[2025] EWHC 2294 (Ch)

The s238 claim

The Applicant’s s238 claim is premised on the Respondent being owed only £89,158.68 on his director’s loan account at the point at which the salary/loan swap arrangement was put in place. It is on that basis that, of the total payments of £101,000, the Applicant alleges that payments totalling £89,158.68 are preferences contrary to s239 and that payments totalling £11,840.32 are transactions at an undervalue contrary to s238.

The Applicant has, however, adduced no documentary evidence in support of its contention that the sum owed to the Respondent in respect of his director’s loan account at the point of entry into the salary/loan swap arrangement was £89,158.68. At paragraphs 27-28 of his first witness statement, Mr Kienlen states simply:

‘27 As at the date of the first payment on 25 April 2019 (during the period of the CVA) the Defendant was a creditor of the Company pursuant to his director’s loan account, with the Company being indebted to the Defendant in the sum of £89,159.68 (“the DLA Balance”).

28 The payments referred to in paragraph 25 above were caused by the Defendant instructing the Company to make the payments and which had the effect of repaying in full the amount due under his loan account. Furthermore, in receiving the Payments, and having discharged the DLA Balance in full, the Defendant was in receipt of £11,840.32 resulting in an overdrawn balance on his loan account’.

Mr Kienlen does not state the source of the figure of £89,159.68, which differs from the figure of £97,445 given in the statement of affairs dated 18 January 2019 prepared shortly prior to the Company’s entry into CVA.

Mr Arumugam argued that the Respondent did not ‘seriously challenge’ the £89,158.68 figure. I disagree. A fundamental premise of the Respondent’s defence all along has been that the Payments were loan repayments, received in place of salary. Moreover, by paragraph 61 of his first witness statement, the Respondent put the amount of the DLA Balance in issue. Whilst paragraph 61 expressly referred only to paragraph 28 of Mr Kienlen’s first witness statement, read in context it is clear that the Respondent was contesting both paragraphs 27 and 28. It read:

‘61 Paragraph 28 is denied. The loan had interest applied at the same rate the investors were paid. This was arranged by Mr Botting. In not having access to the One Legal server, the full details of the loan cannot be produced.’

Mr Kienlen went on to file two further witness statements after this point but failed to exhibit to either his second or third witness statements any documents to vouch or explain the lower figure of £89,159.68. He also failed to make reference to or acknowledge the contractual interest of 8% payable on the debt owed by the Company to the Respondent, which was formally recorded in the Company’s statutory accounts for the year ending 31 August 2017. In cross examination he later admitted that he was unaware that the loan carried interest at 8% per annum.

Mr Arumugam argued that in cross examination the Respondent had not formally ‘put’ to Mr Kienlen that his director’s loan account stood at £97,445 (or that figure plus some interest) at the point of entry into the salary/loan swap arrangement. I accept that. The Respondent did however ask whether Mr Kienlen was aware that his director’s loan carried interest at 8% per annum, to which Mr Kienlen responded that he was not. He also asked whether the figure of £11,840.32 took account of that interest. to which Mr Kienlen had responded that he couldn’t say without checking. Mr Kienlen could not ‘check’ during the course of his oral testimony as he had adduced no documentary evidence on the issue. Further questions on the amount outstanding on the director’s loan account would have been pointless in context, without reference to the underlying documentation and workings, which had not been adduced in evidence. This was not the Respondent’s fault. It was on the Administrators’ watch that access to the Company server was terminated. Mr Kienlen had the hard copy books and records of the Company and had not produced them.

Overall, I am satisfied that Mr Kienlen had a fair opportunity to adduce evidence on the sum outstanding on the director’s loan account after it had been put in issue by the Respondent’s first witness statement. He filed two witness statements after that point yet failed to address the issue. The fact that the Respondent did not put the point in cross-examination must be considered in that context. It is not fatal to the Respondent’s case. I would add that Mr Arumugam did not put the lower figure £89,159.68 to Mr Botting in cross-examination either, even though the Respondent had made clear in his oral testimony that Counsel should ask Mr Botting, explaining that ‘that was what he hired chartered accountants for’.

