England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS IN MANCHESTER
INSOLVENCY & COMPANIES LIST (ChD)

		Manchester Civil Justice Centre 1 Bridge Street West Manchester M60 9DJ

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His Honour Judge Hodge QC:

1. This is my extemporary judgment in the matter of Whitestar Management Ltd, number 2768 of 2016.
2. This is an application by Mr Stephen Conn and Mr Jonathan Avery-Gee in their capacity, originally as the joint administrators and now as the joint liquidators of the company, for relief under section 238 of the Insolvency Act 1986. The Applicants were appointed as joint administrators of the company on the 24^th August 2016. Just under a year later the company moved into creditors' voluntary liquidation, on the 23^rd August 2017, and the Applicants are now the joint liquidators. The relevant application notice was issued on the 4^th August 2017. The original respondents were Mr David Nigel Thompson and EMS Waste Services Ltd.
3. Pursuant to an order made by His Honour Judge Pelling QC, sitting as a Judge of the High Court, on the 18^th August 2017, Mr Jesse Frayne was joined as the third Respondent to the claim. The first Respondent, Mr David Thompson, was formerly a director and shareholder of the company. He resigned as a director and transferred his shareholding to Mr Frayne on the 21^st December 2015. Mr Frayne was the other director of the company and, following the transfer of Mr Thompson's shares, he became the sole shareholder of the company.
4. There had been a dispute between Mr Thompson and Mr Frayne which had resulted in the presentation by Mr Thompson of an unfair prejudice petition under section 994 of the Companies Act in the Bristol District Registry on the 6^th May 2014. The resulting litigation was protracted and costly. During the course of these proceedings, Mr Mark Halliwell (of counsel), who appears for the Applicants, expressly accepted that there was no suggestion that that section 994 petition was not a genuine unfair prejudice petition. Ultimately, the unfair prejudice petition was settled by way of a Tomlin Order that was ultimately approved by District Judge Rowe on the 18^th January 2016.
5. The schedule to the Tomlin Order, which was made between Mr Thompson, Mr Frayne and the company, provided for Mr Thompson to transfer his shareholding in the company to Mr Frayne and to resign as a director of the company. In return, Mr Frayne was to pay Mr Thompson £244,500, of which £30,000 was to be paid by 4pm on the 4^th January 2016 and the balance of £214,500 was to be payable by 24 monthly instalments of £8,937.50 payable by 4pm on the 15^th day of each succeeding month, the first of such instalments to be paid on or before the 15^th February 2016.
6. The agreement also provided for the payment to Mr Thompson of simple interest on the total balance from time to time outstanding at a rate of 5% per annum. The schedule also provided for Mr Frayne to provide security in the form of a charge over a property by way of security for the instalment payments.
7. Although that agreement was ultimately approved by the District Judge on the 18^th January 2016, all of the documentation had been concluded by Monday 21^st December 2015. On that day Mr Thompson's solicitors, WBW, wrote to the solicitors then acting for Mr Frayne, Hillyer McKeown, attaching the final signed consent order, including the documents referred to in it, their letter to the Court of that day's date, and the scanned stock transfer form, letter of resignation, and declaration and indemnity in relation to Mr Thompson's missing share certificate.
8. Contemporaneously with the conclusion of that settlement of the unfair prejudice litigation, but unknown at the time to Mr Thompson, Mr Frayne had also agreed, in principle, with Mr Troy Stuart, in his capacity as the Managing Director of EMS Waste Services Ltd, to sell what would shortly become Mr Frayne's entire shareholding in the company to EMS Waste Services Ltd.
9. That agreement was reached in principle on or about the 16^th December, although it later changed materially in that the agreement changed from a sale of the shares in the company to a sale of the company's business and assets, and a previously envisaged payment of £100,000 for the shares effectively disappeared from the picture.
10. It is clear from the contemporaneous email traffic that the agreement changed from a share purchase into an asset purchase on or about the 19^th January 2016: see the email from Mr Stuart's solicitor of the 19^th January at page 829 of the hearing bundle.
11. The sale and purchase agreement was eventually only concluded on the 29^th March 2016. It provided for the sale by the company to EMS Waste Services Ltd of the company's business and assets. Although at times it is a little difficult to follow the precise terms of the agreement, the gist of it was that the company's business and assets were sold to EMS for £395,000, which represented the value assigned to those assets in schedule 1 to the agreement, together with interest on the sum of £244,500 that was due to Mr Thompson (correctly described in that part of the agreement as Mr David Thompson) pursuant to the Tomlin Order.
12. The purchase price was effectively paid in the following manner: £30,000 was to be paid on completion, less a sum of £17,875 which had already been paid to Mr Thompson (wrongly described in that part of the agreement as Mr Andrew Thompson) in February and March as the relevant instalment payments under the Tomlin Order.
13. In addition, £30,000 that had already been paid by Mr Frayne to Mr Thompson on the 4^th January, as the first payment under the Tomlin Order, was reimbursed by EMS to Mr Frayne. EMS assumed finance agreement liabilities on behalf of the company in the sum of £159,728.05. The balance of the purchase price, amounting to £187,615.50 as expressed in the agreement (although that may have been arithmetically incorrect), was to be paid to Mr Thompson at the irrevocable direction of the company (described as the seller) by way of equal monthly instalments of £8,937.50 on the 14^th of every month, commencing in March 2016. Interest was also payable to Mr Thompson by way of purchase price in accordance with the Tomlin Order.
14. It is quite clear from the various bank statements I have seen that Mr Frayne made a payment of £30,000 to Mr Thompson on the 4^th January 2016. That, as I say, was reimbursed to Mr Frayne by EMS on completion of the asset sale agreement on the 29^th March 2016.
15. Payment of the monthly instalments of £8,937.50 was made to Mr Thompson by EMS on the 15^th February, the 15^th March, the 15^th April, the 13^th May, the 15^th June, the 14^th July and, finally, on the 15^th August 2016. Thereafter the company went into administration and the administrators, on behalf of the company, entered into a deed of variation with EMS whereby future instalment payments under the asset sale agreement were to be made to the company rather than to Mr Thompson.
16. That however meant that out of the purchase consideration under the asset sale agreement Mr Thompson had received £30,000 on the 4^th January 2016 from Mr Frayne, which Mr Frayne had been reimbursed out of monies received from EMS, pursuant to the asset sale agreement, on the 29^th March 2016. In addition, Mr Thompson had received, pursuant to the Tomlin Order, two payments from EMS totalling £17,875 prior to the entry into the asset sale agreement, and five further payments, totalling £44,687.50, from EMS, pursuant to the Tomlin Order, between March and August 2016 before future payments were redirected from EMS to the company.
17. It is to recover those payments that this application was issued, initially directed to Mr Thompson and EMS alone, but, by way of amendment in August of last year, also against Mr Frayne. The proceedings against EMS were compromised on the 18^th December 2017 by way of a written compromise agreement under which the company received £10,000 from EMS in full and final settlement of any claims against EMS and its Managing Director, Mr Troy Stuart. As a result, EMS has taken no part in the proceedings before me.
18. There is a witness statement from Mr Troy Stuart dated the 16^th December 2017 which is in evidence before me but Mr Stuart did not attend to give evidence and was not cross-examined upon it. The application notice seeks:

