Topic 3 Flashcards
What is the role of a liquidator?
Liquidator takes the company’s assets as he finds them (warts and all). He collects assets and disposes of them in order to raise a pool of £, in which creditors are entitled to share.
If a liquidator takes the assets as he finds them, why is there adjustment via clawback/avoidance provisions?
Insolvency law will in certain conditions, require adjustment of concluded transactions which but for winding up of comp, would have remained binding on it- and the return to the company of payments made or property transferred under the transactions or the reversal of their effect.
What are the justifications for avoidance provisions of IA 1986?
- Upholds Pari Passu rule
- Preserves collective basis of insolvency
- Reverses unjust enrichment
- Prevents fraud
Goode: pointing to a single rationale is hard as one justification does not explain avoidance of transactions for all reasons.
what is a transaction at undervalue?
s328(4): undervalue
- Gift with no consideration
- value of consideration significantly less than should be
s436: Transaction
- Gift, agreement, arrangement
a) Gifts and transactions at undervalue
s238(4)
- Bonuses/Golden handshake
- Charitable donations
- True value of consideration NIL
b) Valuable consideration less than that received by company
s238(4)(b)
- Re MC Bacon: Compare value obtained by company for transaction to that it receives
- Stanley v TMK Finance
Stanley v TMK Finance 2010
Re valuable consideration too low.
The court extracted the following propositions form the case law:
- The burden of proving the undervalue was on the applicant;
- The consideration passing between the parties was to be valued at the date of the transaction;
- The value of the subject matter of the transaction was, prima facie, not less than a reasonably well-informed purchaser would be willing to pay for it;
- The court should, where possible, determine a precise valuation, but where this was not possible it could decide that the value fell within a range
On the facts, no undervalue was established. The use value of the property at the time of the transaction fell between £2m and £2.5m. Certainly there were prospects for redevelopment and the acquisition of planning permission, but any value attaching to these prospects was ‘hope’ value only. Therefore, no undervalue.
Re MC Bacon 1990
calculating low consideration:
compare value obtained by company for transaction & that obtained by it. measurable £ for £ worth
pre-requisites for transactions at undervalue s238
- company in liquidation/admin (s238(1))
- Transaction entered into at relevant time (s240)
- Company insolvent at the time of transaction or as consequence of entering into it (s240(2)).
Re Hampton Capital 2015
A transaction requires ‘some engagement or at least communication’ between the applicant party and the company.
Where this had not occurred (E had simply caused payment to be made), no transaction so failed.
Phillips v Brewin Dolphin Bell Lawrie 2001
Look to transaction as a whole- would they have entered it if they knew all that would be contributed was £1 and discharge? probably not.
Transaction at undervalue
Speculative approach? High value still depends on cov being actually carried out. Uncertainty is inherent in transaction. Normally hindsight disapproved in areas of law.
Goode: declines suggestion of hindsight approach- merely relying on evidence of subsequent events to show cov was so precarious/uncertain from the outset, that no reaosnable person would have attributed any value to it
Is there potential for a ‘speculative approach’ in determining the value of consideration?
Phillips suggests yes: look to transaction as a whole. High value depends on cov being carried out for sure
Goode: Goode: declines suggestion of hindsight approach- merely relying on evidence of subsequent events to show cov was so precarious/uncertain from the outset, that no reaosnable person would have attributed any value to it
Agricultural mortgage corporation v Woodward 1995
Incidental benefit/detriment?
Court held transaction at undervalue despite having paid full market value rent. she had subsequent benefit through reduced value and negotiation terms for a large surrender value for tenancy.
Re MC Bacon
Grants of security over company assets (charge)
Bank agreed not to call overdraft and continue to honour cheques on company account with it, with grant of charge over assets
–> company did not suffer loss it should have because of debenture. company parted with nothing of value (no £) - incapable of being valued £ for £ worth.
Hill v Spread Trustee co 2006
It does not follow that no transaction involving grant of security can ever amount to transaction for no consideration. It is no diff from any other transaction in that respect.