The only documentation in evidence relating to the directors loan account supports the higher figure of £97,445 (plus ongoing interest at 8% per annum).

Note 15 to the Company’s accounts for the year ending 31 August 2017, for example, records the sum of £88,980 as owed by the Company to directors at the balance sheet date and confirms that interest had been charged to the Company at a rate of 8% per annum on a principal amount of £75,000. I was taken to no evidence to suggest that the Company owed sums to any director other than the Respondent at the balance sheet date. In the absence of any such evidence I consider it legitimate to conclude that it did not.

The Respondent’s evidence, which in this regard I accept, was that his loan, (which continued to accrue interest at 8% after the balance sheet date for the Company’s accounts for the year ending 31 August 2017), ‘had remained wholly unpaid by December 2018’ (Howarth (2), para 14).

The statement of affairs, the list of creditors and the estimated outcome statement which formed part of the CVA proposal filed on 25 January 2019, signed by both directors and bearing a statement of truth, each provide that the sum owed to the Respondent on his director’s loan account stood at £97,445.

On the evidence which I have heard and read, I am satisfied that, at the time of the Company’s entry into CVA on 22 February 2019, the Respondent was owed a minimum of £97,445 plus interest at a rate of 8% per annum on his director’s loan account. I was taken to no evidence to suggest still less establish that (save for ongoing interest) the sum owed by the Company to the Respondent on his director’s loan account changed between 25 January 2019 and 22 February 2019. In the absence of such evidence I consider it legitimate to conclude that it did not.

The Applicant has adduced no documentary evidence in support of its contention that by the time that the salary/loan swap arrangement was put in place, the sum owed by the Company to the Respondent on his director’s loan account had reduced to £89,159.68. Its case on that issue rests simply on the bare assertion of Mr Kienlen, in a witness statement prepared several years after access to the Company’s server was terminated. Mr Kienlen had no involvement in the CVA, was unaware that the loan carried interest at 8% and is a witness whose evidence I have concluded should be treated with caution.

Mr Arumugam claimed on instruction that the figure of £89,159.68 came from ‘the books and records’ of the Company. No such books and records were produced in evidence, however. The court must proceed on the evidence.

In closing submissions Mr Arumugam also produced his own analysis of the alleged transaction at an undervalue claim, working from a starting figure of £89,159.68 (based simply on para 27 of Kienlen (1)) and allowing for interest at 8% per annum; a process which reduced the alleged s 238 claim from £11,840.32 to £9,960.13. Again, however, this figure was not supported by any documentary evidence vouching or explaining the starting figure.

During the course of trial, Mr Botting had also prepared his own analysis, working from a starting figure of £97,445 (taken from the statement of affairs) and allowing for interest at 8% per annum. This showed a balance of £908.77 remaining due to the Respondent after deduction of the Payments of £101,000.

I also take into account inherent likelihoods. The evidence of both the Respondent and Mr Botting, which in this regard I accept, was that throughout the course of the CVA they met frequently with Mr Adamson (every 7-10 days). As put by the Respondent in his third witness statement at para 26, for example:

‘In the course of those meetings, we considered and discussed the cashflow of the Company and its income and expenditure. Whilst the Company continued to manage all the bank and business accounts, copies of all statements, weekly cashflow, invoices and records were printed off by Richard Botting and handed to either Adamson or Bamforth. As such, it was openly disclosed in documents and bank statements produced to Armstrong Watson that payments were being made to me by way of loan repayments within the period of April to December 2019. At no point within this period, were any of these transactions challenged or questioned by Armstrong Watson or and in particular, Adamson’.