(1) A declaration that the sale of the company's business under the 29^th March 2016 asset sale agreement between the company and EMS constituted a transaction at an undervalue within the meaning of section 238 of the Insolvency Act 1986.

(2) Such order as the Court thinks fit for restoring the position to what it would have been if the company had not entered into the transaction.

(3) An order directing Mr Thompson to pay to the Applicants all amounts received by him under, or by reason of, the March 2016 agreement in connection with the purchase price for the company's business and/or an account of the said amounts.

(4) Further or other relief, and

(5) That provision be made for the costs of the application.

19. The evidence in support of the application originally comprised witness statement from Mr Stephen Conn, one of the joint administrators, and Mr Paul Willan, a solicitor with Athena Law, who act as the Applicants' solicitors, both dated the 4^th August 2017. Mr Thompson put in evidence in opposition to the application in the form of a witness statement of the 11^th August 2017. Following Judge Pelling's order of the 18^th August, Mr Conn put in a second witness statement dated the 8^th September 2013. There was a second witness statement from Mr Thompson dated the 16^th August 2017. Mr Frayne put in a short witness statement dated the 20^th September 2017, and there was a third witness statement from Mr Thompson dated the 6^th October 2017.
20. The application came on for hearing before me at 10.30 yesterday morning, Monday the 8^th January 2018. The Applicants are represented by Mr Mark Halliwell (of counsel). Mr Thompson is represented by Mr Andrew Marsden (also of counsel). There is no appearance by EMS. Mr Frayne appears as a litigant-in-person, supported by representatives of the Personal Support Unit.
21. Judge Pelling had given various procedural and case management directions, including (at paragraph 7) a direction that each witness should attend for cross-examination unless the parties had agreed to dispense with the same. For the avoidance of doubt, no party was to be entitled to rely on the evidence of any witness or witness statement whose evidence had not been filed and served, either previously or in accordance with the provisions of Judge Pelling's order.
22. There was no provision that a party could not rely on a witness statement if the maker did not attend for cross-examination. Mr Conn in fact did not attend the hearing. I was told that he was abroad for a funeral. Mr Halliwell therefore applied to rely upon Mr Conn's witness statement as hearsay evidence. He made no application for an adjournment to enable Mr Conn to attend on a future date.
23. Mr Marsden indicated that he would have wished to cross-examine Mr Conn; but he indicated that we would simply have to take Mr Conn's witness statement as hearsay evidence, bearing in mind that it had not been the subject of cross-examination. Mr Willan was tendered for cross-examination and he was cross-examined by Mr Marsden for about an hour. I accept that Mr Willan was an honest and reliable witness who was genuinely doing his best to assist the Court but, inevitably, as the Applicants' solicitor, his evidence was of limited assistance to the Court.
24. At the end of Mr Willan's cross-examination, I asked him whether he had had any personal involvement in any of the matters which were the subject matter of the present litigation. His answer was:

"Never".

He had had no involvement in any of these matters until after the appointment of the joint administrators on the 24^th August 2016.

