Re Kiss Cards Ltd

The proper party to a potential transaction at undervalue where payment was to a joint account

Corporate insolvency – transactions at an undervalue – s.238 Insolvency Act 1986 – joint bank accounts – burden of proof

This was a liquidator’s application under section 238 of the Insolvency Act 1986 to reverse a large number of payments by a company alleged to constitute transactions at an undervalue. The court considered the position where such payments were made into a joint account.

In those circumstances the application could only succeed if one of the two account holders was a party to the transaction. The other account holder had entered into a voluntary arrangement so that claims against him had been discontinued.

The court held that, for the purposes of section 238, it did not necessarily follow that the paying company had entered into a transaction with all the account holders. One had to look at all the circumstances and ask: (i) whether there has been any form of mutual dealing or arrangement that may properly be called a “transaction“; and, (ii) which, if any, of the account holders had been party to that dealing or arrangement.

The court focused in particular on who the payment was intended to benefit, and noted that it might not be intended to benefit any account holder; for example, if intended for onward payment or to be held on trust.

Although the burden of proof was initially on the liquidator, where the reason for a payment was unexplained by the material available to the liquidator, the burden shifted to the payee. In default of a satisfactory explanation for a payment into a joint account, the court must regard that payment as a gift for the benefit of the joint account holders. Therefore each of them was party to a gratuitous transaction in an amount equal to the total payment divided by the number of account holders. On that basis, the court ordered the repayment by the respondent account holder of half the total unexplained payments.

When considering challenges to antecedent transactions involving payments into a joint account, office holders should consider the substance or the transaction and ask: ‘Who was the insolvent person really dealing with?’, with particular focus on intention to benefit. In the absence of any explanation, there may need to be claims against each account holder.