Simon James Bonney v Graham Lewis Barker

Hearing dates: 12–13 July 2022

Further written submissions: 27 th July 2022

Approved Judgment

This judgment was handed down remotely at 11am on 10 th March 2022 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

ICC JUDGE Mullen

This is my judgment following the trial of the application issued by Mr Simon Bonney and Mr Christopher Newell (“the Liquidators”), as joint liquidators of Fastfit Station Limited (“the Company”), against the Company's former director, Mr Graham Barker (“Mr Barker”), and the company of which he was at the relevant times a director and the shareholder, Fastfit Station MK Ltd (“Fastfit MK”). The Liquidators' claim arises out of the events leading up to the Company's entry into administration on 15 ^th April 2014 and the pre-packaged sale of its business and assets to Fastfit MK under a sale and purchase agreement entered into on the same day (“the SPA”).

The Company was incorporated on 8 ^th July 1996 and carried on business fitting tyres and repairing vehicles. Mr Mark Robinson was appointed as a director in that year and Mr Barker was appointed in 2011, having worked with the company as a self-employed consultant since 2000. Fastfit MK was incorporated on 3 ^rd March 2014. Its sole director on incorporation was Mr Robinson. Mr Barker was appointed as a director on 27 ^th March 2014 and was the sole shareholder of Fastfit MK until 18 ^th July 2014, when he transferred his shares to a Ms Amanda Clowes. Mr Robinson resigned as a director of Fastfit MK on 4 ^th April 2014.

The proximity of the incorporation of Fastfit MK to the administration of the Company, and the similarity of the names, might suggest that Fastfit MK's formation was occasioned by the Company's financial difficulties. Mr Barker contends that these things were unconnected and that Fastfit MK, and another company called Grippy Limited, were instead incorporated to facilitate the splitting of the Company's repair and tyre-fitting businesses. However that might be, by 31 ^st March 2014, the Company was undoubtedly insolvent, with a deficit accepted to be likely to have been in excess of £900,000. It is similarly common ground that it was cashflow insolvent. A notice of intention to appoint administrators was filed on 2 ^nd April 2014 and, between 1 ^st April 2014 and the date of administration, payments due to the Company totalling £110,345.09 were instead paid to Fastfit MK (“the April Payments”). This was achieved, at least in part, by new payment terminals being installed at the Company's premises, which were presented to its customers for payment and caused payments to be made to Fastfit MK's Metro Bank account. In any event it is accepted that the Company's debtors were directed to pay Fastfit MK.

The joint administrators appointed were Mr John Dickinson and Mr Carl Bowles of Carter Backer Winter LLP (“CBW”) but the administration was short-lived. On 8 ^th August 2014, the Company entered creditors' voluntary liquidation and the Liquidators were appointed. Shortly thereafter, they began to enquire into the circumstances of the April Payments. On 20 ^th March 2020 the instant application was issued, supported by the witness statement of Mr Bonney and draft points of claim. On 28 ^th May 2020 it was ordered that the draft stand as points of claim and directions were given for the filing of points of defence and points of reply. Further directions for disclosure and evidence were given by consent on 5 ^th February 2021 and the matter was thereafter set down for trial.

The points of claim allege that the April Payments were transactions at an undervalue for the purposes of section 238 of the Insolvency Act 1986 (“IA 1986”). They further allege that Mr Barker breached the duties that he owed to the Company by reason of sections 171–175 of the Companies Act 2006 (“CA 2006”) in causing or allowing it to make the April Payments otherwise than for the benefit of the Company and, specifically, for the benefit of Fastfit MK and personally profiting from those payments by reason of his shareholding in Fastfit MK.

The respondents deny the Liquidators' claims. They say that the April Payments were made with the knowledge and approval of Mr Dickinson, from whom the Company's directors sought insolvency advice prior to administration. The April Payments were made in anticipation of the administration, in order to keep the business running, and thereby preserve its value, at a time when the Company's bank account with Royal Bank of Scotland was anticipated to be frozen.

The points of defence contend in relation to the claim under section 238 IA 1986 against Fastfit MK that:

i) the April Payments cannot fall within the ambit of section 238 IA 1986 because they were not transactions “entered into” by the Company at all;

ii) the bulk of the April Payments, in the sum of £87,495.37, was used to make payments on the Company's behalf to discharge its liabilities;

iii) the deferred element of the consideration under the SPA was increased to reflect the sum of £22,849.72 that was not so used;

iv) no order should be made under section 238 IA 1986 in any event because, if the April Payments had not been made, the Company would not be in a better position because those liabilities would not have been discharged and Fastfit MK “would not have agreed” to pay the enhanced level of deferred consideration provided for in the SPA;

v) the April Payments were made in good faith for the purpose of carrying on the Company's business and there were reasonable grounds for believing that they would benefit the Company so that Fastfit MK has the protection of section 238(5) IA 1986 and, in any event, the court should decline to make an order in the exercise of its discretion.

In relation to the claim against Mr Barker for breach of duty, the points of defence say that:

i) he did not act in breach of duty, having followed the advice received from Mr Dickinson;

ii) the Company suffered no loss by reason of any breach; and

iii) in any event, Mr Barker acted honestly and reasonably and ought fairly to be excused from any liability that he might otherwise have, by reason of section 1157 CA 2006.

The points of defence exhibit a schedule of the payments said to have been made towards the Company's liabilities from the April Payments as follows:

Money paid to the Company's Creditors

The issues

Mr Colclough, counsel for the Liquidators, and Mr Passfield, counsel for the respondents, have helpfully prepared an agreed list of issues disclosed by the pleadings. These can be summarised as follows:

i) Issue 1: Were the April Payments transactions “entered into” by the Company?

ii) Issue 2: Were the April Payments entered into at an “undervalue”?

iii) Issue 3: Is Fastfit entitled to rely on the defence in section 238(5) IA 1986?

iv) Issue 4: What order, if any, is appropriate to restore the position to what it would have been if the April Payments were not made?

v) Issue 5: Did Mr Barker act in breach of duty in causing or procuring the April Payments?

vi) Issue 6: To the extent that loss is a relevant consideration in a breach of fiduciary duty claim, did the Company suffer any loss as a result of the April Payments?

vii) Issue 7: Is Mr Barker entitled to rely on the defence in section 1157 CA 2006?

The legal framework

I will discuss the legal arguments raised by the parties in the context of my judgment on the individual issues. The following is by way of an introductory outline.

Section 238 IA 1986

Section 238 IA 1986 provides:

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

(a) the company enters administration, or

(b) the company goes into liquidation;

and ‘the office-holder’ means the administrator or the liquidator, as the case may be.

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

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

(4) For the purposes of this section and ...