25. I asked Mr Willan whether he had any personal knowledge of the subject matter of this litigation, over and above the knowledge which he had derived from the documents which were before the Court. Mr Willan's response was that he knew absolutely nothing. The joint administrators and their solicitors had had to recover files from four different firms of solicitors, and to undertake some 12 months of detective work in order to try to work out what had happened. He said that it had been a mammoth task to reconstruct events.
26. Inevitably, I derived little assistance from Mr Willan's cross-examination and anticipate that I would have derived no more assistance had Mr Conn been cross-examined. During the course of his cross-examination, Mr Willan did accept that there was no evidence that entry into the Tomlin Order had involved any misrepresentations on the part of Mr Thompson. Mr Willan also volunteered the information that he accepted that the apparent failure to stamp the share transfer form from Mr Thompson to Mr Frayne had not been something for Mr Thompson to attend to.
27. Mr Willan explained that, rightly or wrongly, the administrators had taken the view that Mr Thompson had known of the deal to sell the assets of the company to EMS at the time of the Tomlin Order. Under the terms of the asset sale agreement, it was Mr Thompson who had received all the cash. Mr Frayne did not appear to have any assets, and therefore Mr Willan explained that the administrators had decided to chase, or to follow, the money, and it was for that reason that they had pursued Mr Thompson rather than initially pursuing Mr Frayne as well.
28. Towards the end of his cross-examination, Mr Willan had expressed the view that the payments made by EMS to Mr Thompson had been extremely unusual. Two substantial payments had been made before any contract had formally been in place. Mr Willan then added that those matters had been wholly unexplained.
29. I asked Mr Willan whether he had sought any explanation from EMS prior to issuing these proceedings and he said, "No, the payments had been unexplained on the face of the documents". The administrators had tried to deduce what was going on, given their statutory obligations to report on conduct in an administration or liquidation. Mr Willan said that it was sometimes counterproductive to ask questions of individuals rather than trying to find primary evidence.
30. At the conclusion of his evidence, I also asked Mr Willan about his evidence that the £30,000 payment had been reimbursed to Mr Frayne by EMS, and he accepted, on the evidence of the bank statements, that such reimbursement appeared to have taken place on the day of completion of the asset sale agreement, the 29^th March 2016.
31. Mr Thompson gave evidence and was cross-examined by Mr Halliwell, for the Applicants, for about 50 minutes before, and 45 minutes after, the short adjournment. Again, I accept that Mr Thompson was an honest and reliable witness who was genuinely doing his best to assist the Court.
32. The third and final live witness was Mr Frayne. He expanded upon the evidence in his short witness statement for about ten minutes before he was cross-examined. He referred to his meetings with Mr Stuart of EMS and said that the deal which had been concluded with EMS had been concluded very quickly and that there had been no previous meetings or discussions prior to the agreement on the terms of the Tomlin Order.
33. Mr Frayne said that the agreement in principle had been reached with Mr Stuart shortly before Christmas. On the email evidence, it would appear that an agreement in principle had been concluded on or about the 16^th December, but there was no final and binding agreement at that stage; and it is clear that the agreement at that stage was one for the sale of shares, and was later converted into an agreement for the sale of the company's business and assets.
34. Mr Frayne's evidence was that his only concern in entering into that agreement had been to try to ensure that all of his staff would continue in employment with the company. He took the view that his staff had worked extremely hard over the years; all were capable guys who deserved to keep their jobs. He felt that he, Mr Frayne, was doing his duty as a director to salvage their incomes.
35. Mr Frayne was cross-examined by Mr Marsden for about 20 minutes and by Mr Halliwell for about 30 minutes. He was then asked some questions by the Court and was given the opportunity to address any matters arising from his cross-examination. Again, I find that Mr Frayne also was an honest witness who was doing his best to assist the Court.
36. The evidence concluded at about 4.10pm yesterday and I then adjourned for submissions until 10 o'clock this morning. Mr Marsden addressed me by reference to his skeleton argument for about 55 minutes. Mr Frayne then addressed me briefly; and Mr Halliwell then addressed me in reply for about a further 50 minutes.
37. It is appropriate at this point to set out my findings on the few disputed matters of evidence. I find that by at least December 2015, the company was balance sheet insolvent, if one disregards tangible assets without which the company would have been unable to continue to carry on its business. I find that the company was also by then insolvent on a cash flow basis. I find that Mr Thompson had been concerned about the company's solvency as early as the 22^nd March 2013: see the letter from his solicitors of that date at page 775 of the hearing bundle.
38. By March 2015, Mr Thompson, through his solicitors, had been made aware that Mr Frayne's solicitors thought the company was insolvent: see emails from Emma Davey, Mr Frayne's solicitor, to Jenny Kemp, Mr Thompson's solicitor, of the 10^th March 2015 (page 771) and 11^th March 2015 (at page 596).
39. Mr Frayne accepted in cross-examination by Mr Halliwell that by December 2015 the company was on the verge of insolvency. If Mr Stuart had not come in when he had, Mr Frayne thought that all the company's employees would have lost their jobs. In his evidence to the Court following his cross-examination, Mr Frayne said that by that stage the company was heading for insolvency.
40. I find that there were various offers and counter offers made to settle the unfair prejudice proceedings, starting with a meeting on the 6^th August 2015 and continuing through October until agreement was eventually reached in principle on or about Wednesday, 16^th December. On that day, the solicitor for Mr Frayne said that he would ask his client to sign the draft Tomlin Order, which he would then supply to Mr Thompson's solicitor so that she could file it with the Court. He also sought confirmation that Mr Thompson's solicitor held the stock transfer form, indemnity, and letter of resignation signed by Mr Thompson.
41. Mr Thompson's solicitor's response on the 16^th December was that she would be submitting them to Mr Thompson for signing at the same time as the order, so would have them prior to concluding settlement: see the exchange of emails at page 631.
42. It was following on from that that, on the following Monday 21^st December, the documents were sent to Mr Frayne's solicitors, signed by Mr Thompson, and the order was submitted to the Court for its approval: see the letter at page 632, together with the accompanying signed stock transfer form, letter of resignation as a director and undertaking and indemnity in respect of the missing share certificate, at pages 633 to 638 of the hearing bundle.
43. I accept Mr Thompson's evidence that he had no awareness whatsoever at that time of the proposed transaction, or indeed of any transaction involving either the sale of the company's shares or its assets to any third party such as EMS. I accept that, as stated at paragraph 22 of Mr Thompson's third witness statement, he did not know of the existence of any proposed transaction with EMS in respect of the company. The first he heard of it was by way of word of mouth, in passing from Russell Toghill, who was the Managing Director of Newbery Metals, another local scrap metal recycling business.
44. When Mr Thompson heard about the potential transaction he emailed his solicitor on the 11^th January to ask whether Mr Frayne's conduct in the unfair prejudice litigation and the settlement had been deceitful given that it had now become apparent that he must have known that he was in negotiations with EMS but at no point had said that in the period leading up to the concluded settlement. That email is at page 646 and it states that Mr Thompson had received information from a very reliable source that Mr Frayne was selling the company to EMS.
45. Mr Thompson's solicitor's response was:

"I'm afraid I don't think there is anything you can do about the proposed sale to EMS, apart from hope that it produces a faster payment of the settlement amount by Mr Frayne."

