England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION, COMPANIES COURT
The Hon Mr Justice Peter Smith
[2013] EWHC 311 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		15th November 2013

Lord Justice Kitchin:

Introduction

1. This is an appeal by Mr Stephen Hunt, the liquidator of Ovenden Colbert Printers Ltd ("Ovenden"), against the order of Peter Smith J made on 22 February 2013 whereby he struck out a claim brought by Mr Hunt against Mr Andrew Hosking.
2. The claim was brought pursuant to ss.238 and 241 of the Insolvency Act 1986 ("the 1986 Act"). Mr Hunt alleges that Mr Hosking has received or benefited from payments made by Ovenden which constitute transactions at an undervalue, and that these transactions were entered into by Ovenden within a period of two years ending with the commencement of its insolvency.
3. The judge held that the claim had no prospect of success. On this appeal, Mr Hunt contends that the judge fell into error, that his order should be set aside and that directions should be given for the further conduct of the claim. He argues that there are substantial issues of fact concerning the circumstances in which the payments were made which cannot be resolved on a summary judgment or "strike out" application, and that it is therefore not possible to say that the claim is bound to fail.
4. For his part, Mr Hosking accepts that he has received certain payments and recognises that, for the purposes of this application, this court must proceed, as did the judge, on the basis that the various factual allegations made by Mr Hunt will be established at trial. However, he maintains that the claim as formulated must nevertheless fail because the particular payments which he has received were not the result of any transaction which was entered into by Ovenden in the relevant period. Accordingly, the requirements of s.238 cannot be fulfilled and no claim may be made against him under s.241. The judge was therefore right to strike the claim out.

Background

5. The background relevant to this appeal may be summarised as follows. Mr Hosking is a licensed insolvency practitioner and was for some time a partner in Grant Thornton UK LLP. In 2002 Mr Hosking was appointed joint liquidator of two connected companies, CSM Group Limited and CSM Sheet Fed Limited ("the CSM companies"). The CSM companies owed Ovenden in excess of £1.3 million and accordingly Ovenden was prospectively entitled to a substantial dividend from their liquidation.
6. On 17 December 2003 Ovenden entered into a fee agreement ("the 2003 agreement") with its then accountant, Mr Alan Temple, a sole practitioner trading as Scott Temple Wilshire & Co ("STW"). Mr Hosking maintains that the purpose of this agreement was to reward Mr Temple for the work he had carried out for Ovenden in formulating its claim in the liquidation of the CSM companies and providing information to himself as liquidator of those companies to assist him in bringing claims against their former directors and accountants.
7. The 2003 agreement authorised Mr Temple to receive any distributions from the liquidation of the CSM companies, to hold those distributions in an account to the order of Ovenden, and to transfer to his own account agreed fees. In that regard the agreement provided:

"We authorise you to transfer from the proceeds to your office account, the agreed fees in the sum of 25% of any distribution in excess of £250,000.

The balance of the funds are to be held to our account and released only as instructed in writing by ourselves, such instructions shall include copies of any board minutes pertaining thereto."

8. On the same day, 17 December 2003, Ovenden wrote to Mr Hosking in his capacity as liquidator of the CSM companies authorising him to pay the dividends due to Ovenden into a client account maintained by STW.
9. On 28 January 2005 the 2003 agreement was purportedly varied in the following terms:

"Due to the additional work performed by Scott Temple Wilshire & Co since the original agreement above, this agreement is amended, such that if the distributions from C/S/M Group in favour of Ovenden Colbert Printers Ltd exceeds the sum of £916,967, then Scott Temple Wilshire & Co are entitled to retain fees of the difference between the sum received and £750,000, which is the maximum amount Ovenden Colbert Printers Ltd will be entitled to."

This variation ("the 2005 variation") was ostensibly signed by a Mrs N A Waugh on behalf of Ovenden.

