CHANCERY DIVISION
COMPANIES COURT
B e f o r e :
____________________
(1) PAUL ANTHONY SAXTON (2) ROGER NEIL MARSHMAN |
Claimants |
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-v- |
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(1) ASHLEY CLARKE (2) JUNE CLARKE |
Defendants |
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and |
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CONEGRADE LIMITED (In Liquidation) |
Claimant |
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-v- |
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(1) ASHLEY CLARKE (2) JUNE CLARKE |
Defendants |
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Marten Walsh Cherer Ltd., Midway House,
27/29 Cursitor Street, London, EC4A 1LT.
Telephone No: 020-7405 5010. Fax No: 020-7405 5026)
appeared on behalf of the Claimants.
MR. T. LAWSON-CRUTTENDEN (instructed by Freeth Cartwright,
Leicester) appeared on behalf of the Defendants.
____________________
Crown Copyright ©
MR. JUSTICE LLOYD: This is my judgment in relation to two proceedings, both arising from the same transaction and concerning a company called Conegrade Ltd. which is now in creditors' voluntary liquidation. The transaction involved the transfer by the company to Mr. and Mrs. Clarke, who were Directors and shareholders of it, of a freehold property valued at £125,000.
By proceedings commenced by claim form, the company alleges against Mr. and Mrs. Clarke that this transfer was effected in breach of section 320 of the Companies Act 1985.
By an originating application in the Companies Court, the joint liquidators assert against Mr. and Mrs. Clarke that the transfer constituted a preference of them within the meaning of section 239 of the Insolvency Act 1986. Accordingly, they claim an order that Mr. and Mrs. Clarke pay compensation to the company. They also seek a declaration that Mr. and Mrs. Clarke were guilty of misfeasance in procuring or assisting the transfer of the property to themselves.
Although the two proceedings have to be separate for procedural and jurisdictional reasons, they are, in effect, different and alternative ways of challenging the same conduct. As it happens, the same remedy is sought based on each claim. I have been told that directors' disqualification proceedings are also pending in relation to the company, but I know nothing about the charges made in those proceedings.
Conegrade was a small engineering company. It was originally founded in about 1974 by four men. Two of them withdrew quite soon and the third in the early 1990s. That left Mr. Ashley Clarke. By 1995 he, too, wanted to withdraw.
On 1st June 1995, he and his wife made an agreement with the company and a Mr. Brian Bayes for the latter to acquire some shares and to be appointed Managing Director and for Mr. and Mrs. Clarke not to receive any salary for six years but, as and when required to perform duties for the company, to be paid at an hourly gross rate of £10. Their loan account was to be repaid by equal monthly instalments over six years with interest at 7 per cent.
The agreement stated that it was the intention of Mr. and Mrs. Clarke to continue their policy of giving financial support to the company, but the dividends would be paid as and when agreed to be appropriate. Mr. and Mrs. Clarke then greatly reduced their active participation in the company's affairs for a time, but in 1997 they resumed more or less full time work for the company, for reasons which I do not need to identify for present purposes.
The loan account had been about £100,000 in 1995 and repayments were made against it for a while. Mr. and Mrs. Clarke made further loans to the company after 1997 and, moreover, did not draw all that was due to them in respect of remuneration.
In 1998 the company put up for sale its freehold property in Station Road, Uppingham. This had been bought in 1977 and it was one of three sites then used for the company's business. Another of them, also in Uppingham, was rented from Mr. and Mrs. Clarke. The asking price was £160,000 but no interest was expressed at more than £120,000 and in fact no offers were received. The idea, at that stage, had been to restrict the space used by the company to the other two sites and to raise further working capital.
No sale having materialised, the company considered other courses of action. The company's bankers were National Westminster Bank. They had security over the property and the book debts for an overdraft facility which, strictly speaking, was no more than £60,000, although it was sometimes exceeded on an unauthorised basis. The company felt that this was not sufficient and that more extensive facilities ought to be obtainable.
At some point in 1999 the idea emerged of the property being sold to Mr. and Mrs. Clarke. In November 1999, the Clarkes instructed local valuers, Culshaws, to prepare a valuation of the property. It is said that this was on the advice of the company's auditors but such advice is not recorded in any document produced in evidence. The valuation was given on 14th February 2000 and showed the value of the property to be £125,000.
In the meantime, a meeting of the Board had been held on 11th December 1999, attended by Mr. and Mrs. Clarke and Mr. Bayes. A Mr. Guy Davies was to be appointed Managing Director in January and was to have 5 per cent of the shares, Mr. Bayes becoming Chairman.
Three items in the Minutes of this meeting are important. I will read them:
"(7) That, due to difficult trading conditions, it was impossible to repay ACA and J Clarkes' loan account debt which was, including undrawn salary, in excess of £100,000. It was agreed that, to discharge this debt, the company should sell to ACA Clarke the factory buildings and land, leasing these back to the company at a nominal rent with an inflation clause and regeneration agreement on a long lease. The independent valuation for the property is anticipated to establish a cash payment to be made by the Clarkes to allow them to purchase it from the company and it was agreed by all that this sum of money be used to reduce company debt and facilitate company development".