46. In the course of Mr Marsden's closing, I have pointed out that the email from Mr Thompson referred to a sale of the company by Mr Frayne. Mr Marsden realistically acknowledged that Mr Thompson may have had little appreciation of the subtle distinction between a sale of the company and a sale of its assets.
47. As I have indicated, the agreement at that stage was indeed for a sale of the company's shares. The nature of the agreement only changed to a sale of the company's business and assets about the 19^th January 2016.
48. At paragraph 47 of his third witness statement, Mr Thompson states that he realised in February 2016 that there had been a change on site and therefore presumably a transaction with EMS. He began to notice vehicle signs written with the EMS logo were operating from the company's site next door to his own company's premises.
49. Some of the company's staff told Mr Thompson's staff that EMS were taking over. He says that he was somewhat ruffled to discover this, and he discussed it with his solicitors by telephone on the 1^st February. His solicitor's handwritten telephone note is at page 649 and dated the 1^st February 2016. It records that Mr Thompson thought that EMS had bought the assets and taken over the yard at the company's site. Mr Thompson wondered what Mr Frayne would decide to do.
50. At paragraph 47 Mr Thompson repeats that he had no knowledge of the nature or extent of EMS's involvement at the time. He says that he assumed that EMS had either entered into an agreement to purchase the shares in the company, bought the "Bay Skips" side of the business, or had entered into some sort of partnership agreement with Mr Frayne as he remained in situ, as did all the other employees. Having made those observations, Mr Thompson says that he was not particularly surprised when settlement payments into his bank account started being made by EMS.
51. In his witness statement, Mr Stuart says that EMS had taken over the management of the company's business on the 1^st February 2016, which fits in with the date of the telephone attendance note from Mr Thompson's solicitor.
52. Mr Halliwell cross-examined Mr Thompson about what he had thought about receiving payments from EMS. Mr Thompson accepted that he had known that he was being paid by EMS but he did not know why those payments were being made by EMS. It was put to him that this was because the company had been sold to EMS, and Mr Thompson said that was how it had been told to him. He was asked what he had inferred from that, and Mr Thompson said he did not know. He was asked if he had spoken to Mr Frayne and Mr Thompson replied:

"I spoke to my solicitor. We didn't know the deal that Mr Frayne had done with EMS."

53. Mr Thompson said that he was content as long as he was being paid. EMS might have bought his shares; he did not know. He was asked whether he had carried out a company search and he said that he had not done so; and he added that whether or not the information would have appeared on a company search at that date he didn't know. He later went on to say, as related in Mr Stuart's witness statement, that Mr Stuart had later contacted him about a possible purchase of Mr Thompson's own company.
54. Mr Thompson accepted that he had not given anything to the company in return for the monies that he had received from Mr Frayne and EMS. He reiterated that he had had no knowledge of the asset sale agreement.
55. I find, consistently with the evidence of Mr Frayne and Mr Stuart, that Mr Thompson had absolutely no knowledge of the fact or detail of the sale of the company's business and assets to EMS over and above that which I have related from his witness statement, supported by the contemporaneous documents. According to Mr Stuart, the first draft of the asset sale agreement was prepared on or about the 26^th February 2017. Mr Stuart makes it clear, at paragraph 24 of his witness statement, that he met Mr Thompson for the first time only early in May 2016.
56. Mr Thompson's second witness statement addresses the use that he made of the various payments received pursuant to the terms of the Tomlin Order. Significantly, he does not say that he would not have made any of those payments had monies not been received pursuant to the terms of the Tomlin Order. Mr Thompson explained in chief what was set out in the schedule at page 554 of the hearing bundle; and he was asked to expand upon this by Mr Halliwell at the end of his cross-examination.
57. £11,979 had been paid by Mr Thompson to his solicitors, WBW, in respect of legal fees. £19,500 had been paid in relation to a dispute in St Lucia which Mr Thompson confirmed was a pre-existing dispute. £50,000 had been repaid to Mr Thompson's family company, County Skip Hire. That was the repayment of a loan. He was not sure whether the loan had been taken out before December 2015, but it had been taken out to fund his legal costs. A further £9,360 odd had been repaid to Barclays by way of repayment of a bank loan. Mr Thompson was not challenged as to any of those payments; clarification of them was simply sought.
58. That concludes my review of the evidence and my findings of fact. I am now going to move on to the applicable legal provisions and the submissions of counsel, so I think it is convenient that I should do that at 2 o'clock this afternoon. So, I will now adjourn until 2pm.

(Adjournment)

59. This is a continuation of my extemporary judgment in the matter of Whitestar Management Ltd, number 2768 of 2016. Before the short adjournment I had set out the background to this application, the evidence, and made my principal findings of fact. I now turn to the applicable law.
60. Section 238 of the Insolvency Act 1986, headed "Transactions at an Undervalue", applies where a company enters into administration or goes into liquidation; and" the office holder" means the administrator or liquidator as the case may be.
61. By sub-section (2), where the company has at a "relevant time" (as 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 Section 238.
62. Section 240 explains the meaning of "relevant time" for the purposes of section 238. In the present case, the applicable provision is section 240 subsection (1) (a) and is a two year period ending with the onset of insolvency.
63. In the present case the company entered into the asset sale agreement less than five months before the appointment of the joint administrators. I am therefore satisfied that the provisions of Section 240 are satisfied in the present case and it is unnecessary to rehearse them in any detail.
64. By section 238, subsection (3):

"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."

65. By subsection (4), and so far as material for the purposes of sections 238 and 241, a company enters into a transaction with a person at an undervalue if:

"(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."

