Case note: Liquidator seeking re-payment of school fees that constituted a ‘transaction at an undervalue’

Background

The case concerned a liquidator’s claim against our client (a school) for recovery of sums that had been paid to the school in respect of school fees from a company bank account, on the basis that they constituted a transaction at an undervalue (TUV) which infringed the insolvency legislation, because the company received no benefit/no consideration passed to the company for the payment.

Facts

The company in question was incorporated in April 2017 and traded as a provider of security services. At the material time there was a sole director who was also the sole shareholder of the company. The company entered into insolvent Creditor’s Voluntary Liquidation (CVL) on 2 July 2021 following a special resolution of the shareholders with the Liquidator being appointed on the same day.

The Liquidator carried out investigations into the company’s transactions and reviewed the bank accounts to ascertain if the company had entered into any antecedent – and therefore challengeable – transactions prior to liquidation. It transpired that the client received a payment on 9 April 2021 from the company. The Liquidator pursued our client for repayment under section 238 of the Insolvency Act 1986 (IA86) on the basis, he alleged, that payment was a TUV.

What is a TUV?

Under s 238 IA86 a TUV is one of the ‘antecedent transaction’ claims that may be brought by a liquidator of a company if certain circumstances exist:

1. The company made a gift to a person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or
2. The company enters into a transaction with a 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.

The look-back period for a payment to a company that constitutes a TUV is 2 years prior to insolvency.

In addition, the company must be insolvent at the time of the transaction in question or became insolvent as a result.

Analysis

The company’s filed accounts suggested that it was balance sheet insolvent at the time the payment was made to our client and the Liquidator could produce an aged debtor analysis to show that creditors that existed at the date of liquidation were outstanding at the time of the payment – therefore suggesting the company could not pay its debts as they fell due.

The client could not identify any direct benefit to the company for the sums it paid – the benefit in such a case would ordinarily be for the director or more specifically children of the director.

We sought to argue, albeit without the benefit of the company’s internal accounting records, that the benefit to the company was a corresponding obligation on the director to pay a sum equal to the school fees to the company under a director’s loan account.

Whilst the court have accepted that a collateral contract can form the basis of consideration for a seemingly unrelated payment, each case will turn on its own facts. The fact is that a notional corresponding loan account argument may not be sufficient to justify the school retaining such a payment.

Parents may often decide to settle school fees from their company’s funds rather than from their personal funds, particularly in small owner managed businesses where the directors may treat company money as an extension of their own wealth. Their actual entitlement either as directors or shareholders to receive monies from the company will be determined by company law – in the case of shareholder dividends – or their contractual rights be that as employees or under a director’s service contract, however, in this case the client had no information to support the reason why the company had paid these particular school fees or the legitimate entitlement of the director.

Advice and practical solutions

The use of company funds for personal expenditure comes into stark reality when the company in question goes into insolvency, as was the situation in this case.

We successfully settled this claim, however, the case provides a useful reminder of the issues schools may face when receiving payments of school fees.

Schools may seek to avoid such a scenario by reviewing any receipts from a company when reconciling its bank account. A school can pro-actively manage payments and seek to confirm the solvency of the company; on the face of the publicly available information is the company insolvent? – however, sometimes accounts filed at Companies House can be out of date. If there is any doubt, then confirmation can be sought from the parent of the basis on which the company made the payment on their behalf and that the payment was correctly ratified.

According to the Insolvency Service website the number of registered company insolvencies in May 2023 was 2,552, 40% higher than in the same month in the previous year.  As such it is an issue that all Bursars and finance teams ought to be alive to in the current economic climate.