"(9) Concern was also expressed that a very loose agreement was being applied by the National Westminster for the financial support of the company in the form of an overdraft facility. The bank had taken a charge on the company's building and debtor's ledger but were reluctant to say what amount of cash they would advance on these assets. It was agreed that the situation stated above could not be tolerated and that the company approach the HSBC Bank for factoring terms which, if successfully obtained, should release the company's property deeds to the company's custody so that they can be transferred to ACA Clarke when he has purchased the property from the company." "
(11) That ACA and J Clarke had received no salary for one year by January 2000, this being done to help the company over a difficult financial period. It was agreed that a dividend be declared and payment be made to the Clarkes' loan account and payment from Mr. Bayes' loan account be made to him monthly from the dividend paid to his loan account; this method of payment being made to reduce the financial pressure on the company's cashflow situation."
That is the first reference to the transaction which is the subject of these proceedings.
On 2nd February, a further Board meeting was held. It was agreed to change banks from National Westminster Bank to HSBC who were prepared to factor the book debts and, thereby, to advance more than the National Westminster Bank would. At item (2) of the Minutes there is the following: "It was agreed also that ACA and J Clarke advance the company £40,000 on 2nd February to assist the company's finance and that the company would sell to ACA and J Clarke the company's property and site at Station Road, Uppingham for the value of their loan account as per previous Directors' meeting." It was also agreed that Mr. and Mrs. Clarke's salary, in arrears for 15 months, be paid by way of dividend and transferred to their loan account.
Mr. and Mrs. Clarke duly paid the £40,000 in the course of February. Before this, their loan account was recorded in the company's books at £68,428 so that by the year end, on 29th February, the total was given as £108,428. It is clear that this does not include any arrears of salary or remuneration which may have amounted, by then, to some £40,000.
On 14th February, as I have mentioned, the value of the property was identified as £125,000 by the valuation which had been commissioned by Mr. and Mrs. Clarke.
On 1st March, a further Board meeting, attended by Mr. and Mrs. Clarke, Mr. Bayes and Mr. Davies, discussed the sale of the property and resolved that the property "be re-assigned to Mr. and Mrs. Clarke in respect to the payment of £40,000 on 28th February 2000, and the outstanding loan account being reduced by the balance (balance minus independent valuation, £125,000, minus £40,000 = £85,000)". That is signed by all four Directors. Mr. and Mrs. Clarke and Mr. Bayes were then the only shareholders so, in fact, the shareholders also agreed (although they were not expressed to do so as such).
The transfer of legal title took place on 17th April but it is reasonably clear that Mr. and Mrs. Clarke and others treated the ownership as having passed at the beginning of March. A Board Minute of 7th March is in the following terms: "(1) It was agreed that ACA and J Clarke would advance a further sum of £20,191.99 to Conegrade Ltd. to clear the company's debt with NatWest Bank. This is to close the company's account with that bank. The £20,191.99 is to be added to the Clarkes' loan account. "(2) It was agreed that the company be granted the use of the premises in March 2000 rent free. A lease, taking effect from 1st April 2000, is being arranged. "(3) It was agreed that ACA and J Clarke would forego their dividend payment on 29th February 2000, this to be posted and paid when affordable. The loan of £20,191.99 being accepted as final payment for the company's property. This virtually clears the company's loan debt to the Clarkes."
The reference to rent free occupation in March (although this was in fact later changed) shows that Mr. and Mrs. Clarke were treated as being the company's landlords already. By this time, there was no suggestion of the company ceasing to use the property so terms for its occupation were needed.
On 16th March, Mr. Clarke wrote to Mrs. Margaret Dainty, a conveyancer employed by the company's solicitors, Messrs. Crombie Collins. He sent her a Minute for inclusion in the Minute Book, which she held. He said:
"We have bought out Conegrade's overdraft with National Westminster Bank and secured for ourselves the property occupied by Conegrade".
He went on:
"I wish you now to proceed with the transfer of title to June and myself as soon as possible as we have paid for it in advance and will probably have to find more support for the company at the end of March, as the company's expanding cashflow is a problem and I have to provide financial support. Please do not worry about the lease for now as you will see that part of my support for the company is to let it use the property rent free."
On the next day, at a Board meeting, the property was spoken of as "now owned by the Clarkes". The company had had management accounts prepared by a Mrs. Julie Wright, though none has been produced in evidence. However, at about this time, it was discovered that she had been falsifying the figures to conceal misappropriation of funds from a company called Courtyard Coatings Ltd., which was then a subsidiary of the company, although it ceased to be a subsidiary later on. By the end of March it seemed that Mrs. Wright's misdeeds had involved stealing some £6,000 or so but not a much larger sum, as had been feared.
At a Board meeting of Conegrade on 31st March the consequences were considered and the meeting resolved as follows:
"(3) It was agreed that the company was in a difficult trading position and, although things were looking much more promising with the introduction of more and more products by our new sales force. To help the company through a difficult transition period and overcome the problems caused by Mrs. Wright's cover-up of her illegal activities of Conegrade and Courtyard, the Clarkes agreed to advance a further £10,000 to Conegrade, this sum to be added to their loan account and repaid as soon as possible.