66. It was accepted by Mr Halliwell that EMS had provided at least some consideration for the asset purchase because it had assumed the finance agreement liabilities amounting to some £159,728 odd. This is not, therefore, a case where the company received no consideration for the transaction. The question is whether the company entered into a transaction for a consideration, the value of which was significantly less than the value of that provided by the company.
67. In the present case, I am entirely satisfied that the consideration provided by the company was the value assigned to the company's assets in schedule 1 to the asset purchase agreement, namely £395,218 odd.
68. As Lord Scott of Foscote pointed out in Phillips v Brewin Dolphin Bell Lawrie [2001] UKHL 2, [2001] 1 WLR 143 at Paragraph 30:

"The value of an asset that is being offered for sale is prima facie not less than the amount that a reasonably well-informed purchaser is prepared in arm's length negotiations to pay for it."

The value that EMS attached to the assets being sold was the sum of £395,000 odd.

69. Although the terms of the asset purchase agreement are somewhat Delphic, it is entirely clear that of the purchase consideration being paid by EMS to the company, £187,615.50 was to be paid to Mr Thompson at the company's irrevocable direction by way of equal monthly instalments of £8,937.50. Those were the payments to which Mr Thompson was entitled under and in accordance with the terms of the schedule to the Tomlin Order, and which were to be paid to him by Mr Frayne.
70. In addition, the asset purchase agreement gave credit for the two instalments that had previously been paid by EMS to Mr Thompson in February and March 2016, amounting to £17,875.
71. For Mr Thompson, Mr Marsden submitted that the fact that EMS was directed to pay part of the total sale consideration to Mr Thompson does not change the fact that the consideration payable for the assets transferred was, and is, the sum of £395,218 odd, plus certain interest. There is no evidence that the company's assets had a value in excess of that sum. Consequently, he submits that the jurisdiction conferred by section 238 of the Insolvency Act is not engaged at all because there was no transaction at an undervalue.
72. Mr Marsden elaborated upon that submission in his oral argument to the Court. He pointed out, first, that a conventional contractual analysis looks for the consideration moving from the promisor, in this case EMS, and does not look for it to move to the promisee, in this case the company.
73. Secondly, Mr Marsden submitted that if it was important to look at the consideration actually received by the company, the company had received an equivalent benefit from the very act of making payments to Mr Thompson. He submitted that the company thereby enjoyed the benefit of an asset in the form of a right to take proceedings against Mr Frayne on either a contractual or a restitutionary basis as a result of the direction that it had been given to make payment of part of the sale consideration to Mr Thompson in discharge of Mr Frayne's pre-existing liability under the Tomlin Order to Mr Thompson.
74. Mr Frayne's existing liabilities to Mr Thompson had been discharged pro tanto by the payments and therefore the company should have a contractual restitutionary claim against Mr Frayne. Mr Marsden submitted that, in reality, the Applicants should have been pursuing Mr Frayne from the very outset in respect of the benefit that he had derived from the diversion from the company to Mr Thompson of the sale proceeds. He pointed out that although the administrators, and now liquidators, had questioned Mr Frayne's financial position, there had been no examination of that.
75. Mr Halliwell, for the Applicants, submitted that the consideration for the purposes of section 238, subsection (4)(b), had to be one received by the company which had entered into the transaction. He pointed to the terms of section 238, subsection (4)(a), which provides that a company enters into a transaction with a person at an undervalue if a company enters into a transaction on terms that provide for the company to receive no consideration.
76. The emphasis in section 238, subsection (4)(a) was upon the receipt of consideration by the company entering into the transaction. Mr Halliwell submitted that the Court had to construe section 238 (4)(b) consistently with the terms of the preceding paragraph (a). That paragraph referred, and looked, to the consideration received by the company; and section 238 (4)(b) should be construed in the same way so that one needed to compare the consideration received by the company with the value of the consideration which it provided. I accept that submission.
77. In my judgement, one needs to compare the consideration provided by the company with the consideration that it receives for the purposes of deciding whether the consideration received was significantly less than the value of the consideration provided.
78. The consideration must, in my judgement, either be payable to, or be in discharge of a legitimate liability of, the vendor company for the purposes of making the value comparison in section 238 (4)(b). That achieves consistency with the preceding paragraph, section 238 (4)(a), and it is also consistent with economic and commercial common sense.
79. A company enters into a transaction at an undervalue if it receives a consideration which is significantly less than the value of the consideration that it provides. The fact that the other party to the transaction provides consideration to a third party is in my judgement to be disregarded, save to the extent that the receipt by that third party enures to the benefit of the other party entering into the transaction.
80. So, I reject Mr Marsden's submission. In my judgement, this was clearly a transaction at an undervalue because the company received, or was due to receive, and would but for the deed of variation have received, at least £187,615 odd less than the value attributed to the value of the company's assets by EMS as the purchaser and other party to the asset purchase agreement.
81. Subsection 238 (5) provides that the Court shall not make an order under Section 238 in respect of the 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."

82. Mr Halliwell points out that the requirements of section 238, subsection (5) are cumulative. All three of the ingredients must be satisfied for reliance to be placed by a respondent upon that subsection. I accept that submission. In the present case, the company did not enter into the transaction for the purpose of carrying on its business because the transaction involved the sale of all of the company's business and assets, thereby disabling it from continuing to carry on its business.
83. Further, at the time the company entered into the asset sale agreement, there were no reasonable grounds for believing that the transaction would benefit the company. At that time the company was insolvent and therefore benefit has to be judged by reference to the interests of the company's creditors. By diverting a substantial part of the purchase consideration away from the company, the company's creditors were disadvantaged, and therefore there could be no reasonable grounds for believing that the transaction would benefit the company.
84. I should say that I accept that Mr Frayne genuinely believed that the transaction would benefit the company's employees, and that it has done so; but in a situation where the company was insolvent, and known to be such by Mr Frayne, the benefit of the employees is not the relevant criterion. So, I am satisfied that there was a transaction at an undervalue for the purposes of section 238.
85. One therefore turns to the orders available under section 241. As Mr Halliwell points out, the various heads of relief identified in section 241, subsection (1), are just examples of the type of relief that can be granted on a section 238 application. They are by way of exemplification, and not of limitation or restriction; but, as Mr Halliwell points out, one of the heads of relief available in section 241, subsection (1)(d), is that an order may:

"require any person to pay, in respect of benefits received by him from the company, such sums to the office holder as the Court may direct".

