Insolvency Proceedings | Transactions Under Value and Preferential Payments | Kangs Insolvency Proceedings Solicitors
Upon appointment to administer the affairs of an insolvent company, one of the roles of the appointed Insolvency Practitioner is to gather in all available assets and discharge creditors out of the recovered funds according to the Insolvency Rules.
In order to accomplish this task, all of the insolvent company’s financial and trading records will be examined both to establish their authenticity and the financial reasons for the company’s insolvency.
The Insolvency Practitioner will be alert to any attempts which have been made to extract funds by way of any ‘transactions under value’ and ‘preferential payments’ both of which are prohibited by company legislation.
Stuart Southall of Kangs Solicitors outlines the nature of ‘transactions under value’ and ‘preferential payments’.
The Team at Kangs Solicitors provides vast experience in handling all aspects of company insolvency and personal bankruptcy coupled with the wide range of business disputes which frequently lead to such unfortunate financial circumstances.
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Transactions Under Value | Kangs Company Offences Defence Solicitors
Definition
A ‘transaction under value’ is one where the insolvent company has provided another company or individual with an asset for no consideration or that the value of such consideration received was significantly less than the ‘market value’.
Examples include, without reasonable explanation, the simple sale by the insolvent company of property for a sum of money well below a reasonable ‘market price’ or the exchange by the insolvent company of property for the property of another which is substantially lower in value, thereby reflecting a loss to the insolvent company.
The Insolvency Act 1986 (‘the Act’) provides:
‘238 Transactions at an undervalue (England and Wales).
(1) This section applies in the case of a company where—
(a) The company enters administration,
(b ) The company goes into liquidation;
and “the office-holder” means the administrator or the liquidator, as the case may be.
(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.
(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.
(4 ) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—
(a) The company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or
(b) The company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.
Handling an allegation of a Transaction under Value.
- The current, and any relevant former directors, will be required to explain the history of the transaction being investigated, any relationship between the company and the third party (who may have received the asset), the reasoning behind the transaction and the anticipated impact on the solvency of the company
- If not satisfied with the explanations provided, the Insolvency Practitioner may request the Court to reverse the transaction so that the asset reverts to being available for realisation and distribution to the company’s creditors, in the regulated order of priority
- The ‘Burden of Proof’ lies with the directors to evidence that the transaction was justifiable and in good faith designed to benefit the company’s business
When viewing all aspect of the consideration changing hands the Court will consider, inter alia:
- The overall nature and intent of the transaction
- The consideration received by the insolvent company under the transaction agreed between the Parties
- The circumstances following the transaction which may have introduced unexpected consequences leading to the insolvency
Preferential Payments | Kangs Director Disqualification Proceedings Defence Solicitors
A preferential payment is one which benefits one creditor to the detriment of others having equal rights to be repaid under the Insolvency Rules. and which puts that creditor into a better (preferred) position than they would have otherwise been at the point of the company’s insolvency.
Examples would include a director repaying a loan to himself or a member of his family without regard to the claims of those having a recognised priority, such as HMRC.
When pursuing such a claim It will be incumbent upon the Insolvency Practitioner to evidence that, in respect of the alleged preferred payment:
- The recipient is a creditor or guarantor of the company
- The recipient was put into a better position than they would have otherwise been in
- The recipient is in some way connected to the insolvent company or the director who authorised the payment
- It occurred within the immediate six months before the company was deemed, or should have been deemed, as being insolvent and
- The company was insolvent (i.e. unable to meet its debts as and when they fell due
)at the point the of payment
Instructive Case Law | Kangs Insolvency Litigation Solicitors
As explained above concerning ‘transactions under value’, an Insolvency Practitioner may, where appropriate, seek to recover (i.e. reverse) any ‘preferential payment’ which will become a distributable asset for the benefit of the creditors.
When seeking recovery of assets, Insolvency Practitioners are occasionally faced with a situation where claims of both ‘transactions under value’ and ‘preferential payments’ merge into one cause of action.
This occurred in the case of Re: MC Bacon Limited [1990] BCLC 324 where Insolvency Practitioners were dealing with a Debenture that had been provided to a Bank, as a condition of its continued support to the company.
It was contended that the benefits derived from the Debenture either constituted a preferential payment, because the Bank was put into a better position than it would otherwise have been, or alternatively, there had been no benefit to the company by providing the Debenture with the result that it amounted to a transaction under value.
The Court rejected the Insolvency Practitioners claim upon the basis that it was necessary to show that the company had been influenced by a desire to produce the effect set out by s239(4) Insolvency Act 1986 which provides:
‘(4) For the purposes of this section and section 241, a company gives a preference to a person if—
(a) that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities, and
(b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.’
The Court held that the granting of the Debenture to the Bank was neither a gift nor made without consideration because the consideration it received was:
- Not calling in its overdraft, as it was entitled to do and
- To provide further capital lending to the company
The security afforded to the Bank was not to deplete the asset value of the company and therefore there was no need for consideration for money or monies worth and so, could not be a transaction under value.
Who Can I Contact for Advice & Help? | Kangs Insolvency Solicitors
It will be appreciated from the above that both statute and case law provide detailed considerations when identifying both transactions under value and preferential payments.
The Team at Kangs Solicitors is available to provide experienced guidance in respect of all aspects of Insolvency law and would be delighted to assist with whatever guidance you may require.
If we can be of assistance, our Team is available via telephone 0333 370 4333 and by email info@kangssolicitors.co.uk.
We provide initial no obligation discussion at our three offices in London, Birmingham and Manchester.
Alternatively, discussions can be held virtually through live conferencing or telephone.