"(4) The meeting thanked the Clarkes for their support and noted that the company now owed them 16 months' salary, undrawn since November 1998, amounting to £46,678. This was to be paid as dividend but has since been delayed until the company recovers financially."
It was also noted that Brian Bayes had now also been without salary for three months and loan account interest had also not been paid to the Clarkes in the 16 month period. The additional £10,000 agreed was duly paid by Mr. and Mrs. Clarke to the company early in April.
In the meantime, on 27th March, two loans due to former Directors, amounting to some £30,000 odd, had been agreed to be waived and, on 20th March, Mr. and Mrs. Clarke had said that they would not charge the company any rent for April 2000.
Also at the end of March, on the 28th, Mr. and Mrs. Clarke and Mr. Bayes went to see Mrs. Dainty about the transfer of the property. She mentioned the risk of a challenge should the company be made bankrupt and questioned whether they should take advice about that. They did not take up that suggestion.
Having heard Mrs. Dainty's evidence, I am satisfied that she mentioned bankruptcy only as a standard precaution, perhaps because it was clearly not a transaction negotiated at arms' length, rather than because she had any reason to suppose that the company was in fact insolvent.
The agreement and transfer were signed and sealed then or soon thereafter but only dated when clear Land Registry searches had been obtained. The price is recorded as £125,000, and as having been paid direct by the buyer to the seller.
To anticipate one matter but to complete the story of Mrs. Dainty's involvement, early in July Mr. Clarke spoke to her on the telephone about the intended lease to the company. Her notes include the following: "The Clarkes just bought property to reduce loan account -- becoming too large -- then want to lease to the company". The commencement date of the lease was to be 12th May and rent was payable monthly at the rate of £1,000 per month with a five year term. In October, the lease was executed in those terms.
Going back in time, however, on 1st May at a Board meeting it was recorded that there was little prospect of the Clarkes being paid a salary in April or May and that over £50,000 in undrawn salary was due to them. In the light of their support for the company, it was agreed that the company should pay rent to them for March of £1,000 and that this be added to their loan account.
On 9th May a further Board meeting was held. After recording changes to the shareholders, the Minute continues as follows:
"It was agreed that the Clarkes have now completed their part of the agreement made on 11th December 1999. It was agreed, having given the company financial support (£75,000) and practical support for 1 1/2 years for no financial gain (£50,000 salary owed), that, during the month of May, they retire from active participation in the company as agreed by the new Executives. It was the intention of the company to pay the Clarkes' salary owed off slowly when finances recover."
At that point, Mr. and Mrs. Clarke ceased to be active in the company's affairs, though they did not in fact resign from the Board until August, and they remained as shareholders.
I must say something, in outline, about the later course of the company's affairs. The eventual resignation of the Clarkes as Directors was dealt with at a Board meeting on 1st August. By then, the Clarkes had provided the company with a further £5,000. Figures were given for the company's indebtedness to the Clarkes, including loan account, undrawn salary and unpaid rent, of £146,000 or £192,000 -- in each case subject to checking. Mr. Clarke said he thought that these were wrong in not taking off the £125,000 as the value of the building. It was said that the company would start to re-pay the loan account as soon as possible and that dividends would be paid.
A shareholders' meeting was held on 6th September at which it was said that Mr. Clarke said they had not been aware of how critical the cashflow situation had become. They had waived the monthly rent on the main building and the other unit rented from them. In a letter dated 7th October from Mr. and Mrs. Clarke to Mr. Bayes, there is reference to an overdraft of £20,000 and to creditors waiting for their money, but the letter is cast in terms which clearly shows that they hoped that the company would recover.
In October, Courtyard Coatings which, as I have mentioned, had been a subsidiary of the company though, by then, it no longer was and was a debtor, went into receivership owing the company £90,000, none of which was recoverable.
In January 2001 the position became critical and insolvency practitioners were asked to advise. The advice was to wind up the company unless a considerable cash injection was obtained. Mr. and Mrs. Clarke agreed to make a final cash injection of £12,000, which they did. Special terms were agreed for this, including a personal guarantee by Mr. Davies. In fact the sum was not re-paid and they did not call the guarantee.
The company went into creditors' voluntary liquidation on 4th April 2001 with an estimated deficiency for creditors of over £300,000, according to the Statement of Affairs. At that stage, the loan account of Mr. and Mrs. Clarke was put at £45,915. This was made up of elements that I have already mentioned, plus the payment of £1,771 in legal and other fees to do with the sale of the property and £14,500 unpaid rent. It was recorded that Mr. Clarke had undrawn remuneration of £50,000 though, probably, correctly this should have been shown as due to Mr. and Mrs. Clarke.
Evidence was given before me by a Mr. Marshman, one of the liquidators, and by Mrs. Dainty and, for the defendants, by Mr. and Mrs. Clarke and by Mr. Bayes. Nothing turns on Mr. Marshman's evidence since he had no direct knowledge of the relevant facts.
