31.4.22EA Introduction

The Act has made the law relating to corporate and individual insolvency broadly the same removing the former emphasis on fraud. The provisions relating to transactions at an undervalue are contained in sections 238, 240 and 241 (companies) and sections 339, 341 and 342 (bankruptcy). The transactions may be challenged by an administrator, a liquidator or a trustee. Where an action to challenge a transaction is commenced by a liquidator on or after 15 September 2003 he/she must obtain sanction of the court or the liquidation committee before bringing legal proceedings under section 238.

(See paragraphs 31.4.8 and 31.4.8A EA relating to the funding of such recoveries.)

Similarly, where an action under section 339 is commenced by a trustee on or after 15 September 2003, he/she must first obtain sanction of the court or creditors' committee.

Notes:[Schedule 4, Part 1, para 3A][Schedule 5, Part I, para 2A]

The Act defines transactions made by a company or an individual which may be defined as an undervalue transaction. Firstly, there is a gift or transaction for which the company or individual received no consideration. This appears to be straightforward to understand, where no benefit has been derived from the payment or transaction, but it is necessary to know whether any indirect benefit has been derived from the payment or transaction, but it is necessary to know whether any indirect benefit has been derived or consideration less that market value. In company cases the disposal of an asset for consideration or consideration less than market value may amount to a breach of fiduciary duty on the part of the directors actionable under section 212 (see chapter 31.5).

A court cannot make an order under section 238 in respect of a transaction at an undervalue if it is satisfied that the company in question entered into the transaction in good faith and for the purpose of carrying on its business and that at the time there were reasonable grounds for believing that the transaction would benefit the company.

Secondly, there is a transaction whereby the company or the individual has received inadequate consideration. It is necessary to establish what consideration was received and what ought to have been received and to decide whether the discrepancy in value is "significant". There is no guide in deciding if the disparity is significant. As far as bankruptcy is concerned, it is provided that a transaction in consideration of marriage is to be regarded as a transaction at an undervalue.

Notes:[s238(4)(a)] [s330(3)(a)][s283(5)] [s238(4)(6); s339(3)(c)] [s339(3)(b)]

The fact that a settlement or transfer of property had to be made to comply with a property adjustment order under the Matrimonial Causes Act 1973 does not prevent that settlement or transfer being considered as a transaction at an undervalue. For further details see chapter 33. It is a matter for the trustee to apply to the court to restore the position to what it would have been had the bankrupt not entered into the transaction. For further details see paragraphs 31.4.28 and 31.4.29. A property adjustment order under section 24 of the Matrimonial Causes Act 1973 cannot be pursued against the bankrupt after a bankruptcy order has been made. In Re Flint [1993] 2 WLR 537 it was considered that a transfer of property order made by a Divorce Court under section 24 of the Matrimonial Causes Act 1973 in respect of property held by a person against whom a bankruptcy petition had been presented was a "disposition" and was void unless ratified by the court dealing with the bankruptcy.

Notes:[s284(1)]

In the case of Re M C Bacon Ltd [1990] BCC 78 (1990) BCLC 324, the court held that the granting of a debenture to secure existing indebtedness could not be a transaction at undervalue (it may of course amount to a preference, see part 4).

31.4.26EA Period of review (companies only)

In a liquidation it is not only necessary to show that the transaction was at an undervalue but also that it occurred during the relevant time, and that the company was insolvent at that time or became insolvent as a result of the transaction. In the case of an administration a time is also a "relevant time" if it occurs between the application for an administration order and the order or between the filing with the court of a copy of the notice of intention to appoint an administrator under Schedule B1 paragraph 14 or 22 and the making of the appointment. For a company the commencement of the relevant time is 2 years prior to the onset of insolvency. The "onset of insolvency" means one of the following:-

 in a case where an administrator of a company is appointed by an administration order, the date on which the administration application is made,

in the case where an administrator of a company is appointed under Schedule B1, paragraph 14 or 22 following filing with the court of a copy of a notice of intention to appoint under that paragraph, the date on which the copy of the notice is filed,

in a case where an administrator of a company is appointed otherwise than as mentioned in paragraph (a) or (b), the date on which the appointment takes effect,

in the case where the company goes into liquidation either following the conversion of administration into winding up by virtue of Article 37 of the EC Regulation or at the time when the appointment of an administrator ceases to have effect, the date on which the company entered administration (or, if relevant, the date on which the application for the administration order was made or a copy of the notice of intention to appoint was filed), and

In any other liquidation, the date of the commencement of the winding up (see paragraph 31.4.10).

If the transaction in question occurred after the commencement of the winding up, consult part 1 of this chapter.

Notes:[s240][s123][Schedule B1, Paragraph 14 or 22][s240(3)(as amended by EA2002 s8, Schedule 17)]

[Schedule B1, Paragraph 14 or 22]

Where a party to a transaction at an undervalue is connected with a company special considerations apply. A person is connected with a company if he is a director or shadow director, as defined by section 251. It is possible for a company’s bank to come within the definition of a connected person if its involvement in the company’s affairs is such as to make it a shadow director. (Re a Company No 005009 of 1987 [1988] 4 BCC 424). A person is also connected with a company if he is an associate of the company as defined by section 435. Where the company has entered into an undervalue transaction with a connected person it is presumed that the company was insolvent unless the contrary is shown. It is also presumed that the person did not act in good faith. The period of review is as stated in the preceding paragraph.

Notes :[s249] [s240(2)] [Insolvency (No 2 Act 1994]

It is necessary to show that the transaction was at an undervalue and that it occurred during the 5 years prior to the day that the bankruptcy petition was presented. If the transaction was entered into in the period of 2 to 5 years prior to the presentation of the petition, the individual must either have been insolvent at that time or to have become insolvent as a result of the transaction. The onus of proving insolvency is on the trustee except in relation to an associate (see below). Any transactions entered into in the 2 years prior to the presentation of the petition are voidable regardless of whether or not the individual was insolvent, unless the transaction was for valuable consideration and entered into in good faith.

Notes:[s339(3)]

A person is an associate of an individual if that person is the individual’s husband or wife, or a relative, or the husband or wife of a relative, or the individual or the individual’s husband or wife. Where an individual has entered into an undervalue transaction with an associate, it is presumed that the individual was insolvent at the time (see paragraph 31.4.2). It is presumed that the person did not act in good faith.

Notes:[s435] [s341(2)][Insolvency (No 2) Act1994]

If a transaction is to be successfully challenged the solvency of the company or the individual must be considered. If the company or individual was able to pay its debts the transaction will not be voidable but if the administrator, liquidator or trustee considers that there was an intent to defraud creditors an application under section 423 might be considered (see part 8)

Section 241(1) and section 342(1) contain examples of the possible orders the court may make, in relation to both a transaction at an undervalue and a voidable preference. The applicant is not entitled to demand any particular form of order or right and the court may refuse to make an order. Although the sections set out in detail various orders that may be made, they do not limit the general powers of the court.

The court may make an order which affects the property of, or imposes an obligation on, a third person who was not a party to the transaction and/or preference. However, bona fide third parties, who acquired property in good faith and for value will be protected.

Any person who was the other party to a transaction at an undervalue or received a preference will not be protected if he had notice of the relevant surrounding circumstances (the transaction or preference) and of the relevant proceedings (pending or actual insolvency) since it will be presumed that he did not act in good faith.

Notes :[s241(2) and s342(2)] [Insolvency (No 2) Act 1994

[Back to Part 2 - Avoidance of Dispositions] [On to Part 4 - Preferences]