10. Over the period November 2004 to May 2005 distributions were made from the CSM companies in favour of Ovenden amounting to in excess of £1.275 million. These sums were paid by Mr Temple into a client account at Barclays Bank plc designated "Scott Temple Wilshire & Co Client Account".
11. On the basis of the 2003 agreement, Mr Temple became entitled to a payment of £256,502.34. On the basis of the 2005 variation, however, his entitlement rose to £526,502.34.
12. Between 10 December 2004 and 6 October 2005 Mr Temple made a series of payments out of the client account amounting to a total of £570,292 (a sum which exceeded his entitlement under either agreement, although nothing has been made of that in these proceedings). Of these, payments totalling £224,951.11 were made to Mr Hosking or to persons on his behalf. It is these payments to or for the benefit of Mr Hosking which are attacked in these proceedings. Mr Hosking maintains that Mr Temple was his personal friend and that Mr Temple was simply repaying personal loans which Mr Hosking had made to him.
13. On 6 April 2006 Ovenden filed notice of intention to appoint an administrator. Mr Hosking and one of his partners, Mr Anthony Flynn, were appointed as joint administrators. The company subsequently went into creditors' voluntary liquidation, with Mr Hosking as one of the liquidators. On 9 January 2009 a final meeting of creditors was held, following which the company would ordinarily have been dissolved. However, upon an application made to the court by a creditor and a former director, the dissolution of the company was deferred and Mr Hunt was appointed liquidator.
14. In his capacity as liquidator of Ovenden, Mr Hunt now advances a series of very serious allegations against Mr Temple and Mr Hosking. So far as Mr Temple is concerned, Mr Hunt contends that he had no entitlement to any fees and provided no consideration at all for the 2003 agreement or the 2005 variation. Moreover, he continues, both of these agreements were entered into as a result of fraudulent misrepresentations made by Mr Temple to the directors of Ovenden as to the further work he was being asked or required to undertake. He also asserts that the signature of Mrs Waugh on the 2005 variation was a forgery. As for Mr Hosking, Mr Hunt contends that he must always have known that Mr Temple had no proper entitlement to the monies he was paying over to him.

Mr Hunt's claims

15. As I have mentioned, Mr Hunt's claims against Mr Hosking are founded on ss.238 and 241 of the 1986 Act.
16. Section 238 confers on a liquidator a right to apply to the court to have certain transactions entered into by a company at an undervalue set aside. It reads:

"238. Transactions at an undervalue (England and Wales)

(1) This section applies in the case of a company where –

(a) the company enters administration, or

(b) the company goes into liquidation;

and "the office holder" means the administrator or the liquidator, as the case may be.

(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.

(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.

(4) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if –

(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or

(b) the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company.

(5) The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied –

(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company."

17. "Transaction" is defined in s.436 in these terms:

""Transaction" includes gift, agreement or arrangement, and references to entering into a transaction shall be construed accordingly."

18. The transaction must have been entered into at a relevant time, which is defined in s.240:

"240 "Relevant time" under ss 238, 239

(1) Subject to the next subsection, the time at which a company enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into, or the preference given –

(a) in the case of a transaction at an undervalue or of a preference which is given to a person who is connected with the company (otherwise than by reason only of being its employee), at a time in the period of 2 years ending with the onset of insolvency (which expression is defined below)."

19. Section 241(2) permits orders to be made against third parties who have received a benefit from a transaction falling within s.238. It reads:

"241 Orders under ss 238, 239

….

(2) An order under section 238 or 239 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the company in question entered into the transaction or (as the case may be) the person to whom the preference was given; but such an order –

(a) shall not prejudice any interest in property which was acquired from a person other than the company and was acquired in good faith and for value, or prejudice any interest deriving from such an interest, and

(b) shall not require a person who received a benefit from the transaction or preference in good faith and for value to pay a sum to the office-holder, except where that person was a party to the transaction or the payment is to be in respect of a preference given to that person at a time when was a creditor of the company."