Mrs. Dainty gave evidence of what she was told about the sale. She confirmed the accuracy of her notes. She knew Mr. and Mrs. Clarke reasonably well and knew that they had given financial and moral support to the company. She remembered Mr. Clarke saying, at some stage, that he wanted to keep the company going as it was keeping a lot of people in work but she was not party to any discussion about future support nor was she told about any particular payments made after March other than that the Clarkes paid her firm's bill, although she did understand that the property was to be used rent free for a time. I accept her evidence as entirely reliable and helpful.
Mr. Bayes is a respondent to the directors' disqualification proceedings and has his own solicitors in relation to that. His witness statement was produced at a late stage and was admitted with permission granted at the outset of the trial. I have reservations about some of his evidence. He said, for example, that someone from the company's accountants' firm was on the company's premises as a temporary accountant in February and March 2000 and that they assured the Directors that the company was solvent. It seems that the relevant period was late March and April between the sacking of Mrs. Wright and the date when the replacement took up the post in May.
More seriously, at paragraphs 16 and 17 of his witness statement, he said in terms that the Directors made no inquiries of the accountants as to the legality or propriety of the transaction because they had no thought that it was not entirely solvent.
In the light of that, I cannot accept his oral evidence that they were advised the company was solvent. Probably what he was referring to was that there was a clear audit report for the figures as at 29th February 2000 signed off on 19th May. It sounded as if he meant more than that and his evidence, therefore, has to be treated with care. He did accept, as did Mr. and Mrs. Clarke, one point which shows that the year end balance sheet was not correct, namely that they did not expect to be able to recover the £80,000 owed, at that stage, by Courtyard Coatings, within 12 months. It should, therefore, not have been included, as it was, as a current asset in the balance sheet. If it had not been so included the net liabilities figure should have been at least some £95,000 instead of £65,000, even if one were to include the property at its up-to-date value of £125,000 instead of the book value of just over £73,000.
In fact, the £80,000 should probably have been heavily discounted by a provision, as well deferred, because the accounts of Courtyard Coatings would have shown that it, too, was loss-making. It depended on achieving profitability to be able to pay any part of this debt and the prospect of that was remote.
It is clear from his evidence that the company was going through a difficult time, some parts of its business being currently unprofitable due to severe pressure on prices. He thought the company should go back to its core business which was profitable but that, for the time being, the company depended on continuing credit given by the Clarkes who said the company was not to be pressed to re-pay the loan account.
He was unable to help as to who first proposed that the company should sell the property to the Clarkes, nor could Mr. or Mrs. Clarke. I accept that one subject discussed was the desirability of changing banks to HSBC who could factor the book debts. This could not be done without paying off National Westminster Bank, which had security over both the book debts and the property.
At first, it may have been thought that the proceeds of the factoring would re-pay the whole of the National Westminster Bank debt and, therefore, release the property. Later, it became clear that another £20,000 was needed and the Clarkes paid this. However, they could have provided that loan without becoming owners of the property. They could even have taken security for that loan over the property.
I find that the idea of the transfer of the property was first mentioned by Mr. Clarke. I will come later to the question of what lay behind this.
According to the Clarkes' pleadings, they contended that they gave some £72,000 worth of new money to the company in return for the transfer of the property. Mr. Bayes said that they introduced £60,000 to £70,000 of extra cash as part consideration for the value of the property but he accepted that nothing was discussed about support except for the payment needed to bring the loan account up to the value of the property. He was asked, in chief, about the Minute of 9th May, which I have read out in part, and he said that Mr. and Mrs. Clarke were going to and did provide additional funding for the company which came to £75,000. In the light of his answer later in cross-examination, that answer has to be very much qualified as due to hindsight.
Mr. and Mrs. Clarke both gave evidence. I accept them both as honest witnesses trying to do their best to assist the court. Mr. Clarke had a pronounced tendency not to wait for the end of counsel's question before answering and, even when he did wait, not to limit his answer to the proper ambit of the question.
However, I bear in mind that he had been involved with this company -- running it and trying to keep it going -- for the best part of 25 years, and its eventual failure must have been deeply disappointing to him. He has medical problems of his own and he referred to other personal problems, in evidence, of which I need say no more. He is a forthright man, no doubt accustomed to saying what he wants to say and having a good deal he wanted to say about the company and the particular transaction. His memory for detail and for dates is not particularly good and he had a tendency to answer a question directed to a particular point in the sequence of events by reference to hindsight. His evidence was, therefore, not always as helpful or reliable as I might have hoped.
Mrs. Clarke was fully committed to and active in the company. She prepared the Minutes of the meetings from her husband's dictation. She was clear in her views in her evidence and provided some vivid comments on the history and the situation.
Both of the claims before me turn, in part, on an analysis of what was the relevant transaction between the company and Mr. and Mrs. Clarke. I propose to make findings of fact as to that before going on to the other matters that are relevant in relation to the separate claims.
Mr. Lawson-Cruttenden, appearing for Mr. and Mrs. Clarke, submitted that there was a rolling or developing transaction. Clearly, the matter was discussed and agreed, first, in principle and, later, in successively greater degrees of detail. However, it is necessary to form a view as to the terms on which the property was transferred as they finally took shape. In one sense, the answer is to be found in the agreement of transfer, but those only show that the consideration was £125,000 and that it had already been paid. Further inquiry is necessary to see how that sum was made up. The agreement and transfer are dated 17th April 2000, but that is, in a sense, a fortuitous date since the documents were in final form by the end of March, signed and sealed in escrow, subject to clear searches being obtained.
