Topic 3

Question 1

What is the role of a liquidator?

Answer 1

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.

Question 2

If a liquidator takes the assets as he finds them, why is there adjustment via clawback/avoidance provisions?

Answer 2

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.

Question 3

What are the justifications for avoidance provisions of IA 1986?

Answer 3

• 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.

Question 4

what is a transaction at undervalue?

Answer 4

s328(4): undervalue

• Gift with no consideration
• value of consideration significantly less than should be

s436: Transaction
- Gift, agreement, arrangement

Question 5

a) Gifts and transactions at undervalue

Answer 5

s238(4)

• Bonuses/Golden handshake
• Charitable donations
• True value of consideration NIL

Question 6

b) Valuable consideration less than that received by company

Answer 6

s238(4)(b)

• Re MC Bacon: Compare value obtained by company for transaction to that it receives
• Stanley v TMK Finance

Question 7

Stanley v TMK Finance 2010

Answer 7

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.

Question 8

Re MC Bacon 1990

Answer 8

calculating low consideration:

compare value obtained by company for transaction & that obtained by it. measurable £ for £ worth

Question 9

pre-requisites for transactions at undervalue s238

Answer 9

1. company in liquidation/admin (s238(1))
2. Transaction entered into at relevant time (s240)
3. Company insolvent at the time of transaction or as consequence of entering into it (s240(2)).

Question 10

Re Hampton Capital 2015

Answer 10

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.

Question 11

Phillips v Brewin Dolphin Bell Lawrie 2001

Answer 11

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

Question 12

Is there potential for a ‘speculative approach’ in determining the value of consideration?

Answer 12

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

Question 13

Agricultural mortgage corporation v Woodward 1995

Answer 13

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.

Question 14

Re MC Bacon

Answer 14

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.

Question 15

Hill v Spread Trustee co 2006

Answer 15

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)

Question 16

Barber v CI 2006

Answer 16

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).

Question 17

Defences and remedies available for transactions at undervalue

Answer 17

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.

Question 18

How are third parties protected from transactions at undervalue?

Answer 18

• 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).

Question 19

Prerequisites for Voidable Preferences (s239)

Answer 19

1. Company in Liquidation/Administration
2. Transaction entered into at the relevant time
3. Insolvent at time of transaction/as consequence of it

Question 20

Factual preference (s239(4))

Answer 20

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

Question 21

Re Stealth construction ltd 2011

Answer 21

(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

Question 22

Airservices Australia v Ferrier 1996

Answer 22

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.”

Question 23

Re Agriplant Services Ltd [1997] BCC 842

Answer 23

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.

Question 24

Wilson v Masters International Ltd [2010] EWHC 1735 (Ch)

Answer 24

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).

Question 25

What is needed in UK to prove preference?

Answer 25

1. Factual (de facto)

2. Desire to prefer (intention needed)

Question 26

Intention/Mens Rea of Company in preferring

Answer 26

s238(5) The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b)

Question 27

MC Bacon 1990 (MR of company in preference)

Answer 27

fact: The company borrowed on unsecured terms from its bank. It lost its main customer and found itself at the extent of its overdraft limit. The bank threatened to call in the overdraft, at which point it was agreed to grant the bank a floating charge over the company’s assets.

Held:
- It is no longer necessary to establish a dominant intention to prefer. It is sufficient that the decision was influenced by the requisite desire. That is the first change. The second is that it is no longer sufficient to establish an intention to prefer

• It was submitted on behalf of the bank that it must have been the factor which ‘tipped the scales’. I disagree- requires only that the desire should have influenced the decision.

Question 28

Presumption of desire to prefer

Answer 28

s329(6) A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5).

Question 29

Rebuttal of presumption of desire to prefer

Answer 29

Re Fairway Magazines Ltd. [1992] BCC 924
“If the company is influenced by ‘proper commercial considerations’ and not by a ‘positive wish to improve the creditor’s position in the event of its insolvent liquidation’, then the debenture will be valid.” Per Mummery J at 929

Question 30

Re Fairway Mags 1992

Answer 30

Rebuttal of presumption re desire to prefer

“If the company is influenced by ‘proper commercial considerations’ and not by a ‘positive wish to improve the creditor’s position in the event of its insolvent liquidation’, then the debenture will be valid.” Per Mummery J at 929

Question 31

Floating charges for past value

Answer 31

s245

IA s. 245(2) Subject as follows, a floating charge on the company’s undertaking or property created at a relevant time is invalid except to the extent of the aggregate of–

(a) the value of so much of the consideration for the creation of the charge as consists of money paid, or goods or services supplied, to the company at the same time as, or after, the creation of the charge,
(b) the value of so much of that consideration as consists of the discharge or reduction, at the same time as, or after, the creation of the charge, of any debt of the company, and
(c) the amount of such interest (if any) as is payable on the amount falling within paragraph (a) or (b) in pursuance of any agreement under which the money was so paid, the goods or services were so supplied or the debt was so discharged or reduced.

Question 32

Meaning of consideration

Answer 32

1. Technical sense: Re Yeovil Glove 1965
   Bank allowed further drawings on overdraft account of company, but had not agreed to do so at the time of the creation of the charge. The company’s liquidator challenged the charge as granted for past value on the ground that the further drawings were not ‘in consideration’ for the creation of the charge.
2. Money paid to company: Re Destone Fabrics 1941
   The company granted D a floating charge in return for a loan of £900.
   The money was used to pay two sets of directors’ fees and to discharge a debt guaranteed by D.
3. Goods/services supplied to company
   s. 245(6) For the purposes of subsection
   (2) (a) the value of any goods or services supplied by way of consideration for a floating charge is the amount in money which at the time they were supplied could reasonably have been expected to be obtained for supplying the goods or services in the ordinary course of business and on the same terms (apart from the consideration) as those on which they were supplied to the company.
4. discharge or reduction of debt of company:
   Whether the grant of a floating charge in consideration of the discharge or reduction of a debt owed by the company is a genuine injection of value or not.

Question 33

Timing of consideration

Answer 33

Re Fairways mag: one month before creation of charge

Re shoe lacem power v sharp 1993:
“I do not, for my part, see how the relevant temporal requirements of the exemption contained in … sec. 245 of the 1986 Act can be satisfied if the making of the advance precedes the formal execution of the debenture by any time whatsoever, unless the interval is so short that it can be regarded as de minimis - for example a ‘coffee-break’.” Per Sir Christopher Slade at 619.

“It would seem to me that some degree of latitude might be permissible to take account of such matters as urgency, international transactions across different time zones and other factors which might make it difficult to determine at what precise time money was paid or a charge created.” Per Nolan LJ at 624.

Question 34

Remedies for floating charge for past value

Answer 34

Invalidity of the Charge