Given the frequency of these meetings, it is in my judgment inherently implausible to suggest that no one would have noticed if the Company had reached the point of paying off the Respondent’s director’s loan account in full ahead of the termination of the CVA. Mr Adamson was an IP. The Company hired two chartered accountants as part of its finance team, one of whom, Mr Botting, was closely involved in the meetings with Mr Adamson and in the preparation and collation of documentation produced for consideration at those meetings. Had the director’s loan account reduced to nil ahead of termination of the CVA, this would have been noticed and discussed. At any stage during the course of the CVA it was open to the Respondent simply to go back on the payroll and draw his salary instead.

A further factor I take into account is the absence of any questioning regarding the £11,840.32 (or as adjusted, £9960.13) at the time of the Respondent’s meeting with Mr Adamson and Ms Jo Smith in June 2021. This was not a chance meeting; it is clear from AW’s detailed WIP reports that some time was spent preparing for it. Mr Adamson logged time preparing and considering the agenda for the meeting. Ms Bamforth logged time on 1 June 2021 bearing the descriptor ‘Interview questions for Jo [Smith] re Trevor Howarth’. Mr Kienlen stated in his evidence that the director’s loan repayments were readily apparent from the Company’s books and records. Jo Smith’s question at the June 2021 meeting made clear that she knew the Respondent had come off the payroll in April 2020 and had received loan repayments instead. In my judgment it is legitimate to conclude that, had the director’s loan account balance reduced to nil ahead of termination of the CVA, questions as to the status of any payments by the Company to the Respondent after that point would have been raised at the June 2021 meeting.

Similar considerations apply regarding the failure of Mr Adamson and Ms Jo Smith to raise the point at their subsequent meeting with Mr Botting in January 2022.

Mr Arumugam also argued that interest should not be treated as continuing to accrue on the director’s loan during the course of the CVA. In this regard he relied on an ‘order of priority’ provision in paragraph 17 of the proposal, which provided that any dividend paid to unsecured creditors would be paid ‘without interest’. As I have found, however, under the terms of the arrangement, the Respondent’s director’s loan was left unimpaired.

I would add that the undervalue claim also completely fails to take into account the impact of the ‘back to back’ arrangements agreed between Mr Tinkler and the Respondent in 2017, touched on briefly at [30] of this judgment, pursuant to which, in transactional terms, (in broad summary) Mr Tinkler loaned monies to the Respondent which the Respondent then invested into the Company. As shown by the transactional documentation exhibited to Mr Kienlen’s second witness statement, this arrangement entailed (among other things) the Respondent discharging, from the monies loaned to him by Mr Tinkler, a sum of £1.3m owed by the Company to Davic Properties Limited (the ‘DPL Loan’). Having reviewed these ‘back to back’ arrangements between Mr Tinkler and the Respondent, Mr Dickson of AW by letter dated 24 March 2020 (exhibited to Mr Kienlen’s third witness statement) concluded that:

‘Trevor Howarth is therefore a £2M creditor of the Company, not Andrew Tinkler’.

Mr Arumugam even asked Mr Botting in cross-examination why the Respondent had not voted at the meeting of creditors in February 2020 in respect of the ‘investor loan’.

Ultimately, I remind myself that the burden of proof rests with the Applicant to establish an undervalue for the purposes of its s238 claim. On the evidence which I have heard and read, it has failed to discharge that burden.

It follows that the s.238 claim fails.

I would add that on the evidence which I have heard and read, I am satisfied that the Company, acting by the Respondent, made all the Payments in good faith, for the purpose of carrying on its business and with reasonable grounds at the time for believing that the transactions would benefit the Company. I am satisfied that Mr Adamson, an experienced IP, advised the Respondent and the Company that the Payments would positively benefit the Company by saving it the PAYE and NIC that would otherwise be payable in respect of the Respondent’s salary. I am further satisfied that the Respondent (and through him the Company) relied upon such advice and that such reliance was reasonable. As I have found, that the Company made significant tax savings as a result of the salary/loan swap arrangement. In my judgment the Respondent and the Company had reasonable grounds for believing that the Payments would benefit the Company. It follows that even if the Applicant had been able to establish a small undervalue, the s.238 claim would still fail by virtue of s238(5).

I turn next to consider the preference claim.