Clarification of the burden of proof in TUV cases

The case of Re City Build Ltd provides an important reminder that the burden of proof in cases alleging transactions at an undervalue lies firmly with the applicant, both in respect of demonstrating that a payment has been made and in showing that it was made in circumstances where it was either a gift or any consideration received by the payer was worth less than the payment made.

Facts of the case

The liquidator of two insolvent companies discovered payments of circa £1.6 million had been made by the companies to two connected recipients. £1.3 million of the payments were made within the relevant period for transactions at an undervalue (TUVs). Claims were brought by the liquidator's assignee against the director of the insolvent companies (R1) and the recipients of the payments (R2 and R3), alleging misfeasance and TUVs. R1 was connected to both R2 and R3 by virtue of having been employed by them. It was later claimed by R1 that R2 was in fact a shadow/de facto director of the insolvent companies.

R1 did not defend the application but put forward evidence that R2 was actually the controlling mind of the companies. R2 did defend the application. At the time of the trial both R1 and R2 were suffering from dementia or similar conditions.

There were three strands to the claim:

         1. Shadow/de facto director

The principal evidence regarding R2's status was R1's statement that R2 was the controlling mind of the companies. The applicant had provided no additional evidence to support R2's accountability for the companies' actions. The Court, its view taking into account R1's dementia, held that the applicant had provided insufficient evidence that the actions of R2 demonstrated that he should be accountable. Therefore, the burden of proof on the applicant was not discharged and no claims for breach of duty against R2 arose.

         2. TUVs

The applicant argued that once they had established the relevant payments had been made, the burden of proof was transferred to the recipients to demonstrate that the payments were made for adequate consideration. This argument was rejected, and the Court found that there was some evidence to support the assertion that some elements of the payments had been made in the ordinary course of business between the companies and the recipients.

As such, the applicant had not succeeded in satisfying the burden of proof.

         3. Breach of director's duties in making the payments

By reference to Section 1157 of the Companies Act 2006, the Court (having already dismissed the claims against R2 and R3) decided that it should not order R1 to pay any compensation in respect of the breach of duties claims made against him. In reaching this decision, regard was given to R1's dementia and the effect this had on his ability to recall the relevant facts.

Conclusion

The facts of the case are specific, and the Court's decision was clearly impacted by the effect on R2 and R3 of memory-limiting conditions. However, potential applicants should be reminded of the need to ensure they have sufficient evidence to discharge the burden of proof in the claims they pursue.

Specifically, in TUV cases, such burden extends beyond demonstrating that a payment has been made and the applicant must also adduce evidence that the payment was either a gift or that insufficient consideration was received by the payer.