Reviewable transactionsBackground

Certain transactions entered into by a company within a specified period before insolvency may be set aside, or otherwise adjusted, by the court on the application of an administrator or liquidator.

The transactions concerned are:

• transactions at an undervalue

• preferences

• transactions defrauding creditors

• extortionate credit transactions

• certain floating charges

Transactions at an undervalue

A company enters into a transaction with a person at an undervalue if it:

• makes a gift to him, or otherwise enters into a transaction with him, on terms that the company receives no consideration, or

• enters into a transaction with him where the value of the consideration it receives is significantly less than that it provides

'Transaction' normally involves some element of dealing. Granting a creditor a charge over assets is not a transaction at an undervalue.

Where a company has, at a relevant time, entered into a transaction with any person at an undervalue, an administrator or liquidator may apply to court for an order restoring the position to what it would have been if the company had not entered into that transaction.

The court must consider each case on its facts; there is no default remedy. The court may not make such an order if:

• the company entered into the transaction in good faith and to carry on its business, and

• when it did so, there were reasonable grounds for believing that the transaction would benefit the company

Preferences

A company gives a preference to a person if:

• that person is one of the company's creditors or a guarantor of any of its debts, and

• the company does or allows anything which puts that person in a better position than he would otherwise have been should the company enter insolvent liquidation. The latter term is not defined for this purpose

Where a company has, at a relevant time, given a preference to any person, an administrator or liquidator may apply to court for an order restoring the position to what it would have been if the company had not given the preference.

The court may not make such an order unless the company was influenced, in giving the preference, by a desire to put the recipient in a better position on insolvent liquidation than he would have been without the preference. Influence is presumed where the person is connected with the company. In this context 'connected' means that the person:

• is, or is an associate of, a director or shadow director of the company, or

• is an associate of the company

An associate:

• of an individual or his/her spouse, means:

• • a spouse or a relative, or the spouse of a relative

  • a partner (in a partnership)

  • an employee (of the individual only, not a spouse)

• of a company, means:

• • a person controlling that company (ie having at least one-third of the votes in general meeting)

  • another company controlled by the same person or his associates

Connected does not include employees.

In most cases recoveries from Insolvency Act 1986, s 239 proceedings are applied for unsecured creditors generally, not for a chargee.

Payment to a creditor who is able to claim set-off in respect of the payment is not a preference.

The relevant time

An administrator or liquidator only has a remedy in respect of transactions at an undervalue or preferences if they are entered into at a relevant time. This means, for transactions entered into with or preferences given to:

• persons connected with the company (other than only by being its employee), during the period of two years ending with the onset of insolvency

• persons not connected with the company, during the period of six months ending with the onset of insolvency

A time is not a relevant time unless the company is then unable to pay its debts, or becomes so due to the transaction or preference. However, these requirements are presumed to be satisfied in relation to a transaction at an undervalue with a connected person.

Orders which may be made

The court may make any order it thinks fit to restore the position to what it would have been had the transaction at an undervalue not been entered into or the preference not given. It may:

• set aside the transaction, ie require any property transferred, or its proceeds of sale, to be retransferred to the company

• release any security given by the company

• order any person who has received benefits from the company to pay them to the administrator or liquidator

However, an order may not generally prejudice any interest in property acquired, or compel repayment of a benefit received, in good faith and for value. Absence of good faith is presumed where (broadly) the person acquiring or receiving was aware of the circumstances or was connected, either with the company or the person from whom he acquired.

Other remedies, eg for misfeasance (below) may also be available.

Transactions defrauding creditors

A transaction at an undervalue entered into by a company may also be set aside, whether or not the company subsequently enters into insolvency, under Insolvency Act 1986, s 423. However, the court may not make an order restoring the previous position unless a person has entered into the transaction to:

• put assets beyond the reach of a person who is making or may make a claim against him, or

• otherwise prejudice the interests of such person in relation to such a claim

Transaction at an undervalue in this context has the same meaning as above. There is no relevant time in Insolvency Act 1986, s 423 proceedings; the transaction may be set aside whenever entered into. Application may be made by an administrator, liquidator, or (with leave of the court) a 'victim' of the transaction (someone who is or may be prejudiced by it); application by a 'victim' is treated as made on behalf of all 'victims'. The orders the court may make are as stated above, and are subject to the same restrictions as to property acquired and benefits received in good faith, for value and without notice of the relevant circumstances (those by which an order may be made).

Extortionate credit transactions

Where a company has, in the three years preceding entry into administration or liquidation, been party to an extortionate transaction involving the provision of credit to the company, the court may, on the application of an administrator or liquidator, make an order with respect to the transaction. A transaction is extortionate if, considering the risk accepted by the credit provider:

• its terms require grossly exorbitant payments in respect of the provision of credit, or

• it otherwise grossly contravened ordinary principles of fair dealing

There is a presumption that a transaction the subject of an application is extortionate. The court may:

• set aside or vary the transaction

• vary any security provided for the transaction

• require any party to the transaction to pay any money, or surrender any security held, to the office-holder

Avoidance of certain floating charges

A floating charge on a company's undertaking or assets created at a relevant time is invalid, except to the extent of the aggregate of the value of:

• money paid, goods or services supplied, or reduction of the company's debt, on or after, and in consideration of, the creation of the charge, and

• interest payable on such amounts

The relevant time in this case means:

• for a charge in favour of a connected person, two years ending with the onset of insolvency

• for a charge in favour of any other person, twelve months ending with the onset of insolvency (in this case, provided that the company is on creation, or becomes because of creation, unable to pay its debts)