A Transaction At Undervalue Claim Is About ‘Value’

Overview Of How To Defend Bounce Back Loan Transaction At Undervalue Claim

If you are facing a legal claim from a Liquidator or an Administrator then how might you defend a Bounce Back Loan Transaction At Undervalue Claim?

A possible clue might be in the word “Undervalue” which suggests that it ought conceivably to be a claim about value.

What Is A Transaction At Undervalue Claim?

A Transaction At Undervalue arises in cases of insolvent companies which go into Liquidation or Administration. Alternatively, in the case of individuals who go into Bankruptcy. In the case of Limited companies, it arises as a claim capable of being brought by virtue of Section 238 of the Insolvency Act 1986. It is known technically as an Antecedent Transaction.

The transaction will be claimed to have been for less than it was alleged to have been worth. In addition, there are two other standard requirements for a Transaction At Undervalue:

  • The transaction must have taken place within 2 years of insolvency; AND
  • The company or individual must have been insolvent and unable to pay its debts when they fall due.

For the purpose of this article, it is assumed that the relevant company was insolvent and that the transaction being challenged by the Liquidator or Administrator arose within 2 years of insolvency.

What Is A Bounce Back Loan Transaction At Undervalue Claim?

Bounce Back Loans only existed for the benefit of Limited companies.

A classic example of a claim to a Transaction At Undervalue in the current climate would be in relation to the use that a company Director might have put Bounce Back Loan monies, either in respect of those monies paid to a Director or alternatively to a company connected to the Director.

Funds that were paid to companies that were eligible to claim a Bounce Back Loan became company monies and as a result, the use of those loans can be capable of being investigated and reviewed by a Liquidator or an Administrator if the company ends up in either Liquidation or Administration.

Claim To Improperly Obtaining The Bounce Back Loan

If a Bounce Back Loan has been incorrectly and even improperly obtained then this may have all kinds of ramifications for Directors.

It can potentially lead to allegations or claims of misfeasance and breach of Director Duties. It is the duty of an appointed Insolvency Practitioner to report to HMRC details of any Bounce Back Loan that has been obtained in breach of the purposes of the government scheme.

An improperly obtained Bounce Back Loan will also be reported to the Insolvency Service as part of the Insolvency Practitioner’s Director conduct reporting obligations and could as a result lead to Director Disqualification.

However, a claim that a Director has improperly obtained a Bounce Back Loan is not a claim that ordinarily would directly support a claim to a Transaction At An Undervalue.

Bounce Back Loan Improperly Obtained Is Unlikely To Be A Transaction At Undervalue

The reason that a Bounce Back Loan improperly obtained is unlikely to be a Transaction At Undervalue is because the company that has applied for the Bounce Back Loan will have received money in exchange for the terms of the Bounce Back Loan.

The Bounce Back Loan will have involved entering into an agreement to repay that loan over a number of years and to pay interest on the sum lent. None of that is likely in most cases to cause the company to suffer a loss. For the most part, it is what is referred to as balance sheet neutral ie. in exchange for the money received there is a corresponding liability to repay it.

The ‘Value’ In A Transaction At Undervalue

In order for a Transaction At An Undervalue to be successfully claimed it is necessary to show that the value received by the company for the relevant transaction is materially less than what was given away.

Crucially, Section 238(5) of the Insolvency Act 1986 says that a Transaction At Undervalue cannot be claimed if the transaction was entered into as follows:

  • In good faith and for the purposes of carrying on the business of the company; AND
  • It was reasonable to think that the transaction would benefit the company

Transactions Involving Connected Companies With Common Directors And Owners

If a Director has taken Bounce Back Loan monies and used the funds either in part or whole to fund the activities of a connected company then is a Transaction At Undervalue claim brought by a Liquidator or Administrator likely to succeed? Well, the answer is it depends.

Economic Benefit Of The Use Of The Bounce Back Loan

On the face of it, it is conceivable that the use of the Bounce Back Loan could have been improper. Bounce Back Loan monies were only to be used to provide ‘economic benefit‘ to the company applying for the Bounce Back Loan, not for ‘personal purposes‘.

If funds have been in effect gifted to a connected company without an agreement that they be repaid, then it is unlikely (or perhaps even inconceivable) that a defence to a Transaction At Undervalue claim would exist on the grounds of the value received by the company that gave away Bounce Back Loan monies.

It is likely that using Bounce Back Loan monies to fund a connected company could be considered for ‘personal purposes‘ because each Limited company is a separate legal person or entity as a Limited Liability Company and the Bounce Back Loan should have been deployed for the benefit of the company that applied for it in the first place. In other words, if a connected company needed funds then it should perhaps have directly applied for a Bounce Back Loan to see if it qualified and not relied upon another company to do so for it.

Connected Company Trading

However, what about the scenario where two connected companies have entered into an agreement and are therefore trading with one another? This is likely to come down to a detailed assessment of the facts of the case.

If there was already a pattern of historic trading between the two companies then it is possible that monies paid to the connected company could have followed a normal chain of events.

New Connected Company Venture

But if Bounce Back Loan monies were used to fund a connected company that has embarked upon a new venture then it will conceivably come down to an assessment of how any agreement between the two companies operated and if it could be shown that the company that has paid over some of the Bounce Back Loan monies did indeed really stand to benefit from such an arrangement.

One way potentially of testing if that is the case is perhaps to be able to show that notwithstanding the Liquidation or Administration of the company that parted with some or all of the Bounce Back Loan monies, that it still stands to benefit from the arrangement with the connected company.

Provided the benefit that still can be shown to exist and capable of being received is not materially less than the sums handed over from the Bounce Back Loan, then this may provide a reasonable defence to a Bounce Back Loan Transaction At Undervalue claim.

To be clear, however, given the uncertainty arising from connected company transactions involving the use of Bounce Back Loan monies, deployment of caution and obtaining expert professional advice would be recommended. Such instances may involve considerations that are finely balanced, where matters could easily be open to conflicting interpretations.

Salary

If a Director has paid themselves their normal monthly salary then it is likely to be more difficult for a Transaction At Undervalue Claim to be brought. Provided the company has approved the Director’s contract of employment then it will be normally proper for a Director to be paid for their services.

It is therefore conceivable that a reasonable defence exists to a suggestion that salary ought not to have been taken using Bounce Back Loan monies for a Director where there was an entitlement to be paid a salary. The argument might well properly develop along the lines that the payment was made for the benefit of the company to ensure that its Director was incentivised to continue acting as a Director and in doing so would therefore fulfil his or her Director Duties, such as promoting the success of the company.

Directors Loan And Unlawful Dividends

Directors who have paid themselves from Bounce Back Loan monies either by way of dividends or through their Director’s Loan Account may however find themselves in difficulty.

It is likely that the company was in some financial difficulty otherwise a Bounce Back Loan might not have been applied for and therefore a Director who pays themselves from Bounce Back Loan monies other than by way of salary, may be at risk of having their dividends clawed back by a Liquidator or Administrator as an unlawful or illegal dividend. Alternatively, if such Bounce Back Loan monies were paid through the Directors Loan Account then a Director may find that they have created an Overdrawn Directors Loan Account. In such instances, monies may have to be repaid by the Director.

Are you a Director concerned about a claim against you?

If you are a Director of an insolvent company or a bankruptcy, Oliver Elliot can help you address your claim and concerns arising from the insolvency.

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Disclaimer: Defending A Bounce Back Loan Transaction At Undervalue Claim

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