Payments made during pre-pack sale transactions at undervalue?

Bonney & Anor v Barker & Anor (Re Fastfit Station Ltd) [2023] EWHC 496 (Ch)
Are payments made to creditors of an insolvent company in the context of a pre-pack sale to a connected party transactions at undervalue?

Overview

This case considers whether payments made to employees and trade creditors of an insolvent company in the context of a pre-pack administration sale to a connected party were transactions at undervalue, or whether they were made for the benefit of the insolvent company.

Background

Fastfit Station Limited (the “Company”) was incorporated in 1996 and carried on business fitting tyres and repairing vehicles. Graham Barker was a director of the Company. On 3 March 2014, Fastfit Station MK Ltd (“Fastfit MK”) was incorporated. At the time of incorporation, Mr Barker was Fastfit MK’s sole shareholder, and he later became the company’s sole director.

By 31 March 2014, the Company was insolvent, and a notice of intention to appoint administrators was filed on 2 April 2014. Between 1 April 2014 and the date of administration, payments due to the Company totalling £110,345.09 were instead paid to Fastfit MK (the “April Payments“). This was achieved, at least in part, by new payment terminals being installed at the Company’s premises which caused payments to be made to Fastfit MK’s Metro Bank account.

On 15 April 2014, the Company entered administration and a sale and purchase agreement (the “SPA“) for the pre-packaged sale of its business and assets to Fastfit MK was entered into on the same day. On 8 August 2014, the Company entered creditors’ voluntary liquidation and Simon Bonney and Christopher Newell were appointed as joint liquidators (the “Liquidators”). Shortly thereafter, the Liquidators began to enquire into the circumstances of the April Payments.

In March 2020, the Liquidators issued an application against Mr Barker and Fastfit MK, alleging that the April Payments were transactions at an undervalue under section 238 of the Insolvency Act 1986, and that Mr Barker had breached his duties as a director under sections 171-175 of the Companies Act 2006 in causing or allowing it to make the April Payments for the benefit of Fastfit MK and personally profiting from those payments by reason of his shareholding in Fastfit MK.

Mr Barker and Fastfit MK denied the Liquidators’ claims, arguing that the April Payments were made with the knowledge and approval of one of the joint administrators in anticipation of the administration, in order to keep the business running, and thereby preserve its value, at a time when the Company’s bank account with Royal Bank of Scotland was anticipated to be frozen. They also stated that payments made to Fastfit MK were accounted for in the SPA.

Mr Barker further argued that he did not breach any duties owed to the Company, having followed the advice received from the joint administrator.

The Court’s Decision

The Court ultimately found that the April Payments were transactions at undervalue and that Mr Barker had breached his duties as a director.

Based on the evidence and the various provisions of the SPA, the Court was not able to conclude that the payments made to Fastfit MK were accounted for in the SPA.

The Court also found that the April Payments were not made for the benefit of the Company. Mr Barker and Fastfit MK had argued that approximately £20,000.00 was paid to trade creditors of the Company, while £67,320.73 was paid by way of salaries, bonus and overtime to employees of the Company. The Court found that the Company obtained no benefit from these payments.

As regards the payments made to employees of the Company, the question was whether responsibility for the business passed to Fasfit MK before the Company entered administration or after. Here, it was plainly after. The administration had been opened and the transfer of employees took place, and the Company was subject to the insolvency regime at the time of the transfer. The SPA provided that salaries were to be met by Fastfit MK for the period from 1 April 2014. There was no reason to conclude that the date was incorrect. The contention that some of the payments fell due before 1 April 2014 was not adequately evidenced. The Court could therefore not accept that the payments made included any element of salary, wages or bonuses owed by the Company.

The Court reached similar conclusions with respect to payments paid to trade creditors, finding that they were not made for the benefit of the Company, but rather to preserve the relationship between Fastfit MK and certain key creditors with which Fastfit MK wished to keep doing business.

The Court then turned to the relevant prongs of the test for a transaction at undervalue, finding that the April Payments were made at the direction of the Company. It was accepted by Mr Barker and Fastfit MK that new card machines were installed in the Company’s premises and the Company ‘s employees were instructed to use them so that they were presented to the Company’s customers for payment. It was the Company, by its employees, which caused the payments to be made.

The Court also concluded that the April Payments to Fastfit MK were gratuitous, and that the Company received no value from them.

Finally, the Court found that Mr Barker was in breach of his duties as a director. There was no evidence that he considered the interests of the Company, or the interests of creditors as a class, at a time when the Company was insolvent. Rather, Mr Barker’s focus was to acquire the business of the Company and to pay those creditors that would be of advantage to Fastfit MK in carrying on the business once acquired. There was no evidence of essential suppliers being paid so as to preserve the value of the Company’s business for the benefit of its creditors, as opposed to being carried on for the benefit of Fastfit MK.

Accordingly, the Court ordered that Fastfit MK repay the April Payments and be treated as an unsecured creditor in the liquidation for the same amount. To the extent that the April Payments are not repaid by Fastfit MK, the Court ordered Mr Barker to repay the April Payments to the Company personally.

Judge: IIC Judge Mullen

Counsel: Jon Colclough of New Square Chambers (instructed by Summit Law LLP) for the Joint Liquidators; Simon Passfield of Guildhall Chambers (instructed by Capital Law Limited) for Mr Barker and Fastfit MK