20. Mr Hunt maintains that the payments made by Mr Temple to or for the benefit of Mr Hosking were transactions at an undervalue. Originally the case was advanced in two ways, described as "route 1" and "route 2". Route 1 was that the payments were transactions between Ovenden and Mr Hosking. Route 2 was that the payments were transactions between Ovenden and Mr Temple, and that the court has power to make an order against Mr Hosking as a third party who has received benefits from those transactions.
21. There are two other important matters I must mention at this stage concerning the nature of the case which Mr Hunt advances. First, the claim is founded entirely on ss.238 and 241 of the 1986 Act. Mr Hunt was invited by the judge to consider whether he wished to amend to plead a different or additional case, such as a claim against Mr Temple for breach of trust and a claim against Mr Hosking for dishonest assistance in breach of trust, but, after a short adjournment, he chose not to do so.
22. Second, Mr Hunt identifies the relevant transactions within the meaning of s.238(2) as being the payments rather than the 2003 agreement or the 2005 variation. The 2003 agreement was, of course, entered into more than two years before the onset of insolvency. However, the 2005 variation falls within that two year window. Nevertheless, it has been made clear by Mr Hunt, and it was confirmed to this court during the course of the appeal hearing, that it forms no part of his case that this was or formed part of a transaction impugned under s.238 and no application has been made to set it aside.

The decision of the judge

23. The judge found both route 1 and route 2 unarguable. In summary, he found that, however the case might be put, the payments attacked by Mr Hunt were not transactions which Ovenden had entered into. Moreover, they were either payments that Mr Temple was authorised to make or they were not; in the former case, they could not be attacked unless the agreements were themselves challenged, and they had not been; in the latter case, the payments constituted a breach of trust and so could not be attributed in any way to Ovenden.

