Challenging Voidable Transactions
EXAM GENERAL = SCENARIO WHERE YOUR BUYER CLIENT IS ENGAGING / HAS, IN TRANSACTION
(BUYING MACHINARY, CONSTRUCTION ETC) FOR A COMPANY, WHO IS AT RISK OF FUTURE
INSOLVENCY (or has become insolvent) – WHAT IMPACT COULD THIS HAVE ON CLIENT.
LIQUIDATOR / ADMINISTRATOR MAY CHALLENGE TRANSACTION = WHAT CHALLENGE?
Director duties consider (SGS 25) +
‘Explain the most likely action that a liquidator of B company, will take against your client, in relation to
payment’
‘Explain any implications for Company A of Company B going into liquidation last week, following the
payment to Company A by Company B of all outstanding invoices [X] months’ ago.’
Liquidator + Administrators = have ability to challenge certain transactions that have taken place within the
specified statory periods, prior (before) insolvency of the company.
The aim of the challenge is to restore the company to the same position, it would have been in had the
transaction not taken place and,
Take actions against directors, to increase the funds available in the insolvent estate for the benefit of
(available to) creditors.
S.245 = Prevents an unsecured creditor obtaining a floating charge to secure an existing loan for no new
consideration, at the expense of other unsecured creditors. A floating charge will still be valid to the extent that
‘new money’, or other fresh consideration is provided.
Exam Structure:
(1) Did the transaction involve a connected person or associate?
(2) Did the transaction take place within the relevant time?
(3) Was the company insolvent at the time of the transaction or did it become insolvent as a result of the
transaction?
(4) Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the
other party?
Did the transaction involve a connected person or associate?
Connected persons Companies directors (S.249 IA) + associates of directors/company (S.435 IA)
S.435(8) = Associates: Includes relatives, spouses, linear ancestors, linear descendants, business
partners, employees (widely defined), company controlled by Directors, or associated with company.
‘Associate’ includes a ‘relative’ of the individual (s.435(2)(b)(i)), which includes one’s ‘brother’ (S.435(8)
Did the transaction take place within the relevant time?
Defined in S.240(1) for S.238 + S.239
Defined in S.245(3) for S.245
Calculated backwards from the ‘onset of insolvency’ = S.240(3) and 245(5)
- Administration = Date of filing application (court) or notice to appoint (out-of-court procedure)
- Liquidation = Date of commencement of winding up (date of resolution for voluntary winding up, or date
of presentation of petition for compulsory winding up: S.129)
Was the company insolvent (S.123 IA)
Insolvency means inability to pay debts under S.123 IA = the company is insolvent on either the cash flow
or the balance sheet basis.
Company must be insolvent at the time of the transaction, or company become insolvent as a result of the
transaction.
Is there a presumption which shifts the burden of proof?
From the liquidator/administrator to the other party?
Insolvency is presumed for transactions with a connected person = S.240(2) - up to connected person to
rebut it.
Depends on whether there is a connected person or associate.
There are no defences
, Type of Transaction Relevant Time Prior to an Is insolvency required at Presumption available?
onset of insolvency date of or as a result of
the transaction
S.238 = Transaction 2 years Yes No
at an undervalue–
unconnected person
s.238 = Transaction 2 years – Prior to the Yes Yes – Insolvency
at an undervalue – commencement of the Presumption presumed.
connected person relevant insolvency
procedure
S.239 = Preference – 6 months Yes No
unconnected person
S.239 = Preference – 2 years Yes Yes – Desire to prefer is
connected person presumed.
S.245 = Avoidance of 12 months (1 year) Yes No
Floating Charges –
Unconnected
persons
S.245 = Avoidance of 2 years No No
Floating Charges –
connected persons
S.423 = N/A – no relevant time No No
Transaction’s
defrauding creditors
Exam = Advise the company whether or not it should go ahead with the sale, bearing in mind the company’s current
financial circumstances – consider:
(1) The type of voidable transaction
(2) Who can bring a claim?
(3) Does it relate to unconnected person / connected person? – Make sure to add in this below!
(4) The challenge period for bringing claim
(5) The requirements of the clam
(6) Who has burden of proof (is the burden reserved) + what must be proved?
(7) Defences available
(8) Conclusion on the merits of the case.
Transactions at an Undervalue
Exam = Can apply when client is buying from the insolvent client – does this transaction create problems for them.
Liquidator or administration may challenge the transaction.
Who Can apply?
S.238(1)-(2) IA = Liquidator / Administrator may apply to court for order To set aside (make voidable) gifts or
transactions (to individuals) for a consideration that is significantly less in value, than the consideration originally
provided by the company (the market value), at the time of insolvency. S238(4)
Challenge Period:
S.238(2) + S.240(1)(a) + S.240(3) = Relevant time for a transaction of undervalue is 2 years before the
commencement of the relevant insolvency procedure.
Requirements:
S.238(1) = Company is insolvent (cash-flow or balance sheet test), at the time of payment, or became insolvent
as a result (S.240(2) Likely to be satisfied if Bank ready to call in overdraft.
S.238(4)(b) = Must prove that company entered into a transaction for a consideration the value of which, in
money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration
provided by the company / or no consideration (gifts) = TRANSACTION AT UNDERVALUE.
Ex-Gratia payments = outright gift – is an undervalue.
S.240(2) = Company is insolvent at that time or became insolvent as a result of the transaction.