(agreed with Millett in Bacon- security in that case was not given without consideration because it was given in exchange for forbearance by creditor)
Barber v CI 2006
Payment = unlawful preference
facts:
- C lent £ to D, D lent money to S itself (company at which director)
- S repaid substantial part of loan to C, with D discharging remainder
- company insolvent at time of repayment so payment made in return for no consideration and transaction was at undervalue
- C argued S in repaying, had discharged own indebtedness and this was consideration for purposes of s238- but in discharing Ds liability to CI, S had unlawfully preferred D (s238)
Held:
“…the only consideration upon which CI Ltd can rely to defeat the suggestion of undervalue is the preferential payment to Mr Susca. In those circumstances Mr Cousins submits that, as a matter of law, a preferential payment which is inevitably susceptible to challenge cannot amount to consideration for the making of that very payment.” (Judge Hodge QC, para.29)
“In those circumstances it does seem to me that that payment cannot properly be treated as constituting valuable consideration for the purpose of taking the payment made by Sonatacus to CI Ltd outside the scope of s.238 of the Insolvency Act.” (Ibid, para.33).
Defences and remedies available for transactions at undervalue
Court orders as it sees fit (s238(3)
- s241 catalogue:
Property transferred to be vested in the company
Proceeds of property transferred to be vested in the company
Release or discharge of security granted by the company (MC Bacon?)
Order to pay money to office holder
Release or revision of guarantee
Provision of security
Defining limits of entitlement to prove in liquidation - Reasonable business purpose defence (s238(5)
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. - protection of 3rd parties (s241(2)
So third parties without notice of the initial transaction are safe, whereas those with notice are presumed to have acted otherwise than in good faith.
How are third parties protected from transactions at undervalue?
- 3rd parties without notice of the initial transaction are safe, whereas those with notice are presumed to have acted otherwise than in good faith.
- Re Sonatacus Ltd (Re barber)
CI claimed to be able to retain payment made to it by Sonatacus on the basis that although that payment constituted an unlawful preference, CI Ltd acquired it in good faith.
Held: that the company, through its director, must have known that the money in question was repaid by Sonatacus or must have shut its eyes as to that possibility, and therefore was not entitled to relief under s.241(2).
Prerequisites for Voidable Preferences (s239)
- Company in Liquidation/Administration
- Transaction entered into at the relevant time
- Insolvent at time of transaction/as consequence of it
Factual preference (s239(4))
A) person is one of creditors, surety, guarantor
B) company does anything or suffers anything to be done which has effect of putting person in position better than what he would have been in if that had not been done
- Payment must relate to antecedent debt
- Payment to existing creditor
- Preferring creditor at expense of others
- Mutual dealings/ running accounts
Re Stealth construction ltd 2011
(preference of creditor at expense of others)
Facts: R lent money to a company (Stealth) of which her sister was a director. R claimed that, at the time the loan was made, it was agreed that she should be granted a second legal charge over property to be purchased with funds she advanced and other funds of the company. Some time later, Stealth encountered financial difficulties and R discovered that no charge had actually been executed in her favour. R demanded that the charge be executed, and it was, in December 2008. Stealth entered liquidation in 2009 and the grant of the charge was challenged as a preference.
Held: focus on Ds state of mind not creditors, significance of timing which preference given at
Airservices Australia v Ferrier 1996
Re ongoing accounts/mutual dealings
“If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off.
A court … does not allow itself to be unsighted by the shadow of the legal form when it can see that the economic effect of the transaction does not give the creditor any preference, priority or advantage over the general body of creditors.”
Re Agriplant Services Ltd [1997] BCC 842
Preference & Guarantor
The company leased equipment from a hire firm and fell into arrears with its payments. The payments had been guaranteed by S, a director of the company.
S caused the company to make payment to the hire firm of the outstanding instalments, thus reducing his own contingent indebtedness to the hire firm.
Wilson v Masters International Ltd [2010] EWHC 1735 (Ch)
Preference & Guarantor
“…in the event of a hypothetical liquidation at any relevant time, the bank was, infact, and as evidenced by the accounts and the actual realisations on the liquidation of OPL, fully covered by the book debts and stock secured by the cross-guarantee and debenture.
–> Consequently, Dr Masters was, in fact, in no different position than he would have been vis-à-vis the bank even if no payments had been made…” (per Mark Cawson QC).