86. By Section 241, subsection (2), an order under section 238:

"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…; 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 transactional 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 that payment is to be in respect of a preference given to that person at a time when he was a creditor of the company."

87. In the course of his skeleton argument, Mr Halliwell sought to invoke the provisions of section 241, subsection (2A). That provides that

"where a person has acquired an interest in property from a person other than the company in question, or has received a benefit from the transaction or preference, and at the time of that acquisition or receipt—

(a) he had notice of the relevant surrounding circumstances and of the relevant proceedings, or

(b) he was connected with, or was an associate of, either the company in question or the person with whom that company entered into the transaction or to whom that company gave the preference,

then, unless the contrary is shown, it shall be presumed for the purposes of paragraph (a) or (as the case may be) paragraph (b) of subsection (2) that the interest was acquired or the benefit was received otherwise than in good faith."

88. In his skeleton argument, Mr Halliwell submitted that section 241, subsection (2A) imposes a presumption that the transaction was not made in good faith where the third party had notice of the relevant surrounding circumstances. By virtue of section 241, subsection (3), the relevant surrounding circumstances are the fact that the company in question entered into the transaction at an undervalue.
89. However, it is not only notice of the relevant surrounding circumstances that is required by subsection (2A). Notice is also required of the relevant proceedings. Subsection (3A) has the effect of determining whether for those purposes a person has notice of the relevant proceedings. By subsection (3A), where section 238 applies:

"by reason of a company's entering administration, a person has notice of the relevant proceedings if he has notice that -

(a) an administration application has been made,

(b) an administration order has been made,

(c) a copy of a notice of intention to appoint an administrator under paragraph 14 or 22 of Schedule B1 has been filed, or

(d) notice of the appointment of an administrator has been filed under paragraph 18 or 29 of that Schedule.

90. There is no suggestion, and could be no suggestion, that either Mr Thompson or Mr Frayne had notice of the relevant proceedings within the meaning of subsection (3A). That is because the administrators were not appointed out of Court until the 24^th August 2016, almost five months after the entry into the asset sale agreement.
91. Mr Halliwell contended that the requirement for notice of the relevant proceedings applied only where there were relevant proceedings. He submitted that the Court should read section (2A), paragraph (a) as though after the words:

"and of the relevant proceedings"

there were inserted the words, "if any", or as though the concluding words of paragraph (a) read, "and of any relevant proceedings". I reject that submission. It would involve reading words into the section that are not there. It would also mean that there would be no need for any requirement of notice of the relevant proceedings, and no need for the elaborate provisions identifying where a person had notice of relevant proceedings contained within subsections (3A) and (3B).

