What Is A Transaction At An Undervalue?

A Transaction Challenged By A Liquidator

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.

Legal Test For A Limited Company Transaction At Undervalue

In summary, for a limited company transaction at an undervalue to arise, the Company must go into liquidation and, per IA 1986, s238:

For the purposes of this section and section 241, a company enters into a transaction with that 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 a 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.

The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied –

a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

Further:

i. The transaction must have been entered into in the period of 2 years ending with the onset of insolvency (IA 1986, s240(1)(a));

ii. The payments must have been made either at a time when the Company was unable to pay its debts within the meaning of the IA 1986, s123, or the Company must have become unable to pay its debts within the meaning of that section in consequence of the transaction or preference (IA 1986, s240(2));

iii. The requirements of (ii) above are presumed to be satisfied, unless the contrary is shown, where the transaction is entered into with a connected person, such as the Respondents (IA 1986, s240(2)).