim under section 238 could not succeed, and accordingly the claim under section 241 against the Defendant also failed. The court further noted that the factual complexities raised did not overcome this fundamental legal deficiency.
Holding and Implications
The appeal is dismissed and the claim against the Defendant under sections 238 and 241 of the Insolvency Act 1986 is struck out.
The direct effect of this decision is that the Plaintiff’s claim alleging transactions at an undervalue involving payments received by the Defendant fails as a matter of law because the payments were not transactions entered into by Company A. No new precedent was set beyond the application of established principles confirming the necessity of the company’s participation in the relevant transactions. The decision underscores the strict interpretation of "entered into" in the statutory context and limits the scope of liability of third parties receiving payments in such circumstances.