Case law update
IPA Insolvency Practitioner newsletter, May 2024


An insolvency case law update prepared by Stuart Lindley, Associate Director at Manolete Partners PLC.
Stuart is an Associate Director who joined Manolete’s London team in December 2023, having most recently been an insolvency partner at the London office of a large national solicitors firm. He has over 20 years’ experience of contentious insolvency matters, acting predominantly for insolvency practitioners. Stuart has held an individual ranking in Chambers & Partners for personal insolvency for the last nine years, most recently being described as, “…an excellent lawyer. He has excellent knowledge of personal insolvency and he’s easy to deal with.”
Antecedent transactions; repayment of loan
Bourne & Anor v Manukyan & Anor (Re MM Apartment Letting Ltd) [2024] EWHC 832 (Ch) (16 April 2024)
Background
The company provided agency services, referring European customers who were seeking short-stay holiday accommodation in London, to various accommodation providers. One of the largest of these accommodation providers was a company called NGH.
The company traded from the home of its director, Mr Manuk Manukyan (“MM”), but suffered regular cashflow issues because the business by its nature was low-margin and accommodation providers often required payment in advance of the company receiving payment from its customers.
In March 2017, MM was informed by NGH that it was owed £40,000-50,000 and that it would not allow customers to use booked rooms without immediate payment. The company did not have those funds. Accordingly, MM asked his wife, Yolanda Manukyan (“YM”), who was also the company secretary, to lend £40,000 to the company, which she agreed to do and sent this sum directly to NGH. Despite that payment, monies remained owing to NGH. There was no written loan agreement between the company and YM.
MM was subsequently told that NGH was no longer willing to extend credit to the company, which would henceforth be expected to pay immediately on booking, rather than, as before, within 60 days. As the company extended 42-day credit terms to its customers, its cash flow problems worsened.
As a solution of sorts, certain store credit cards held in YM’s name were used from May 2017 to make payments to NGH on behalf of the company from time to time. Such payments amounted to £36,670.57 and were repaid by the company.
Trading did not improve and in April 2018, NGH presented a petition to wind the company up. The company was wound-up in June 2018.
The Claims
MM admitted receiving an unlawful dividend of £10,000, so that was not in issue.
The liquidator sought relief against MM and YM in respect of various payments (including cash withdrawals) made by the company, acting by MM, from its sole bank account between 14 August 2017 and 13 April 2018, in the aggregate sum of £93,003.73:
- against MM, under ss.212 and/or 238 and/or 239 of the Insolvency Act 1986 (“IA86”), for the whole amount of £93,003.73; and
- against YM, under s.239, IA86, for the aggregate sum of £76,670.57.
The Defence
MM’s case, which he also purported to advance on behalf of YM (who chose not to make written submissions, give evidence, or attend trial), was that:
- He alone was responsible for the operation, management, and financial affairs of the company; that the sums in issue were all paid or used by him for the proper purposes of the company’s business and in return for valuable consideration. YM was the company secretary, but according to MM, had “no idea” about its affairs, and was not involved in its management. MM said they had been separated for some 20 years.
- The company had only one bank account, in respect of which MM was the sole signatory, and only he held a debit card; he accepted that he alone was responsible for all payments and transfers out of the company’s bank account.
- To the extent YM was repaid, those repayments were not made under the influence of a desire to improve her position in the event of an insolvent liquidation. The repayments were made in order to allow for future payment of additional sums and to avoid credit card interest at 40%.
The Decision
The judge noted that as the company’s director, MM was a fiduciary, obliged to act in accordance with the duties in set out ss.171-177 of the Companies Act 2006. He further noted the provisions of s.212, IA86 and, in accordance with the decision in Re Idessa (UK) Ltd [2011] EWHC 804, that once the liquidator proves the relevant payment has been made the evidential burden is upon the respondents to explain the transactions in question.
On the question of solvency, the judge noted that the company was reliant upon YM to pay NGH in March 2017, that YM’s store cards were used for company purposes from May 2017 and that from at least August 2017 MM failed to either understand the company’s financial affairs or control them.
After briefly referring to the unlawful dividend which MM admitted, the judge then turned to the various categories of payments made by MM.
In relation to the cash withdrawals and miscellaneous bank account repayments, the judge found that MM had failed to give an adequate explanation of the purpose of these payments, and failed to show that they were used for proper company purposes.
In relation to payments made in respect of accommodation bookings, the judge accepted that certain payments were evidenced and were of value as they meant that the company was able to provide accommodation to at least some of its customers.
In relation to the repayments of YM’s store card debts, although the judge found that not all the card payments matched payments made to NGH, he accepted that the payments repaid, in part, the liabilities incurred by YM in discharging company debts. It followed that these payments were not at an undervalue but were in return for value by virtue of them discharging company debts. The judge therefore declined to grant relief against MM for making those payments.
The judge did however grant relief against YM on the basis that some of those payments were preferences. MM’s explanation that payments were necessary to avoid high interest charges was rejected, as payments to the card providers were not made promptly. The judge held that the requisite desire to prefer did not have to be the only influencing factor, or amount to a dominant or decisive desire or reason for payment – merely, it must be present and must be found to have influenced the company to act. A subjective desire on the part of MM to protect YM from the consequences of liquidation was consistent with the view that by some means, YM had been repaid any sum which she lent. The judge noted in that regard that YM was not listed by MM as a creditor in the liquidation and that YM had not submitted a proof of debt.
MM was ordered to repay £75,024.35; YM was ordered to repay £8,996.40.
Summary
Besides being yet another example of the court’s unwillingness to take unevidenced use of company monies at face value, this case is useful for its discussion of how unexplained payments can be viewed and treated in the context of antecedent transactions.
Disclaimer: This article provides a general overview of the case and is not intended to be relied upon in place of legal advice.
Content courtesy of IPA corporate partner Manolete Partners PLC.
Please note that guest content does not necessarily represent the views of the IPA.