The stage at which instructions were given to Mrs. Dainty to proceed with the transaction was 28th March. That seems to me to be the last date at which one can properly look at the position. The earliest is 1st March because the previous resolutions were only decisions in principle, the value of the property being then not known.
According to the 1st March Minute, the consideration was for £40,000 cash just paid and £85,000 off the loan account. In fact, the loan account, according to the company's books, stood then only at £68,428 before the additional £40,000 was paid.
On 16th March, however, £20,192 was paid by the Clarkes to the National Westminster Bank on behalf of the company. That is referred to in the 7th March Board meeting as "the final payment towards the property". That payment, of course, went to pay off an existing creditor so it did not alter the amount of the company's debts, although it did (a) substitute a soft creditor, the Clarkes, for a relatively hard one, National Westminster Bank and (b) enabled the company to take advantage of HSBC's debt factoring facility.
In those circumstances, it seems to me that the Clarkes can legitimately claim that this sum of £20,192 was real new cash introduced for the company's benefit. That being so, I regard it as proper to treat the £125,000 consideration as having been provided as to £60,192 by new money introduced by the Clarkes and, as to the balance of £64,808, by setting it off against their pre-existing loan account.
Mr. Lawson-Cruttenden submitted that the consideration for the transfer of the property also included a commitment to provide further support to the company, at least up to the value of the property.
Mr. Clarke said, in evidence, that he firmly intended to go on supporting the company as long as it needed support and that he would provide support at least to the value of the property. He said that, from February 2000 onwards, he did in fact provide more than £125,000 support, taking into account undrawn remuneration and rent not charged or waived or simply not paid. He did say that he did not mention any such commitment to the management at any time between December 1999 and April 2000 but that he and Mrs. Clarke had agreed on it. But he also said that his willingness to continue supporting the company was well known and would be taken for granted by the management in any event.
In my judgment, there is no basis for Mr. Lawson-Cruttenden's contention that the consideration for the transfer included any commitment to provide further support for the future. No such commitment was mentioned, and deliberately so. Even if present in Mr. and Mrs. Clarke's mind, it could have no contractual force. The fact that the Clarkes were known to be loyal and generous to the company and might be expected to continue to be, and that in fact they did go on supporting it, cannot make any of the later support they did in fact provide part of the price of the £125,000 which, as recorded in the transfer, had already been paid and which, as recorded in the Minute of 9th March, included a final payment, being £20,192. He cannot even bring into the equation, in my judgment, for these reasons the £10,000 paid early in April which is not in any way linked in Board Minutes to the transfer and was paid after the final instructions to proceed had been given and the documents, including the reference to the price having already been paid, had been signed.
Thus, while I accept that Mr. and Mrs. Clarke did pay £10,000 in early April and gave further financial assistance to the company thereafter in cash and through not taking payment of sums due, I cannot accept that more than £60,192 out of the £125,000 is to be regarded as new money introduced into the company on account of the purchase.
The payments and other benefits afforded by the Clarkes which do not fall to be taken into account include the £10,000 paid in April 2000, £5,000 paid in July 2000, the £12,000 paid in early 2001, the period of work on the part of each of Mr. and Mrs. Clarke from December 1999 to May 2000 during which they took no remuneration and the rent concessions of one kind and another which are put at £14,500.
They also included payment of Mrs. Dainty's firm's legal bill though I doubt whether the £881 paid for the valuation fee should be in the same category since that was clearly commissioned by the Clarkes and it was their debt in any event. The evidence does not allow me to put a figure on the amount of undrawn remuneration accruing to Mr. and Mrs. Clarke during the relevant period, though I have mentioned the figures that were given at the time for the amount of this indebtedness.
On the basis of this finding I will now consider, first, the claim based on section 320 of the Companies Act and start with the statutory provisions. Section 320 is headed:
"Substantial property transactions involving directors, etc."
Under subsection (1), subject to irrelevant exceptions,
"a company shall not enter into an arrangement –
(a) whereby a director of the company"
as Mr. and Mrs. Clarke were
".... acquires or is to acquire one or more non-cash assets of the requisite value"
as the property was
"from the company .... unless the arrangement is first approved by a resolution of the company in general meeting."
What is said for the company is that there was no shareholders' meeting and, therefore, no resolution approving the arrangement. So the transaction is in breach of the section and the transaction gives rise to an obligation on the Directors to account for any gain and to indemnify the company against any loss.
Mr. Russen, for the company and the liquidators, contends that the loss was of £85,000 but, on the basis of my finding already stated, would say that it was £64,808.
Mr. Lawson-Cruttenden accepted that there was no meeting convened as a general meeting of the company but points to the fact that all three shareholders were present, albeit in their capacity as Directors, at meetings at which the transaction was approved by the Board on 11th December 1999, 2nd February 2000, 1st March 2000 and 7th March 2000.
