Who Should Repay Transactions At An Undervalue Made For A Director’s Benefit?

Who should repay transactions at an undervalue made for a Director’s benefit? Should this be the director or the recipient if it is someone else? Typically, if the transaction at an undervalue is indefensible, then it is commonplace for the Court to order the recipient to repay it to the company. However, it is not uncommon for the director also to be held liable due to a breach of duty.

Payments made by a company for the personal benefit of a director could amount to a transaction at an undervalue but various tests need to be satisfied.

Bourne v Tunluk

This was a feature in the matter of Kieran Bourne & Tunluk Ltd v Tunaru CR-2024-BHM-000485 (“Tunluk”) in which the liquidator brought legal proceedings for recovery of money from the company director and a third party. The liquidator’s application was successful against the Director and the third party, Mr Lee.

In Tunluk, there were two fascinating features: 

1. The company in liquidation had obtained two maximum £50,000 bounce back loans when only one was permitted, neither qualified for £50,000 loans and the court found there had been fraudulent trading by the company director.
   
2. Before Tunluk Ltd went into Creditors Voluntary Liquidation, a transaction at an undervalue had arisen by virtue of the company at a relevant time, making payment of some rent for the director.

How Does A Transaction At An Undervalue Arise?

It is the latter issue that this post is concentrated on. The first thing to consider is, what is a transaction at an undervalue? 

A transaction at an undervalue is when financial benefit is provided by a company with inadequate consideration received at a relevant time. 

Example: Director’s Restaurant Bill Paid By The Company

Let’s say the company director has dined at an overseas restaurant whilst on a family holiday and the company’s credit card has come in handy, being used to help the director pay the bill. The company has paid for a meal, but it has not received any benefit from fueling the Director’s calorie surplus. 

The starting point is whether the transaction is, from the point of view of the company, the use of funds for no benefit to the company. 

Then you have to consider whether the transaction took place within 2 years of insolvency. If so, the second tick in the box is met. 

To be safe rather than sorry, you would also want to be able to show that the company was insolvent when the transaction took place. If you can get this third tick in the box, then voila, you are comfortably on your way to transaction at an undervalue land.

Who Could Be Sued In Transaction At Undervalue Land?

When you get to transaction at undervalue land, you then need to scour the area to find where the money can be recovered from; typically, it would involve bringing legal proceedings against a relevant recipient.  

So, who could get sued to make good the loss the company has suffered? 

Should it be the Director or should it be the restaurant that provided the palatial plates of food for the Director to digest?

In Tunluk, the Court put it this way, notwithstanding that it ordered the recipient of the rent, Mr Lee, to repay money received:

Therefore, all in all, whilst I feel every sympathy for the third Respondent, in that it does seem to me that this is classic situation of a liquidator trying to bring claims against every possible defendant, when the real villain of the piece is undoubtedly Mr Tunaru. In addition, there, obviously cannot be any double counting or recovery in terms of the monies that ultimately have to be paid by Mr Tunaru or by the second or third Respondents. 

Whilst the Court ordered Mr Tunaru to repay the rent paid by the company because of misfeasance, that did not mean Mr Lee was off the hook.

Has The Company Received No Consideration?

Ordinarily, if a director receives the benefit of company money through having a payment made on its behalf, this should be documented in the company’s adequate accounting records.

The consideration would be a debit to the Director’s loan account (“DLA”). This would amount to the right to receive this money back from the director.  

Either it would reduce the DLA if it is in credit, or increase the overdrawn position on the DLA. The director is deemed to have provided consideration personally, having received the benefit of company funds. 

Notwithstanding the recording issue, in effect, what seems to be happening is the company is lending money to the director, but instead of filtering that money through the director’s bank account first, it has instead taken a shortcut by paying the end party directly. Had the money gone to the director first, then, whilst tracing options may apply, it might be more difficult to pursue the end recipient.

The question then is, should the route through which the money flows enable or disable the relief capable of being sought under Section 238 of the Insolvency Act 1986 when the substance and purpose of the transaction is for the benefit of the Director?