92. In my judgement, subsection (2A) is not engaged and the Applicants can place no reliance upon it because there is no suggestion that either Mr Thompson or Mr Frayne had notice of the relevant proceedings, as required by subsection (2A), paragraph (a). Therefore, the Applicants are unable to rely upon the presumption in section 241, subsection (2A).
93. The question then falls to be considered: can either Mr Thompson or Mr Frayne invoke the protection of section 241, subsection (2)? Mr Halliwell relies upon the decision of the Court of Appeal in the case of Re Sonatacus Ltd [2007] EWCA Civ 31, reported at [2007] 2 BCLC 627, as authority for the proposition that the burden falls on Mr Thompson and Mr Frayne to show that they acquired the relevant benefit from the transaction in good faith and for value. At paragraph 24 of his judgment in that case the late Sir Martin Nourse said that to his mind it was obvious, both from the language and structure of section 241, subsections (1) and (2), and as a matter of common sense, that the onus of showing good faith rested on the Respondent to a section 238 application. I was also referred to paragraphs 28 and 29 of Sir Martin Nourse's judgment. I accept Mr Halliwell's proposition; and, in my judgement, it applies also to the onus of showing that the benefit was received for value.
94. I should add that Mr Halliwell also relied on paragraphs 29 to 30 of Lord Scott's judgment in Brewin Dolphin in support of his submission, which I have already accepted, that on its true construction section 238, subsection (4)(b) looks to the consideration received by the company when determining whether a transaction is at an undervalue. That reinforces the conclusion at which I have already arrived without reference to Lord Scott's observations.
95. In the present case, Mr Marsden submits that Mr Thompson has discharged the burden that lies upon him of showing that he received the relevant payments in good faith and for value. He submits that Mr Thompson gave value because the payments received from EMS discharged the liability that otherwise would have fallen upon Mr Frayne under the terms of the Tomlin Order and because, having received the relevant instalments, Mr Thompson did not pursue Mr Frayne for the recovery of those monthly instalments which he had received from EMS.
96. He points out that if Mr Thompson were to seek to recover those payments from Mr Frayne now, the prospects of enforcement may well have changed since the payments were received between February and August of 2016. As to the requirement of good faith, Mr Marsden submitted that it was not incumbent upon Mr Thompson to make any enquiries as to the basis upon which he had been receiving payments from EMS. There could have been many viable bases for the payments being made to him by EMS rather than Mr Frayne. It was not incumbent upon Mr Thompson to investigate the arrangements that had been made between Mr Frayne and EMS for the discharge of the liability assumed by Mr Frayne to make those payments under the terms of the Tomlin Order, and Mr Thompson had not sought to do so.
97. The monies had been due to come to him as a term of the settlement of the unfair prejudice petition and Mr Thompson had no knowledge of the terms of the asset sale agreement. Mr Thompson can therefore rely upon the good faith provisions of section 241, subsection (2). Mr Halliwell submitted that good faith was not established for a number of reasons. First, Mr Thompson was aware of the financial difficulties of the company when he had received the various payments. Secondly, as a director until the 21^st December 2015, Mr Thompson had had a non-delegable duty to satisfy him that the affairs of the company were being conducted properly. If he stood back and did nothing, he was acting in breach of his duties to the company. Furthermore, he had in any event been advised in March 2015 that the company was insolvent. He was aware that Mr Frayne had entered into some form of agreement with EMS. He was aware either that the company itself had been sold or that its assets had been sold. He was in fact receiving part of the purchase price at a time when he knew the company was insolvent. In those circumstances, it was said that Mr Thompson had not acted in good faith.
98. As to the requirement of providing value, Mr Halliwell submitted that Mr Thompson had provided no consideration for the payments that were made to him by EMS. The Tomlin Order had been made quite separately. Mr Thompson was entitled to receive payments under the Tomlin Order; but he provided no value for the payments that were being made to him by EMS in partial discharge of Mr Frayne's obligations under the terms of the Tomlin Order.
99. In my judgement, Mr Thompson has shown that he has received value for the payments. He accepted the payments in discharge of the pre-existing liabilities of Mr Frayne under the terms of the Tomlin Order. In my judgement, that constitutes value; but I am not satisfied that Mr Thompson has discharged the burden upon him of proving that he acted in good faith.
100. Mr Thompson was aware by the 11^th January that there were rumours of some transaction between Mr Frayne on behalf of the company and EMS. In the email he sent to his solicitors on the 11^th January, Mr Thompson said that he had received information from a very reliable source that Mr Frayne was selling the company to EMS.
101. Later, on the 1^st February, according to the solicitor's attendance note, he expressed it in terms of EMS buying the assets of the company. I accept that Mr Thompson may not have known the precise form that the transaction took; but he did know that he was receiving payments purporting to be made under the Tomlin Order from EMS, and not from Mr Frayne, who was the person obliged to make them.
102. In my judgement, before accepting them in discharge of Mr Frayne's liabilities he should have inquired as to the circumstances in which they were being made. He knew that the company was insolvent; he appreciated that there may have been a sale by the company of its assets to EMS. He should have made inquiry as to whether the payments were being made by EMS, as was in fact the case, as part of the consideration for the company's assets which should have been paid to the company and not to Mr Thompson himself.
103. Mr Thompson made no such inquiry. In my judgement, that amounts to a lack of good faith. In any event, Mr Thompson has not demonstrated that there was good faith on his part. So far as Mr Frayne is concerned, he knew all the relevant circumstances; he provided no value himself for the payments that were being made in discharge of his liabilities to Mr Thompson. There can be no question of either good faith, or the provision of value, on Mr Frayne's part and therefore he cannot rely upon the provisions of section 241, subsection (2).
104. I should make it clear that the situation is different, so far as Mr Thompson is concerned, in relation to the £30,000 payment because that was made by Mr Frayne and not by EMS and it was made before Mr Thompson had any notice of EMS's potential involvement. The £30,000 payment was made on the 4^th January and Mr Thompson was only put on notice of EMS's involvement on the 11^th January.
105. I have thus far concluded that there was a transaction at an undervalue and that, except in the case of Mr Thompson and the £30,000 payment, neither Mr Thompson nor Mr Frayne can rely on the provisions of section 241, subsection (2).
106. I then turn to the terms of the relief that may be available to the Applicants under section 238(3) and section 241(1). During the course of the hearing, Mr Halliwell accepted that the Applicants could not advance any claim against Mr Thompson to the £30,000 paid to him on the 4^th January 2016 because that sum had been paid by Mr Frayne. So far as that £30,000 and Mr Thompson are concerned, I have no doubt that that sum is irrecoverable for three reasons.
107. First, the £30,000 was not a benefit received from the company, but from Mr Frayne. Secondly, the £30,000 was received by Mr Thompson in good faith and for value. Thirdly, and in any event, even if the company had not later entered into the asset sale agreement, the £30,000 had already been received by Mr Thompson, and he would have been entitled to retain it because he had an existing contractual entitlement to that money from Mr Frayne, who had paid it. Therefore, it cannot be said that if the company had not entered into the asset sale agreement, the £30,000 would not have been received by Mr Thompson. It follows that the Court cannot make an order under section 238 because the requirement of section 238(3) is not satisfied.
