In Re AFM (1932) Ltd (in liquidation)  EWHC 3460 (Ch) the court confirmed that where an applicant is already contractually entitled – as against another party - to be reimbursed, together with interest, by that other party in an amount equivalent to the value transferred by that applicant under a related transaction, there cannot be a transaction at an undervalue pursuant to section 238 of the Insolvency Act 1986.
A construction company, AFM (1932) Ltd (AFM), paid third parties for building work, goods and services to be carried out to a property owned by Belisco Estates Ltd (BEL), totalling £361,528.95 in value. BEL had then failed to reimburse AFM for those payments.
The investigations carried out by the joint liquidators established that Taylor Developments Limited (TDL) sought payment from AFM, in the period between September and November 2013, for the total sum of £171,341 (including VAT) relating to works, goods and/or services provided at the property. As to the remaining balance of £190,187.95, this related to invoices submitted to AFM by other third party contractors for work carried out at the property.
The director of TDL, Mr Taylor, explained that he had been instructed by the occupier of the property, Mr Dockerill, to invoice AFM. Mr Taylor had been advised that a director of AFM, Mr Allen, owed money to Mr Dockerill, and it had been agreed between Mr Dockerill and Mr Allen that the debt should be settled by AFM making the payments for the work carried out at the property.
AFM entered into compulsory liquidation on 9 September 2014 as a result of a subcontractor’s petition issued on 17 June 2014. The joint liquidators sought to recover the payments made by AFM for the works, goods and/or services provided to the property and issued an application pursuant to section 238 of the Insolvency Act 1986, alleging that BEL was in receipt of the benefit of the payments and AFM had received nothing in return.
The court held that there had been a “transaction” and AFM was entitled to be reimbursed, by BEL, for the sums paid by AFM to the third parties for work carried out at the property. However, this was not a transaction at an undervalue (within the meaning of section 238 of the Insolvency Act 1986) because AFM was entitled to be reimbursed for these payments, together with interest.
The issue here was simply a breach of BEL’s obligation to reimburse AFM and, accordingly, AFM had a simple debt claim for the £361,528.95 which it had paid, rather than a claim under section 238 of the Insolvency Act 1986.
Interesting, the judge considered that a Part 7 CPR claim fee is not required in this instance. Please refer to our earlier article "When is an insolvency proceeding not an insolvency proceeding – the use of Part 7 Claims" for more details on how the courts deal with the issue of Part 7 claim fees.
David Steinberg, co-head of the restructuring and insolvency team at Stevens & Bolton comments:
“The purpose of section 238 of the Insolvency Act 1986 is to allow office-holders, in a case where the company had entered into a transaction under which the consideration received by the company was significantly less than the value of the consideration provided by the company, to seek to put the company back into the position it would have been in had the transaction not occurred – i.e. to make good that mis-match between the value given and the value received. The Court made it clear in this case that where the applicant was already entitled to be reimbursed for the full amount of the value which it had transferred under the transaction in question, the fact that the company had not received that reimbursement did not render the transaction impugnable under section 238. Rather, the company had a simple debt claim against the party which was obliged to provide that reimbursement. Given the facts of this case, this was not in any sense a surprising decision. However, there could be other circumstances where the outcome would be far less clear-cut.”