Transactions at an Undervalue Flashcards
Insolvency Act 1986, s.423(1)
Transaction is at an undervalue of debtor makes gift, consideration for marriage, significantly less than value
Insolvency Act 1986, s.423(3)
They may be set aside whenever made if entered into for purpose of putting assets beyond the reach of a claimant or of otherwise prejudicing a claimant
Agricultural Mortgage Corp plc v Woodward [1995] 1 BCLC 1 CA
Case: Debtor faced with possession proceedings by mortgage, leased farm to wife at open market rent
Decision: The tenancy was entered into by Mr W to ensure that A did not get vacant possession of the property (purpose found) and the transaction should be viewed as a whole, with the additional benefits (surrender value of the lease) were treated in value in money or money’s worth than the value of the consideration provide by her (despite being rented at market value)
N.B. this may have the consequence of any lease potentially being a transaction at an undervalue (note that s.339 needs purpose to deprive)
National Westminster Bank v James [2002] 1 BCLC 55
See!
Midland Bank plc v Wyatt [1997] 1 BCLC 242
Case: Debtor made declaration of trust of family home in favour of wife and daughter in 1987 when about to embark on new business via a limited company; debtor solvent at time; in 1991 bank obtained charging order nice on house; debtor revealed declaration of trust for first time when opposing charging order being made absolute (bank wants to set rise trust)
Decision: To show that a transaction was a sham transaction, it was not necessary to show fraud; motivation to ‘keep the home’ is not the only intention as sell intended to deprive creditors, therefore intention shown; he didn’t tell wife/children about the trust (evidence of intention)
Delaney v Chaun [2011] BPIR 11 CA
Case: Couple facing claimants so enter into sale and leaseback
See!
Re Lloyds Furniture Palace Ltd [1925] Cb 858
Case: Company granted floating charge to secure existing overdraft
Decision: On the facts this was not a transaction at an undervalue in the present case; and, therefore, the debentures were not void as against the liquidation (if anything a preference???)
Rule: A fraudulent intention to prefer one creditor over other creditors was not sufficient to avoid a conveyance to that creditor unless the debtor was himself in some way benefited by the conveyance
Hill v Spread Trustees Co Ltd [2007] 2 WLR 2404 (CA)
Case: In 1989 N settled land on trust for daughter. Revenue were told land worth £35,000 although N had received an offer for ti of £700,000. In 1993 under compromise with Revenue N paid £160,000. N borrowed from trustees and i 1996 gave trustees charges over other land owed by him as security. In 1998 Revenue served statutory demand for further tax in January 1999 N made Revenue served statutory demand for further tax in January 1999 N made bankrupt. In December 2002 trustee began proceedings. What is limitation period? Could 1996 charges be set aside as well as original settlement?
Decision: This was a transaction at an undervalue
Rule: Limitation period begins at time of prejudice and also when estate vests in the trustee in bankruptcy
Compare: MC Bacon - got value for charge as business continued so not transaction at an undervalue
N.B. Essay subject - is this bad law; see Goode p.551 footnote
Insolvency Act 1986, s.424
Who may apply for proceedings (victim/trustee/liquidator)
Tribe v Tribe [1996] Ch 107
Case: Lessee, served with schedule of dilapidations, transferred his controlling shareholding in family company to one of his sons; transfer expressed to be for consideration of £78,030 but this was never (and never intended to be) paid; in the event lessee settled claim for dilapidations; lessee wished to recover shares in family home
Decision: Since the transfer of shares was a voluntary transfer between father and son for no consideration the presumption of advancement applies unless the transferor could rebut it; the illegal purpose which the transferor had to rely on in order to rebut the presumption had not been carried into effect
Rule: Debtors may bring proceedings to set aside transactions that they had entered into
Insolvency Act 1986, s.425(1)
Examples of courts powers that may exercise
Insolvency Act 1986, s.425(2)(3)
Good faith/relavant knowledge irrelevant but sub-transferees protected
Barclays Bank plc v Eustice [1995] 4 All ER 511
Case: Bank made claim under s.423 due to E leasing land to son’s that was charged to the bank as security for a loan; E’s solicitors disclosed to the bank the assignment and tenancy agreements
Decision: Where the dominant purpose of legal advice was not to explain the legal effect of what had already been done and had subsequently become the subject of existing or imminent litigation, but to structure a transaction which had yet to be carried out but which had plainly been devised to prejudice the interests of the credit, then legal/professional privilege does not apply
Insolvency Act 1986, s.339
Transaction at an undervalue definition for prior to bankruptcy
Insolvency Act 1986, s.341
Relevant time for s.339, 340
2 years or 5 years if associated
Hill v Haines [2007] 3 FCR 785 (CA)
Case: In divorce proceedings in May 2003 debtor ordered to transfer his share of a house to his wife; debtor made bankrupt in March 2005 and trustee sought to set aside transfer
Decision: This was not a transaction at an undervalue as divorce was considered to be consideration (N.B. that court order will always be definite, out of court settlement more open to bring set aside)
Re Kumar [1993] 2 All ER 700
Case: Architect sued for professional negligence; Mr K transfers house to wife; he goes bankruptcy and they get divorced; Mrs K says consideration as took on mortgage (10% of his value) and that she promised to pay maintenance (void promise)
Decision: Void transaction
Insolvency Act 1986, s.284
Disposition after presentation is void (at court’s discretion)
The Official Receiver for Northern Ireland v Stranaghan [2010] BPIR 928
Case: In November 2000 S lent his nephew £75,000 to purchase premises which were acquired in January 2001; In April 2004 nephew granted mortgage to S to secure the loan; in August 2006 nephew was adjudicated bankrupt and official receiver sought to set aside the mortgage as a transaction at an undervalue (N.B. dates not given - coulee it have been challenged as a preference?)