EXAM GENERAL = SCENARIO WHERE YOUR BUYER CLIENT IS ENGAGING / HAS, IN TRANSACTION
(BUYING MACHINARY, CONSTRUCTION ETC) FOR A COMPANY, WHO IS AT RISK OF FUTURE
INSOLVENCY (or has become insolvent) – WHAT IMPACT COULD THIS HAVE ON CLIENT.
LIQUIDATOR / ADMINISTRATOR MAY CHALLENGE TRANSACTION = WHAT CHALLENGE?
Director duties consider (SGS 25) +
‘Explain the most likely action that a liquidator of B company, will take against your client, in relation to
payment’
‘Explain any implications for Company A of Company B going into liquidation last week, following the
payment to Company A by Company B of all outstanding invoices [X] months’ ago.’
Liquidator + Administrators = have ability to challenge certain transactions that have taken place within the
specified statory periods, prior (before) insolvency of the company.
The aim of the challenge is to restore the company to the same position, it would have been in had the
transaction not taken place and,
Take actions against directors, to increase the funds available in the insolvent estate for the benefit of
(available to) creditors.
S.245 = Prevents an unsecured creditor obtaining a floating charge to secure an existing loan for no new
consideration, at the expense of other unsecured creditors. A floating charge will still be valid to the extent that
‘new money’, or other fresh consideration is provided.
Exam Structure:
(1) Did the transaction involve a connected person or associate?
(2) Did the transaction take place within the relevant time?
(3) Was the company insolvent at the time of the transaction or did it become insolvent as a result of the
transaction?
(4) Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the
other party?
Did the transaction involve a connected person or associate?
Connected persons Companies directors (S.249 IA) + associates of directors/company (S.435 IA)
S.435(8) = Associates: Includes relatives, spouses, linear ancestors, linear descendants, business
partners, employees (widely defined), company controlled by Directors, or associated with company.
‘Associate’ includes a ‘relative’ of the individual (s.435(2)(b)(i)), which includes one’s ‘brother’ (S.435(8)
Did the transaction take place within the relevant time?
Defined in S.240(1) for S.238 + S.239
Defined in S.245(3) for S.245
Calculated backwards from the ‘onset of insolvency’ = S.240(3) and 245(5)
- Administration = Date of filing application (court) or notice to appoint (out-of-court procedure)
- Liquidation = Date of commencement of winding up (date of resolution for voluntary winding up, or date
of presentation of petition for compulsory winding up: S.129)
Was the company insolvent (S.123 IA)
Insolvency means inability to pay debts under S.123 IA = the company is insolvent on either the cash flow
or the balance sheet basis.
Company must be insolvent at the time of the transaction, or company become insolvent as a result of the
transaction.
Is there a presumption which shifts the burden of proof?
From the liquidator/administrator to the other party?
Insolvency is presumed for transactions with a connected person = S.240(2) - up to connected person to
rebut it.
Depends on whether there is a connected person or associate.
There are no defences
, Type of Transaction Relevant Time Prior to an Is insolvency required at Presumption available?
onset of insolvency date of or as a result of
the transaction
S.238 = Transaction 2 years Yes No
at an undervalue–
unconnected person
s.238 = Transaction 2 years – Prior to the Yes Yes – Insolvency
at an undervalue – commencement of the Presumption presumed.
connected person relevant insolvency
procedure
S.239 = Preference – 6 months Yes No
unconnected person
S.239 = Preference – 2 years Yes Yes – Desire to prefer is
connected person presumed.
S.245 = Avoidance of 12 months (1 year) Yes No
Floating Charges –
Unconnected
persons
S.245 = Avoidance of 2 years No No
Floating Charges –
connected persons
S.423 = N/A – no relevant time No No
Transaction’s
defrauding creditors
Exam = Advise the company whether or not it should go ahead with the sale, bearing in mind the company’s current
financial circumstances – consider:
(1) The type of voidable transaction
(2) Who can bring a claim?
(3) Does it relate to unconnected person / connected person? – Make sure to add in this below!
(4) The challenge period for bringing claim
(5) The requirements of the clam
(6) Who has burden of proof (is the burden reserved) + what must be proved?
(7) Defences available
(8) Conclusion on the merits of the case.
Transactions at an Undervalue
Exam = Can apply when client is buying from the insolvent client – does this transaction create problems for them.
Liquidator or administration may challenge the transaction.
Who Can apply?
S.238(1)-(2) IA = Liquidator / Administrator may apply to court for order To set aside (make voidable) gifts or
transactions (to individuals) for a consideration that is significantly less in value, than the consideration originally
provided by the company (the market value), at the time of insolvency. S238(4)
Challenge Period:
S.238(2) + S.240(1)(a) + S.240(3) = Relevant time for a transaction of undervalue is 2 years before the
commencement of the relevant insolvency procedure.
Requirements:
S.238(1) = Company is insolvent (cash-flow or balance sheet test), at the time of payment, or became insolvent
as a result (S.240(2) Likely to be satisfied if Bank ready to call in overdraft.
S.238(4)(b) = Must prove that company entered into a transaction for a consideration the value of which, in
money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration
provided by the company / or no consideration (gifts) = TRANSACTION AT UNDERVALUE.
Ex-Gratia payments = outright gift – is an undervalue.
S.240(2) = Company is insolvent at that time or became insolvent as a result of the transaction.