The appeal

24. On this appeal, Mr Hunt only pursues route 2. Mr Simon Davenport QC who has appeared on behalf of Mr Hunt, as he did below, has developed the route 2 argument in the following way.
25. First, the payments made by Mr Temple out of the client account were transactions within the meaning of s.238 between Ovenden and Mr Temple. These payments included the payments made directly to Mr Temple or to his office account and also, importantly for present purposes, the payments made to Mr Hosking. The payments made to Mr Hosking constituted a sub-set of the totality of the payments and, although they were made directly from the client account to Mr Hosking, they involved, as a first step, the intervention of Mr Temple who treated the moneys paid over as his own.
26. Second, Mr Temple had no contractual entitlement to any of the moneys taken from the client account for the reasons I have summarised above and, as a result, the transactions were entered into at an undervalue. The evidential support for these allegations is set out in Mr Hunt's second witness statement to which we were taken in the course of the hearing. There Mr Hunt explains that the investigations he has carried out suggest that all of the work which Mr Temple claims to have undertaken for Ovenden had already been undertaken and paid for prior to December 2003 so there was no consideration for the 2003 agreement; at that time Mr Temple had no reason to believe that any further work would be required; such additional work that Mr Temple in fact undertook thereafter was very minor and paid for separately; there is good reason to believe that Ms Waugh's signature on the 2005 variation is a forgery; there was in any event no consideration for the 2005 variation; and Mr Temple positively misled Ovenden at all times about the work he had done and was required to do. In summary, Mr Hunt continues, Mr Temple misapplied Ovenden's money and deceived its directors.
27. Third, the court may make an order against Mr Hosking under s. 241(2) of the 1986 Act in so far as he has received a benefit from the transactions because he was not acting in good faith. In support of this contention Mr Hunt relies upon a number of matters, including the following: the payments were made to Mr Hosking out of STW's client account and very shortly after STW had received the dividend payments from the CSM companies; Mr Hosking, as liquidator of the CSM companies, knew that substantial dividends were being paid to STW's client account; the personal loans made by Mr Hosking to Mr Temple were not due for repayment until 2007 and they carried no interest; Mr Hosking was in any event substantially overpaid; and Mr Hosking has sought to justify the payments made to Mr Temple on the basis that Mr Temple had conducted substantial work for the benefit of Ovenden when he must have known at all times that Mr Temple had not carried out any such work.
28. Mr Davenport further submits that all of the factual matters to which I have referred are complex and that there is every reason to suppose that further investigations will add to or alter the available evidence. In these circumstances the case is wholly unsuitable for summary determination.
29. Mr Hosking accepts that, this being an appeal on a point of law from a strike out order, we must assume that it can be established at trial that Mr Temple acted in breach of his fiduciary duty as a trustee of the funds held in the client account. That is plainly right. But it seems to me that we must also consider the possibility that Mr Temple was acting within the scope of his authority and consider the merit of the claim on that basis too. Similarly, we must assume that Mr Hosking was not acting in good faith when he received the benefits relied upon and so cannot rely upon the defence afforded by s.241(2)(a) and (b).
30. Nevertheless, Mr Antony Zacaroli QC, who has appeared in this appeal on behalf of Mr Hosking, submits, and I agree, that a claim against him under s.241 can only succeed if a claim under s.238 is first established. He also submits that this is something Mr Hunt cannot do because an essential ingredient of any claim under s.238 is that there has been a transaction into which a company has itself entered. In this case, however, none of the payments made by Mr Temple from his client account constituted a transaction entered into by Ovenden and thus the requirements of s.238 are incapable of being satisfied.
31. The requirement that the company has itself entered into a transaction is an essential part of any claim under s.238 and comprises two interrelated elements: first, that there is a transaction; and second, that the transaction is something which the company has itself entered into.
32. As I have explained, the term "transaction" is widely defined in s.436 as including a gift or arrangement. If it were necessary for the purposes of this decision, I would therefore be disposed to find it is broad enough to encompass a payment made by a company or by an agent of the company acting within the scope of his authority. But to focus unduly on the term "transaction" risks obscuring the need for the second and vital element, namely the requirement that the transaction be something that the company has "entered into". This expression connotes the taking of some step or act of participation by the company. Thus the composite requirement requires the company to make the gift or make the arrangement or in some other way be party to or involved in the transaction in issue so that it can properly be said to have entered into it, and of course it must have done so within the period prescribed by s.240.
33. These notions are reflected in the decision of Jonathan Parker J in Re Brabon, Treharne v Brabon and others [2001] 1 BCLC 11. In that case the trustee of a bankrupt alleged that transfers of land by a mortgagee were transactions at an undervalue within the scope of s.339 of the 1986 Act. A claim against the purchaser failed because the transfers were not transactions entered into by the bankrupt. Jonathan Parker J said at page 34:

"In the end, however, one comes back to the plain words of the subsection. In my judgment the words 'entered into' by the bankrupt do not extend to a transfer by way of sale not by the bankrupt but by the bankrupt's mortgagee."

34. So also, the unilateral misappropriation by a director of the assets of company does not constitute a dealing between him and the company. This issue arose in Manson v Smith [1997] 2 BCLC 161 in the context of rule 4.90 of the Insolvency Rules 1986 and an attempt by a director of an insolvent company to set off a sum he had been ordered to pay in misfeasance proceedings against the balance due to him on his loan account. In rejecting his application for permission to appeal, Millett LJ said this at page 164 (a passage subsequently cited with approval by Lord Hoffmann in Smith (Administrator of Cosslett (Contractors) Ltd v Bridgend County Borough Council [2001] UKHL 58, [2002] 1 AC 336 at [35]):

"First, r 4.90 and its predecessors require there to be mutual debts or mutual dealings. When Mr Manson improperly withdrew money from the company this did not constitute a dealing between him and the company. A misappropriation of assets is not a dealing. Mr Manson will object to the analogy, but I hope he will forgive me for it is only an analogy: the thief who steals my watch does not deal with me. Similarly, the man who steals money from a company does not obtain the money by a dealing within r 4.90. Accordingly, his liability to repay money he has misappropriated cannot be set off against any debt owing to him by the company."