108. I turn then to the two payments that were made in February and March to Mr Thompson. Those payments were made before the entry into the asset sale agreement. Mr Halliwell submits that I can nevertheless view them as payments that would not have been made but for the asset sale agreement because of the wide meaning attributed to a "transaction" by section 436, subsection (1) of the 1986 Act, which defines "transaction" as including not only an agreement but also "an arrangement".
109. It is said that there was an arrangement between Mr Frayne and EMS for those payments to be made. I reject that submission. Once again, it seems to me that it is difficult to identify a basis upon which it can be said that those payments, which had been made to Mr Thompson by EMS, with full knowledge of all the circumstances, would not have been made but for the entry into the asset sale agreement. I cannot see how it can be said that an order for the repayment of those sums by Mr Thompson would restore the position to what it would have been in if the company had not entered into the asset sale agreement.
110. The payments had already been made by EMS to Mr Thompson, in full knowledge of the reason for, and the basis upon which, they were being made. I cannot identify any basis upon which either EMS or the company could have sought to recall those payments if the asset sale agreement had not been entered into. Therefore, it does not seem to me that the Court can make an order under section 238 to restore the position to what it would have been if the company had not entered into that transaction because the payments were made without the company entering into the transaction; and the fact that the transaction need not be an agreement seems to me to be nothing to the point.
111. In any event, the application itself seeks an order restoring the position to what it would have been in if the company had not entered into the transaction, which must refer back to the transaction identified in paragraph 1 of the application notice, which is the March 2016 asset sale agreement.
112. Paragraph 3 seeks an order directing Mr Thompson to pay the Applicants all amounts received by him under, or by reason of, that agreement. Mr Thompson did not receive those two payments in February and March under, or by reason of, the agreement. He did so because EMS apparently acceded to Mr Frayne's request that EMS should make the payments in partial discharge of Mr Frayne's liabilities under the Tomlin Order. So, in my judgement, those payments are not recoverable from Mr Thompson.
113. However, it seems to me that the five later payments, totalling £44,687.50, are prima facie recoverable from Mr Thompson. Mr Marsden submits that even if the grounds for making an order under sections 238 and 241 of the 1986 Act are available, the Court nevertheless retains a discretion and that it should not make any order against Mr Thompson.
114. He relies upon observations of Sir Donald Nicholls V-C in Re Paramount Airways Ltd (In Administration) [1993] Ch 223 at pages 239F to 240A, with which Lords Justices Russell and Farqhuarson agreed. Sir Donald held that despite the use of the verb "shall", the phrase "such order as it thinks fit" was apt to confer on the Court an overall discretion. That discretion was said to be wide enough to enable the Court, if justice so required, to make no order against the other party to the transaction under section 238. Those observations were cited, adopted and applied by Mr Thomas Ivory QC, sitting as a Deputy Judge at the Chancery Division, in the case of Singla (Trustee in Bankruptcy of Brown) v Brown [2007] EWHC 405 (Ch D).
115. Mr Marsden referred me to paragraphs 51 to 59 of the Deputy Judge's judgment. At paragraph 54, Mr Ivory made it clear that in his judgement the Court's power to make no order at all, which was recognised by the Court of Appeal as falling within the Court's overall discretion under sections 238 and 241, was not confined to territorial considerations. That was because the Paramount Airways case had been concerned with the territorial scope of the relevant insolvency legislation.
116. Mr Ivory went on to say that he did not read the Court of Appeal as saying that the overall discretion, which was wide enough not to make any order where justice so required, was confined to extra-territorial considerations. On the contrary, it was the fact that the Court had an overall discretion which was wide enough to enable the Court to make no order where justice so required which was one of two answers, or safeguards, against what might otherwise be an unsatisfactory position of the Court having to make an order with extra-territorial effect, irrespective of the justice of the matter. The existence of the overall discretion was one of the safeguards against unjust, or extravagant, extra-territorial effect, but it was said by Mr Ivory not to be confined to it.
117. I accept Mr Ivory's analysis. I accept that the Court always retains discretion not to make an order under sections 238 and 241 where the interests of justice so require; but, as Mr Ivory also recognised at paragraph 59, in the vast majority of cases where the conditions for the application of the section are satisfied, the Court will make an order, although it retains an overall discretion which is wide enough to enable it to make no order where, exceptionally, justice so requires.
118. In the present case, I am satisfied that it is not appropriate to exercise the discretion to make no order recognised in the Paramount Airways and Singla v Brown cases. As Mr Halliwell submitted, the effect of the refusal of relief under sections 238 and 241 would be to benefit a former director and shareholder of the company at the expense, and to the detriment, of the company's creditors. In my justification, there is no proper reason for doing that.
119. I accept Mr Halliwell's submission that, in circumstances where Mr Thompson has received a benefit in terms of payments that should properly have been received by the company, there is no proper basis for withholding relief to the insolvency office holders.
120. Mr Halliwell points out that in the course of his cross-examination, Mr Thompson did not demur from the suggestion that he was seeking to acquire, or retain, a benefit in competition with the company's trade creditors. There is therefore no reason not to grant relief.
121. Mr Halliwell pointed out that there is no evidence before the Court that Mr Thompson is unable to meet any payment that may be ordered against him; and Mr Halliwell pointed to the fact that there was some evidence that in May of 2017, Mr Thompson had been asking for £1.3 million for his interest in the company. Mr Marsden fairly indicated that he had never suggested that Mr Thompson did not have the money to meet any judgment.
122. I have considered whether I should make an order that Mr Thompson make payment only if, and to the extent, that Mr Frayne, upon whom the liability to make the payments under the Tomlin Order fell, is unable to discharge the payments to the Applicants; but there are concerns about Mr Frayne's financial position, which is why the Applicants did not take proceedings against him in the first instance. In my judgement, it would not be right to defer any order against Mr Thompson to see whether a liability to repay can be defrayed by Mr Frayne.
123. So, for the reasons I have given, I am satisfied that the Court should make an order against Mr Thompson that he pay to the company, or its insolvency office holders, £44,687.50, representing the five payments made between April and August 2016, but not the earlier two payments in February and March, totalling £17,875, and not the sum of £30,000 that was received by Mr Thompson on the 4^th January.
124. So far as Mr Frayne is concerned, I am satisfied that he benefitted under the terms of the asset sale agreement to the extent of the £30,000 he had previously paid to Mr Thompson, which was reimbursed to him into his bank account on the 29^th March 2016. I am satisfied that he has also received the benefits of all seven of the payments that were made to Mr Thompson in the total sum of £62,562.50.
125. In the case of Mr Frayne, I see no difficulty about the fact that the first two of those payments predated the asset sale agreement. They were nevertheless taken into account in quantifying the consideration payable to the company under the terms of that agreement. Had those two payments not previously been made, then the consideration payable to the company under the asset sale agreement would have been increased by £17,875.
126. So, in my judgement, Mr Frayne should be ordered to pay the £30,000 plus the total of all seven payments, amounting to £62,562.50 in total. So that is my judgment and the reasons for it.