Decision: This is a transaction at an undervalue; The mortgage entered into by S with his nephew was not supported by consideration because the loan which it was intended to secure represented past consideration; The transaction as therefore void as past consideration is not consideration
Insolvency Act 1986, s.341(3)
Meaning of insolvent
Insolvency Act 1986, s.435
Meaning of “associate”
Insolvency Act 1986, s.339(1)
Application for transaction at undervalue in bankruptcy may be made only by trustee
Insolvency Act 1986, s.342(1)
Courts powers (as thinks fit)
Insolvency Act 1986, s.242
Good/faith knowledge irrelevant but sub-purchaser protected
Re Dent [1994] 2 All ER 904
Rule: Trustee’s powers set aside transactions still available after debtor discharged from bankruptcy
Insolvency Act 1986, ss.342A-C
Enables the trustee in bankruptcy to apply for court order where excessive contributions to approved/unapproved pension scheme unfairly prejudiced bankrupt’s creditors
Taylibiv HSBC [2015] BPIR 143
Case: Director guarantee overdraft at time where no protect of financial difficulty; director went bankrupt due to guarantee so bankrupt wants to set aside
Decision: His company got loan in return so not a transaction at an undervalue
N.B. Answers Goode’s question
Insolvency Act 1986, s.238
Definition of transactions at an undervalue by companies prior to admin/liquidation
Insolvency Act 1986, s.240(1)(a)
Transactions prior to admin/liquidation may be set aside (regardless of intent) if 2 years/company unable to pay debts
(Good faith, purpose of business, reasonable grounds will allow transaction: s.238(5))
**Re MC Bacon Ltd [1990] BCLC 324
Case: Company granted charge to bank to secure existing loan; at bank’s request when heard company in financial difficulties - undervalue (s.238) or preference (s.239)?
Decision: Preference
It was not a transaction at an undervalue as the mere creation of a security to not deplete the company’s assets
Insolvency Act 1986, s.240(3)(e)
Onset of insolvency is relevant time
Insolvency Act 1986, s.123
Meaning of unable to pay debts
Insolvency Act 1986, ss.249 and 435
For meaning of persons connected to the company
Insolvency Act 1986, s.238(2)
Application may be made my administrator/liquidator
Insolvency Act 1986, s.241(1)
Court’s powers but “shall” - s.238(3)
Can shareholders’ approval ratify breach of IA under s.238?
No
Re Horsely and Weight Ltd [1982] Ch 442
Company Law: Pension provision set aside for ultra vires
Rolled Steel Products Ltd v British Steel Corporation [1986] Ch 246
Company Law: Guarantees of other companies’ debts set aside for ultra vires/lack of authority o agent
Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722
Company Law: Lease Granted to directors at artificially low rent set aside for breach of director’s duty
Re Duomatic Ltd [1969] 2 Ch 364
Company Law: Golden handshakes set aside for procedural irregularity
Re Halt Garage Ltd [1982] 3 All ER 1016
Company Law: Dividends set aside for paying not out of distributable profits
Aveling Barford Ltd v Person Ltd [1989] BCLC 626
Case: Company in receivership (owner of FC crystallised); job to pay back receiver; Land worth £1m sold for £300,000; wants to get back but not liquidator so had to rely on company law’ obvious breach of duty but Mr Lee owned all the shares and would ratify; used alternative as cannot ratify unlawful dividend
Companies Act 2006, s.247(7)
Ex gratis payments to employees on cessation or transfer of business must “be made out of profits of the company that are available for dividend”
Re Anglo-Austrian Printing and Publishing Union [1895] 2 Ch 891
Rule: Statutory powers only available to liquidator so not subject to floating charge