He prays in aid the decision of Buckley J. In re Duomatic Ltd. [1969] 2 Ch. 365. That case arose in relation to the approval of remuneration of the Directors under Article 76 of Table A to the 1948 Companies Act. In that case there was also a preference shareholder who, in the given circumstances, had no right to receive notice of or attend meetings and it was held that the absence of his consent was irrelevant where all those entitled to attend and vote did in fact agree.
Buckley J. said this at page 373C: "In other words, I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be."
That proposition is not entirely general and a doubt has been expressed in DeMite v. Public Health Ltd. [1998] BCC 638 as to whether it applies in relation to section 320. For my part, however, I do not see why, at any rate where there has been a meeting attended by all those who were entitled to attend and vote at a general meeting and that meeting has considered the matter and has resolved, in terms, that the company shall enter into the particular transaction, the fact that the Minute is headed "Board Meeting" rather than "General Meeting" and was not convened on the notice proper for a General Meeting and was attended by a Director who does not hold shares, should make it impossible to regard section 320 as having been satisfied.
Mr. Russen submitted that it is necessary to be clear as to what is being approved and I entirely agree as to that. But the Minute of 1st March is clear, and it was modified by that of 7th March in only one respect, but a clear one, namely, to bring the £20,192 into account.
Accordingly, in my judgment, the transaction whereby the property was sold by the company to Mr. and Mrs. Clarke for £125,000 of which £60,192 was paid in February and March as new money and the balance was set off against the pre-existing loan account was approved as required by section 320 on 7th March by the meeting, expressly held as a Board meeting, amending that which had been approved at the previous Board meeting on 1st March; both of those meetings being attended by all three shareholders who agreed unanimously in favour of the transaction. I therefore hold that there was no breach of section 320 in relation to the arrangement as I hold it to have been.
Mr. Lawson-Cruttenden had a further submission which I should mention, although it does not arise on my finding. He said that the £10,000 paid in April was part of the consideration and, although not approved in terms in advance, it was in fact ratified after the event by the Board meeting of 9th May, also attended by all the then shareholders. This depends on a proposition that the £75,000 support there referred to was regarded as part of the completion by the Clarkes of their part of the agreement made on 11th December, that is to say, the agreement for the transfer of the property.
Even if I were wrong about the status of the £10,000, I do not see that this Minute is to be read in that way. There are two separate statements. First, the agreement for transfer of the property has been fully performed. Secondly, the Clarkes having done what is referred to specifically in the Minute, part of which is plainly not relevant to the property transfer, they are to retire from active participation. Quite apart from issues about subsequent approval under section 320, this would not have sufficed on the facts.
In the Clarkes' defence to the claims based on section 320 they contended that almost £73,000 was to be regarded as the new money introduced under the transaction but they relied on the Board meeting on 1st March 2000 as having approved the arrangement and as being as effective as if it had been convened as a general meeting. I disagree on the sums and I think the 7th March meeting is also relevant but I hold that the defence is well made out.
I therefore turn to the claim based on preference under section 239 of the Insolvency Act 1986. I need to start by referring to several statutory provisions. Section 239 allows an office-holder to apply for an order under the section where a company has, at a relevant time, given a preference to any person. The Clarkes being creditors of the company, a preference was given to them under subsection (4)(b):
".... if -- (b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done".
In the Clarkes' defence, they admitted that this was satisfied by the transfer of the property, though only to the extent of the difference between £125,000 and the new money introduced, which they put at almost £73,000. On my finding, the admission would show a preference of £64,808.
Mr. Lawson-Cruttenden does not admit that there was any preference because he contends that all the later support should come into the equation. I reject that. Plainly, if the company had gone into insolvent liquidation in late April 2000 the Clarkes would have been in a better position, having exchanged their unsecured debt for the freehold property. The only extent to which that is to be qualified is the new money introduced under the transaction, which is why I quantify the preference at £64,808.
Moving on, however, and before I consider what is meant by "the relevant time" in section 239(2), I must read subsections (5) and (6). "(5) The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b). "(6) A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5)." Clearly, therefore, it is for Mr. and Mrs. Clarke to rebut the presumption that the company was influenced by the desire to put them in such a better position.
As regards "the relevant time", there are two matters to be considered. Under section 240(1), there is a two year cut-off date before the onset of insolvency and this transaction is clearly within that period. But, under subsection (2), it must also be shown that, at the time, the company either was unable to pay its debts or that it became so in consequence of the preference; inability to pay its debts having the same meaning as under section 123 of the Act.
There is a presumption in this case, too, against a connected person which reverses the burden of proof but, for reasons not apparent to me, this only applies for the purposes of section 238, which is concerned with a transaction at an undervalue, and not for the purposes of section 239. Therefore, the burden is on the liquidators to satisfy the court on the question of insolvency.
So the questions arising are: Can the Clarkes rebut the presumption that the company was influenced by the relevant desire and can the liquidators show that the company was or became insolvent at the time?
I will take the latter point first. A company is insolvent for this purpose either if it cannot pay its debts as they fall due (see section 123(1)(f)) or if the value of the assets is less than that of its liabilities taking into account contingent and prospective liabilities (see section 123(2)).
