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Remuneration and Benefits in Kind – transaction at an undervalue?

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The High Court has considered whether an employee should pay elements claimed as pre-insolvency remuneration, such as a company car or fuel expenses back to their employer where the job would not normally attract such perks.

Transactions at an undervalue

A company enters into a transaction at an undervalue (TUV) with a person if:

  • the company makes a gift to or enters into a transaction with that person on terms where the company receives no consideration; or
  • the company enters into a transaction with that person on terms where the value of the consideration received by the company is significantly less than the value of the consideration provided[1].

Where a company goes into administration or liquidation less than two years after a TUV, an office holder can apply to Court for an order to restore the company’s position to that which it would have been in had the TUV not occurred[2].

Common examples of TUVs include the transfer by the company of property or assets for nothing or for significantly less than market value, or the provision of services for significantly less than the usual rate. TUVs such as these may result in the other party to the transaction (whether a connected person or an ‘innocent’ third party) being required to pay money into the insolvency estate to account for the ‘undervalue’ from which they have benefitted.

Kiss Cards

In a recent case[3], HHJ David Cooke was asked to find that a company’s payment of finance and all running expenses in respect of a part-time employee’s Mercedes R-Class was a TUV. The employee in question was a book-keeper and the wife of the sole director/shareholder of the company, who was also a respondent to the application. The wife also apparently drew a salary of £155 per hour (although this rate was not always paid and may not have been agreed).

The company’s liquidators claimed providing a company car was a TUV because the book-keeper was not needed to travel as part of her job and this benefit would not normally be available to book-keepers. They argued the company received no consideration for this element of her remuneration package. All claims against her husband, the director/shareholder, had been compromised by his IVA – otherwise they could have considered a claim for breach of duty against him on the grounds of this generous package.

TUV claim not evidenced

Unfortunately for the liquidators, HHJ David Cooke declined to find the provision of the company car amounted to a TUV. In his judgment, he gave two reasons for this:
¡First, the book-keeper did do some work for the company, and so the company did receive at least some consideration. The consideration received had not been evidenced as no analysis on the work done or the value of that work had been presented. So, it was not possible to decide whether there had been an undervalue.
¡Second, it is not possible to take a single element of a remuneration package (such as a benefit in kind) and state that it is a TUV. The remuneration package must be considered as a whole, and the liquidators had not questioned any other elements of the book-keeper’s remuneration package. In other words, for there to be a TUV in this instance, the value of all the remuneration package must be compared against all the work provided.
HHJ David Cooke ventured no opinion on whether the remuneration package was likely to have been a TUV if the claim had been presented as he wished. It is likely the liquidators would have had to show what work the book-keeper did with what frequency to what value, and show that her remuneration package was significantly more costly than that which would be given to someone with similar ability and similar availability. This might include the cost of out-sourcing the book-keeping work.

Ultimately, the defendants (the book-keeper and her husband the director) in this case were found liable for £25,400 for other TUVs. The judge’s treatment of the two defendants’ liabilities and their joint account will be covered in a future blog.

Learning points

Kiss Cards serves as a useful reminder of what the Court will look for when considering whether a remuneration package amounts to a TUV. Key steps for practitioners to consider following include:-

  • analysing the remuneration package as a whole;
  • analysing what value the employee has given to the company as a whole in return for their remuneration package;
  • comparing the remuneration package to packages offered to other employees or packages similar employees could expect in the same role; and
  • founding their case based on the remuneration package as a whole even if some elements appear reasonable or ‘for value’.

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