What is a transaction at an undervalue?

What is a transaction at an undervalue?

What is a transaction at an undervalue?

What is a transaction at an undervalue? It is a transaction that has been entered into at a relevant time.

For the purposes of insolvency proceedings, a transaction at an undervalue involves a gift or transaction which involves the failure of consideration. Alternatively, it can also be defined as a transaction with a “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 …”.

In simple terms, a transaction at an undervalue is a transaction which leads to an individual or a company or some other legal structure receiving something, considerably less than that which they ought to have received. In the context of insolvency proceedings, a transaction at an undervalue will arise in the 2 years prior to the onset of insolvency, when it is given to a party connected to the person or company that is providing the transaction at an undervalue.

From the point of view of insolvency proceedings, a transaction at an undervalue will not be a problem if it is provided at a time when the company or individual is solvent. However, it will be a relevant time if the individual or company becomes insolvent as a consequence of entering into the transaction at an undervalue.

A notable feature of a transaction at an undervalue when successfully challenged by Liquidator is that the person or legal entity providing the relevant consideration can often be found to be engaging in the transaction for purposes other than for the benefit of creditors. The purpose behind a transaction, particularly a successfully challenged one is that it can often have been done to avoid the creditors and in such an instance makes it much more susceptible to being challenged by a Liquidator.

If you enter into a transaction (which is considered to be at undervalue) and the motivating factor for your entering into the same is in respect of your personal benefit, either in respect of the company that you are in control of or in respect of your personal benefit (because it affects you as an individual) and when undertaking that transaction you are insolvent or you become insolvent as a consequence of entering into the transaction, then it is quite likely (albeit subject to the facts of the case) that the transaction, absent satisfactory consideration could be susceptible to challenge by a Liquidator or Insolvency Practitioner.

This post “What is a transaction at an undervalue? is not legal advice and no liability is accepted for any reliance placed upon on.

Leave a Comment