The Risks of Gifts

This is the next in my series of blogs for the Directors Friend.

SUMMARY:

In respect of a risk under Section 238 of The Insolvency Act 1986 (the “Act”) a director must be very mindful where they are transferring company monies to themselves without good reason and / or supporting accounting records. In the following case, the directors had to personally repay significant sums that they were found to have gifted to themselves.

BACKGROUND:

In a recent case (Nicholson and Anor v Sukhjit Ghuman and Others [2016] EWHC 3509 (Ch)) HHJ Barker QC heard the Applicant Joint Liquidators only in a case. The Respondents did not attend.

This was a case that sought to make the first and second Respondents liable for their actions as directors of a company. The claims (amongst others) brought included for undocumented payments to one of the Respondents in the sum of £174,000 and undocumented payments to the other Respondent in the sum of £38,000.

The claims were claimed as transactions at an undervalue. The claims were also claimed as preferences, breaches of duty as directors by way of section 212 of the Act as misfeasance and the claim for £174,000 was also pleaded as an unlawful distribution.

THE LAW:

The Judge did not consider it necessary to have regard to the Applicants secondary cases. I can actually do little better than to set out what the Judge succinctly said at paragraphs 12 to 14 (inclusive):

  • Transactions at an undervalue are addressed in section 238 of the Act.
  • It is a precondition that the company should have entered into administration or gone into liquidation, and the claim is made at the suit of the office holder
  • The issue is whether, at a relevant time, the company gave away or disposed of assets (including money) for no consideration or for significantly less valuable consideration.
  • A relevant time is two years before the onset of insolvency.
  • In this case, it is not necessary to ascertain the precise date for the onset of insolvency because a winding up order was made in July 2010, and no transaction at an undervalue is alleged to have occurred before 2009.
  • Section 238(5) of the Act provides that:

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

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

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

  • Section 240(2) adds a further condition, namely that at the time of entering the transaction at an undervalue the company should either be unable to pay its debts as they fall due or should become unable so to do in consequence of the transaction.
  • This insolvency condition is presumed where the recipient, or other transacting party, is connected with the company. So, the evidential burden is on that party, here Mr. and Mrs. Ghuman, to demonstrate that company’s solvency.

THE JUDGE’S FINDINGS:

The Judge had no hesitation in finding that the Respondents were directors of the company at all material times.

As to evidence of insolvency the Judge was mindful of the evidenced increasing debt to H M Revenue & Customs (‘HMRC’) owed by the company. The Judge found that HMRC was used as a source of funds or working capital. The Judge found that that pointed to an inability to pay debts as they fell due. That was especially so when there was no evidence that the company had made any provision to pay PAYE or NIC.

The Judge found that on the evidence that there was no documentation at all in the company books and records to explain the payments. Absent clear independent or documentary corroborating evidence the Judge was unable to make a finding that the payments were remuneration as asserted by one of the directors.

The Judge concluded that the payments were gifts and consequently transactions at an undervalue.

COMMENTS:

The well-advised director will note the number of different ways in which a claim against them is likely to be pleaded. This maximises the opportunity of the office holder to succeed on one or other of the heads of claim and for an adverse costs order to follow against the director.

Insolvency is typically (as in this case) evidenced by reference (amongst other indicators) to the (increasing) debt to HMRC.

In addition, the case shows that absent documentation or evidence to the contrary that personal liability for transactions at an undervalue is likely to follow with the additional adverse costs consequences.

WHAT TO DO NOW:

If you are faced with worrying insolvency issues with your company, a claim for transactions at under value and/ or other worrying claims for personal liability please talk to me today.  That is in order to protect your position without delay.  The earlier that you speak with me on +44 (0) 1992 558411 the more that I can help.

I am a Hertfordshire / London based solicitor and a full member of the Insolvency Lawyers Association (‘ILA’). Membership of the ILA is a public mark from insolvency peers that a member has the requisite knowledge, skill and experience to advise you.

Until the next time…

THE DIRECTORS FRIEND

 

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