The company's accounts, as at 29th February 2000, were approved by the Board and passed by the auditors on 19th May with no qualification. The profit and loss account shows an operating loss of £68,484 for the year (up from £18,206 the previous year) and a loss for the year of £81,694 (up from £34,838 the previous year). The balance sheet shows net current liabilities of £65,651 as against current assets a year before of £7,510 and total net assets of £34,332.
These figures include the property at its net book value of £73,787 rather than its current value of £125,000. The position could be improved by £51,213 on that score. However, as I have said, the £80,000 debt owed by Courtyard Coatings was extremely doubtful at all and was certainly not a current asset. Moreover, the accounts do not reflect the true extent of the company's indebtedness to Mr. and Mrs. Clarke. As I have said, there was a substantial amount of undrawn remuneration. Already, by the end of February, there was some unpaid rent although that mainly arose later.
Mr. Clarke said these sums were deliberately not added to the loan account because he thought that if they were he would have to pay tax on them. Be that as it may, a position in which, by the end of March, over £46,000 was said to be owed to Mr. and Mrs. Clarke for undrawn salary, which is not referred to anywhere in the company's accounts, is thoroughly unsatisfactory. No steps were taken to have sums due to Mr. and Mrs. Clarke properly recorded as not being due within 12 months (if that be the case) except in relation to the sums covered by the 1995 agreement. Indeed, from time to time, hopes were expressed that something would be paid off for the arrears of salary.
If an additional £40,000 had been shown as due to Mr. and Mrs. Clarke, that would have a further adverse effect on the balance sheet. Mr. Lawson-Cruttenden submits that, as regards the position at the end of March or on 17th April, the company had been relieved of £30,000 odd of debt due to former Directors. This was not formalised until later in the year, but it may be fair to take this into account. By that date, of course, the undrawn salary due to Mr. and Mrs. Clarke was higher. It was referred to as £46,678 in the Board Minutes of 31st March, and by then there was three months' salary owing to Mr. Bayes as well.
It would be inappropriate to apply too mechanical a process to the adjustment of the accounts, but in the absence of a full consideration of the accounts by experts, I can do no more than estimate the true position of the assets against the liabilities by considering how various adjustments might have affected the figures shown in the audited accounts.
In my judgment, taking into account the various matters that I have mentioned, the true position was that the company was insolvent on a balance sheet basis at the end of February 2000, and still so at the end of March 2000 and, if it be relevant, on 17th April.
So far as paying debts as they fell due is concerned, there is no reference to creditor pressure until later in the year in any correspondence I have seen and the evidence was that outside creditors never, for example, refused to supply at this stage. It was the internal creditors who were not being paid and could not be -- Mr. and Mrs. Clarke and Mr. Bayes. These were patient creditors but the fact remains that the company could not pay them as and when they were entitled to be paid sums including, in particular, remuneration.
I find that the liquidators have shown the company to be insolvent at the material time, in the sense of inability to pay its debts as they fell due as well as balance sheet insolvency.
I must, therefore, now consider the question whether the company was influenced by the desire to give a preference to Mr. and Mrs. Clarke. On this, Mr. Lawson-Cruttenden cited to me the judgment of Millett J. (as he then was) in Re MC Bacon Ltd. [1990] BCLC 324, especially the passage from 335E to 336D, which discusses the statutory test in an illuminating way which I take into account but will not read out at this stage. That was not a case of a preference to a connected person but the criteria are the same, subject to the question of who has the burden of proof.
Mr. Lawson-Cruttenden relied on several points for saying that the relevant desire did not influence the company's decision. First, he said the Directors did not consider that the company was insolvent although it had had and was going through difficult times. Second, he pointed to the purpose of the transaction being to obtain more working capital for the company, especially through the HSBC facility. He also relied on the clients' commitment to provide yet further support, but my findings (already made) exclude that as a factor since there was no such binding commitment.
So far as the working capital element is concerned, the transaction gave the company the £40,000 paid in February, the substitution of the Clarkes for National Westminster Bank as a creditor for £20,192 and the ability to enjoy a higher level of bank credit through HSBC. The issue, however, is as to preference for the amount net of the £60,192. The change of banks did not in any way require the transfer of property. Although there were references in the evidence to "restructuring", these were all very vague. None explained in what respect any such thing led to or justified the transfer of ownership of property.
I am therefore left with the optimism of Mr. and Mrs. Clarke as to the company's recovery from its financial difficulties and, therefore, their belief that it was not insolvent as the principal reason for concluding, as Mr. Lawson-Cruttenden invites me to, that the Directors did not have any desire to prefer Mr. and Mrs. Clarke as any element in the process that led them to commit the company to a transaction.
I accept, as Mr. Lawson-Cruttenden submitted, that whether or not people generally or the Directors in particular were influenced by the relevant desire is a subjective matter but it has to be determined objectively and if they did desire a particular result, it matters not that they thought an insolvent liquidation was a remote risk.
Mr. Russen points out, first, that the obvious effect of the transaction was to put Mr. and Mrs. Clarke in possession of a valuable and realisable asset instead of having an unsecured debt with no prospect, in the foreseeable future, of it being paid.
