This case related to the sale of Mr Smith’s shares in A&D Joinery Limited (Joinery) to A&D MTE Ventures Limited (Ventures).
Mr Smith was the sole director and shareholder of Joinery. Mr Smith received just under £750,000 for the shares. Ventures were liable to pay the purchase price, but the payment was funded by way of a loan from Joinery to Ventures. As a result of the payment, this depleted Joinery’s own cash reserves and it went into administration three months later.
Manolete took an assignment of the claims and alleged:
- Under s. 238 Insolvency Act 1986 that the transaction had been entered into at an undervalue.
- Mr Smith had breached his duties under s. 171-175 Companies Act 2006 by allowing the payments to be made to him.
Mr Smith’s submitted in defence that Joinery received valuable and equivalent consideration in the form of a loan agreement whereby Ventures promised to repay the monies advanced by Joinery in discharge of Ventures’ obligations under the SPA. He also argued that Joinery entered into the transaction in good faith and for the purpose of carrying on its business, and that there were reasonable grounds for believing the transaction would benefit it.
The court rejected both defences. The only possible value to Joinery from the payments to Mr Smith was the repayment promise by Ventures, as Joinery was not discharging any of its own obligations. However, Ventures had no liquidity or substantial assets besides its shares in Joinery. Repayment was therefore only achievable through further borrowing (commercially impossible), a further sale of shares (impossible due to Joinery’s deteriorating finances), or through dividends (which would have taken over 19 years).
As such, the court found that the loan repayment obligation was worth significantly less than the value of the monies paid to Mr Smith. The loan agreement also carried no interest obligations - held to constitute an undervalue in Re Ciro Citterio Menswear plc [2002] EWHC 662. Having found that Joinery was cash sheet and balance sheet insolvent (including considering impossible the suggestion of an attempt to calculate the proportion of goodwill in Ventures’ valuation of Joinery), the court held the transaction had been entered into at an undervalue.
As to Mr Smith’s s. 238(5) defence, the court found that Mr Smith had failed any stage to consider how the company would be able to trade or repay its creditors following his departure and the loss of so much cash, or even that he was concerned by Ventures’ own lack of assets, having never sought detailed advice on this point from solicitors or accountants. There could be no benefit to Joinery in giving up this quantum for a promise to pay (without interest) from a company lacking liquidity and whose only asset was its shares (of declining value) in Joinery itself.
The case is a reminder that directors should carefully consider the impact of transactions they benefit from where the consideration is funded by the company itself.
Manolete Partners Plc v Smith [2026] EWHC 1046 (Ch)
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