What is a Transaction at an Undervalue

Can you give me some examples?

• Example 1 a director causing the company to sell him a car for £2,000 when it was actually worth £10,000. Directors have the power to do this because they can bind the company to contracts by their signature or actions, but to do so is a breach of their duty to the company
• Example 2 An individual could give his interest in an asset most commonly the family home to a spouse, cohabitee , former cohabitee or a relative , or just accept less than their interest is worth for it from them

Does it matter if this happens?

• the transaction took place in the two years before the presentation of the bankruptcy petition ; or
• the transaction took place between two and five years before the presentation of the bankruptcy petition and at the time of the transaction the bankrupt was insolvent or became so as a result.
• If the transaction is with an associated person, then insolvency is presumed and it is for the bankrupt to demonstrate otherwise.

They have to make a court application

When can a preference be set aside?

• given in the two years before the presentation of the bankruptcy petition, and was given to a person who is an associate of the bankrupt or
• was given in any other case in the six months before the presentation of the bankruptcy petition.
• With an associate, there is a presumption of a desire to prefer.
• In other cases, it is necessary for the trustee to demonstrate to the court that the bankrupt was influenced by a desire to prefer. This is not always a simple matter.

There are two types of transaction at an undervalue;

• those under Section 238 IA 1986, i.e. the company enters into a transaction where it receives significantly less in money or money’s worth than it gives, AND that transaction took place within the two years preceding the winding up resolution, AND at the time the company entered into the transaction it was insolvent or became so as a result of the transaction.
• those under Section 423 IA 1986. covers the same issue as Section 238 IA 1986, i.e. transactions where the company receives significantly less value than it gives. But there are three important differences.
• Section 423 has no time limits. Therefore the transaction can occur at any time before the commencement of the liquidation, e.g. 10 or 20 years before.
• An application under Section 423 can be made by either the liquidator, or any creditor.
• Whilst ‘motive’ is not relevant to Section 238, it is relevant to Section 423. For a claim under Section 423 to succeed it must be shown that in entering into the transaction the company intended to put assets beyond the reach of creditors, or otherwise prejudice creditors.
• The burden of proof is not to a criminal standard and remains ‘on the balance of probabilities’. However it is clear the courts will require real evidence of the intentions of the directors of the company to put assets beyond the reach of creditors, which may be difficult to show. As a result, actions under Section 423 are rare. But they may be worth considering if the fraud is blatant and the time limits under Section 238 mean 238 cannot be used.
• Section 423 also applies in personal bankruptcy cases. An example of a case which succeeded was a husband gifting his interest in the matrimonial home to his wife and daughters because he had received advice that to do so would protect his family from any business failure he may personally be involved in ( Midland Bank v Wyatt [1997] 1 BCLC 242).