35. Similarly, in Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39, [2009] 1 AC 1391, Lord Phillips said at [46] that an English court would not attribute to a company the act of its managing director in dishonestly transferring the company's funds into his own account.
36. I come then to apply these principles in the context of the present case and in doing so I must consider the two ways the case can be put. The first and primary argument advanced by Mr Davenport on Mr Hunt's behalf is that Mr Temple has misappropriated the funds he held on trust for Ovenden because he had no right to take the moneys and make the payments to Mr Hosking. But here Mr Hunt faces precisely the difficulty encountered by Mr Manson in Manson v Smith. The improper withdrawal by Mr Temple of the funds he held on trust, if that is what it was, did not constitute a dealing between him and Ovenden.
37. Nor can it be said that Mr Temple was acting as agent for Ovenden in making the impugned payments. Mr Davenport disclaimed any such contention and he was right to do so. Mr Temple was a trustee of the funds but, as Lord Hoffmann explained in Ingram v Inland Revenue Commissioners [2000] 1 AC 293 at page 305, a trustee in English law is not an agent for his beneficiary. He contracts in his own name with a right of indemnity against the beneficiary for the liabilities he has incurred.
38. That brings me to the second way the case can be put, namely that Mr Temple was in some way authorised or entitled to make the impugned payments, albeit that they were made for no or inadequate consideration. However, in my judgment this argument also faces an insuperable difficulty. When Mr Temple took the funds from the client account and paid them over to Mr Hosking it required no further act or step by Ovenden beyond the 2003 agreement and the 2005 variation, and, as I have said, neither of these is said to constitute or form part of a relevant transaction. The payments themselves were not a gift by Ovenden to Mr Temple, nor did it enter into a further transaction of any other kind with him. It follows that the actions of Mr Temple in withdrawing the funds from the client account and paying them over to Mr Hosking were not transactions entered into by Ovenden, just as the transfers of land were not entered into by the bankrupt in Re Brabon.
39. Mr Zacaroli also submits that, on this second hypothesis, the claim must fail for a further reason. He says that if Mr Temple was entitled to be paid the fees he claimed then there could be no undervalue because whenever a company makes a payment in discharge of an actual obligation, the value of the consideration given (the payment) necessarily equals the value of the consideration received (the discharge of the obligation to make that payment). I recognise the force of this submission, however I am not persuaded that it necessarily addresses all the ways in which Mr Hunt challenges the 2003 agreement and the 2005 variation, notwithstanding that he is not seeking to set aside either agreement and neither is said to constitute or form part of a relevant transaction. In the circumstances and since it is not necessary for me to express a final conclusion upon it, I prefer not to do so.
40. For the reasons I have given I believe the claim against Mr Hosking under ss.238 and 241 must fail and the judge was right to strike it out. I would therefore dismiss the appeal.

Lord Justice McCombe:

41. I agree.

Lord Justice Elias:

42. I also agree. Mr Davenport  submitted  that the purposes of section 238, namely to protect creditors of an insolvent company, would be better served if the withdrawal of money by Mr Temple was treated as a relevant transaction at that time when the money was actually lost to the company. That may be so, but like my Lord, Kitchin LJ,  I can see no legitimate way in which section 238 can be construed to achieve that result. The section catches transactions entered into by the company.  As I understand it, Mr Davenport QC was asserting that there was a continuing authority for Mr Temple to withdraw the money at least until that authority was revoked or exercised.  I agree; but that is precisely why it was not necessary for the company to enter into any further distinct transaction at the point when Mr Temple withdrew the funds. Any relevant transaction would have to be the underlying agreement by which the authority was conferred, in this case either the 2003 agreement or the 2005 variation, but neither of these was relied upon.