Secondly, he says that is exactly what all concerned wanted and intended to achieve. It was just because the loan account was getting too large that Mr. and Mrs. Clarke insisted on having it repaid by taking the company's most solid asset in exchange. That is apparent from paragraph 7 of the Board Minute of 11th December 1999, from Mr. Clarke's letter to Mrs. Dainty of 16th March and Mrs. Dainty's note of 3rd July.
I am prepared to suppose that one of the reasons why the idea of the transfer of the property came up was the discussion about changing the company's bankers and the need to redeem all property subject to National Westminster Bank security. That may have been what put the idea of the transfer of the property into the minds of Mr. and Mrs. Clarke. But it seems to me clear that the attraction of the idea to them was that the company owed them a great deal, which they knew the company could not pay, and this was a way of reducing the company's debts; that is to say, by reducing this one debt owed to them.
Mr. Clarke spoke of the size of the company's debts as being a problem and, of course, the transfer did reduce that overall level of debt. But it did so at the cost of letting go of probably the company's most realisable asset and only in favour of one internal creditor.
It seems to me that the strongest argument in favour of Mr. and Mrs. Clarke on this score is the fact that they did continue to support the company to a substantial further extent with some cash and more credit. The case would, clearly, have been stronger for the liquidators if the Clarkes, having got the property, had not extended further support.
Does it follow, however, from this that the presumption that the company was influenced by the relevant desire is rebutted? Re MC Bacon Ltd. points out the difference between intention, which is objective and includes the intention to achieve the necessary results of one's actions, and desire, which is subjective and may be at odds with the consequences of actions.
While, therefore, it is a reasonable starting point to say that, the result of the transaction being undoubtedly to put the Clarkes in a better position in an eventual insolvent liquidation, that must have been intended, and on the part of the Clarkes at least, desired, that is not necessarily the whole of the picture.
As Mr. Russen points out, one of the striking features of the case is the absence of any objectively compelling reason for the transfer other than to put the Clarkes into a better position. It was not needed for the change of banks and the restructuring plans are so vaguely described that it is impossible to tell what they entailed. The company was going to continue to use the premises and, therefore, having parted with the freehold, it had to take a lease and, therefore, to accept the obligation to pay rent.
In the end, it comes down to the fact that the Clarkes asked for and insisted on the transfer, thereby placing themselves in a better position than they had been before. They are presumed in this to have been motivated by the relevant desire. Can they rebut this by saying that they considered the company to be solvent and intended to keep it afloat as long as they could?
I accept that this was their position most clearly by reference to the evidence given as regards the meeting with Mrs. Dainty on 28th March in the course of which she mentioned the question of the implications of possible later insolvency. They did not, however, take any advice about that from a solicitor or an accountant. Although the auditors were sent the Minutes of Board meetings, one by one, Mr. Clarke made it quite clear that he did not ask them to advise on any aspect of this. Mr. Bayes said the same in his witness statement.
On the one hand, it seems to me that it would be unsatisfactory that a well-intentioned but ill-founded belief that the present condition and future prospects of a company which is in fact insolvent can result in an undoubted act of preference to a Director escaping the accountability imposed by section 239. On the other hand, of course, the section does require, in conclusion, that the transaction was, subjectively, motivated by the relevant desire.
I have not found the resolution of this issue easy, but having read and re-read the witness statements and my notes of the oral evidence, I come to the conclusion that Mr. and Mrs. Clarke were influenced by the relevant desire. They knew that they would be put in a better position as a result of taking the property. They knew that, essentially, this could only be justified if they were to take the property in exchange for new financial support for the full value of the property.
Mr. Clarke justified this in his own mind and in discussion with Mrs. Clarke by saying that they would, in future, provide more support, if necessary, to that amount. But he deliberately kept this to himself, whatever hopes or expectations the management might have had from knowing them. If he had chosen not to support the company further or had been unable to do so, or if the company had gone down suddenly in circumstances in which he could not try to rescue it, he would not have broken any obligation to the company but would have secured for himself and his wife the property for less, in terms of new cash, than its true value.
Interestingly, one feature of the history is that he is now letting the property to a new company set up by Mr. Davies carrying on a similar business (possibly on a smaller scale) and employing some of the staff. That gives Mr. Clarke some satisfaction in that those employees, at any rate, have continuing employment. But it is not much consolation to the unsecured creditors of the company.
Accordingly, even without regard to the burden of proof lying on Mr. and Mrs. Clarke, and more so having regard to that, I conclude that Mr. and Mrs. Clarke, and through them the board of Conegrade, was influenced by the desire to create the effect of putting them in a better position than they would otherwise be in the event of an insolvent liquidation in causing the company to enter into the transaction by which a preference was given to Mr. and Mrs. Clarke to the extent of £64,808.
The liquidators' case is, therefore, made out on preference though not under section 320. It is not necessary to consider, separately, the issue of breach of fiduciary duty or misfeasance.
In terms of remedy, it seems to me that the consequence is that I ought to order Mr. and Mrs. Clarke, under section 241(1)(d), to pay the company £64,808, no doubt with interest, although this will, of course, increase, by that amount, the debt for which they can prove in the liquidation.