7- Transaction at an undervalue s.238 new

Question 1

Why was 238 enacted?

Answer 1

Enacted in the IA due to a Cork recommendation, but the provision is half-hearted (due to (5)) because it was widely felt it was necessary.

This is because in the winding up of a co the liquidation/administrator can use the common law doctrines to return property transacted at an undervalue.

BUT 238 is more effective and easier to use than the doctrines, so it is better.

Question 2

Order in PQ?

Answer 2

1. Discuss why 238 implemented and why heal-hearted.
2. Is 239(1) satisfied? i.e. is co in liquid/admin?
3. State 238(2)
4. Is the applicant an office holder?
   - 238(1)
5. Is there a transaction at an UV within 238(4)(a) or (b)?
   - Re MC Bacon- Millet
6. Was the transaction made at a relevant time?
   - 240
   - 127 (can’t pay its debts)
   - 249 (connected person)
7. What order should be made?
   - 238(3), 241(1)
8. Any reason court shouldn’t make the order?
   - 238(5) (GF)
9. Any reason the order is limited?
   - 241(2) and (3

Question 3

238(1)

Answer 3

Co must be in liquidation or administration.

Question 4

238(2)

Answer 4

Where a co has at a relevant time entered a transaction with a p at an undervalue, the office holder may apply to the court for a 238 order.

Question 5

Who is an office holder for s.238(2)?

Answer 5

s.238(1)- liquidator or administrator

Question 6

238(4)

Answer 6

(a) no consideration

(b) for consideration significantly less in money or money’s worth than debtor provided

Question 7

Re MC Bacon 1990- Millet

Answer 7

Case: Co lost its principal customer but decided to continue trading. When overdraft reached £299K for £300K limit bank called a meeting where it learned out the customer loss and that main directors had left the co.

Co granted bank a fixed and floating charge over all of its assets in order to secure the overdraft.

Liquidator argued this was a 238(4)(b) transaction.

Decision:
1. The view that granting security to secure a previously unsecured debt is a transaction at an undervalue is misguided (may not be now after Hill v Spread);

2. The rationale for the property principle, which trans at UV based on, is that value leaves the debtor’s estate and thus is not available to his creditors.
3. Nothing of value leaves the estate when the insolvent co grants a charge for a debt which the co already has with the creditor. All it loses it the right to apply the assets otherwise than in satisfaction of the debt.
4. The right to apply assets otherwise than in satisfaction of a specific debt is not capable of valuation in monetary terms and is not customarily disposed of for value.
5. The consideration provided by the bank was their forbearance from winding up the co and claiming repayment of the debt, so (a) does not apply.
   - NB: this was misinterpreted in Hill as meaning that these cases do fall into transactions at an UV when there is no forbearance, but this is not what Millet was saying.
6. Because the rights concerning proceeds do not form part of the consideration provided by the co (b) must also fail (i.e. only co provided the charge and bank provided forbearance from winding up, which are not significantly different in value)
7. The proper ground of attack in these cases is through PP preference law.

Question 8

240(1)

Answer 8

(1) (a) A transaction at an UV given to a P connected with the co (not an employee) must occur within 2 years before onset of insolvency. if not, 6 months.
(1) (c) RT is trans occurs between making of admin application and admin order;
(1) (d) RT if between filing with court of notice of intent to appoint administrator and the appointment

Question 9

240(3)

Answer 9

onset of insolvency for purposes of 240(1)

Question 10

240(2)

Answer 10

The time in (1)(a) is not a RT unless:
(a) co unable to pay its debts at the time; or
(b) becomes unable due to trans.
BUT presumed for connected persons.

Question 11

s.249

Answer 11

Connected person is

(a) director or shadow director of co or an associate of such director or SD; or
(b) he is an associate of the co (within 435)

Question 12

s.123

Answer 12

definition of if co unable to pay its debts for 240(2)(a)

Question 13

238(3)

Answer 13

Court should make such order as it thinks fit to restore pos to what would have been

Question 14

241(1)

Answer 14

types of order

Question 15

238(5)

Answer 15

Shouldn’t make order if:

(a) co entered trans in GF and for purpose of carrying on business; and
(b) there were reasonable grounds for thinking it would benefit the co

Question 16

241(2) and (3)

Answer 16

Limits on orders if they prejudice certain interests.