Voidable transactions

Question 1

What is a voidable transaction?

Answer 1

The power given to liquidators and administrators to challenge certain transactions taken place within specified periods so to restore company to the position it would have been in had the transaction not taken place.

= often called a clawback provision

Question 2

What is the difference between a transaction involving a ‘connected persons’ or ‘associate’?

Answer 2

• Connected persons: these are directors of company
• Associates: these include - spouses, business partners, employees, relatives or certain trustees

Question 3

When is the onset of insolvency in administration and liquidation?

Answer 3

• Administration: date of filing application or notice of intention or appointment using out-of-court procedure
• Liquidation: date of commencement of winding up - either date of resolution for voluntary winding up or date of presentation of petition for compulsory winding up

Question 4

What is a transaction by company at an undervalue (TUV)

A voidable transaction

Answer 4

A transaction at undervalue is either:
* a gift
* or transaction for a consideration the value of which is significantly less in value than the consideration provided by the company

= whether there has been an inequality of exchange adverse to company

either in money or money’s worth

in some situations, granting security or payment of dividend may be held to amount to TUV

Question 5

When and how can TUV be avoided/challenged

Answer 5

Transaction may be set aside by courts if:
* it took place within relevant time of 2 years ending with onset of insolvency (commencement of insolvency procedure)
* it is proved by applicant that company was insolvent at time of transaction or became so as a result of it
- where TUV is entered into with a connected person = presumption that company was insolvent at relevant time so its on connected person to disprove this

Question 6

What defences are available for TUV?

Answer 6

Even if all requirements are satisfied, no order will be made if court is satisfied that:
* company entered into transaction in good faith for purpose of carrying out business
* AND there were reasonable grounds for believing transaction would benefit company

Question 7

What sanctions could the courts make on TUV?

Answer 7

Any sanctions court thinks fit to restore position as if company has not entered into transaction
* e.g., for counterparty to pay amount of undervalue the company sustained under transaction
* any order should not prejudice a subsequent purchaser from the party which transacted at an undervalue with company, provided they acted in good faith and for value

Question 8

What are transactions defrauding creditors (TDC)?

example voidable transaction

Answer 8

• there has been a transactions at an undervalue
• and intention or purpose was to put assets beyond the reach of creditors of company or otherwise prejudice their interests

= relates to where company is solvent

creditors include future creditors not known at time of transaction

administrators/liquidators would rather bring claim under TUV than TDC as there is no requirement to prove purpose of transaction was to put assets out of reach of creditors

Question 9

Who can make an application under TDC and what sanctions may be made?

Answer 9

• liquidator or administrator
• supervisor of voluntary arrangement
• or victim of transaction in question

Sanction: any sanctions court thinks fit to restore position to what it would have been but for trsnaction in question

TDC claims can be brought in respect to transaction that took place at any time in past whereas TUV only concerns transactions entered into with 2 years of onset of insolvency

Question 10

What is preferences by a company?

example voidable transaction

Answer 10

A company gives a preference to a person if:
* person is a creditor of company or a surety or guarantor
* and company does/allows anything to be done which has effect of putting person in a better postion in event of company going into insolvent liquidation than they would have otherwise been in

claim may be brought by liquidator or administrator

not a preference of a company to pay secured creditors before unsecured ones.

Question 11

When can a preference be avoided?

Answer 11

• preference was given within relevant time - 6 months ending with onset of insolvency = can be extended to 2 years for preferences to connected persons
• if proved that company was insolvent (either cash-flow or balance sheet basis) at time of transaction or became so as a result of it. = no presumption company was insolvent regardless of connected persons or not as such liquidator/administrator must prove
• and if proved that company was influenced by a desire to prefer creditor = subjective test as company must have positively wished to put party in a better position

if preference given to connected person, there is a rebuttable presumption that company was influenced by desire to prefer creditor so burden is on preferred person to rebut presumption.

Question 12

What defences are available for company in relation to preferences?

Answer 12

An abscence of desire to prefer acts as the defence
* BUT in cases of mixed desires - avoid calling in overdraft and by positive desire to prefer creditor - then necessary desire would have been present even if first desire has been stronger than second

Question 13

What sanctions are imposed on preferences?

Answer 13

Court’s discretion to make an order to restore position as if company had not given preference
* common court order would for preferred creditor to pay liquidator or administrator the money it has received from company

Question 14

What is an avoidance of certain floating charges?

Answer 14

Purpose is to prevent creditor obtaining a floating charge to secure an existing debt for no new consideration
* only applies to liquidators and administration
* they can avoid certain floating charges automatically without need to challenge and bring legal proceedings
* if dispute between floating charge holder and liquidator/administrator about avoidance then legal proceedings may be necessary to determine dispute

Question 15

When can certain floating charges be avoided?

Answer 15

• Charge must have been created within relevant time = 12 months ending with onset of insolvency
• relevant time can be extended to 2 years where floating charge was granted to a connected persons (plus no insolvency requirement if CP)
• must be proved that company was insolvent (either cash-flow or balance sheet) at time certain floating charge was created or became insolvent in consequence of transaction

Question 16

When are new floating charges valid?

Answer 16

• to the extent that new money or fresh consideration is provided to company in return for grant of floating charge on or after its creation
• if floating charge is granted to secure repayment of a new loan made on or after creation of charge, it’ll be valid = but not where it is to secure repayment of existing monies

Question 17

What is the effect of floating charge to secure an existing overdraft?

Answer 17

• liquidator/administrator will argue that charge is invalid as it secured debts incurred by company before date the charge was created
• BUT courts held that charge was valid because each time company used its overdraft facility after creation of charge, this was deemed to be new money advanced by creditor

Question 18

What happens when certain floating charge is avoided?

Answer 18

• only security is void and advantage given to charge holder but not debt itself
• floating charge granted to creditor may be voidable as a transaction at undervalue or preference