Transactions at an Undervalue and Preferences

TRANSACTION AT AN UNDERVALUE

The Insolvency Act 1986 provides that a company enters into a transaction with a person at an undervalue if:

• The company makes a gift to that person or otherwise enters into a transaction with that person on terms that the company will receive no consideration or

• The company enters into a transaction with that person for a consideration which is significantly less than the value of the consideration provided by the company.

Transactions at an undervalue undertaken 2 years prior to the liquidation, come under review as part of a liquidator's statutory duties. The detailed statute on undervalue transactions may be found at Sections 238, 240 and 241 of the Insolvency Act 1986.

The liquidator may apply to the Court for a determination as to whether or not a particular transaction was at an undervalue. 

The Court may then " make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction".

Transactions at an undervalue are reported by a liquidator to The Insolvency Service in relation to the conduct of directors for Directors Disqualification purposes.

In other words, if, pre-liquidation, you sell an asset for less than its true value (in other words you enter into a transaction at an undervalue) , the liquidator can take court action to recover the difference and The Insolvency Service might seek to disqualify you from acting as a director for some future period.

PREFERENCE PAYMENTS

Preferences can include any payments made by the insolvent company to any parties by the directors who they have a "desire to prefer".

Examples could include:

1.   Payments to related parties

2.   Payments to the directors themselves

3.   Payments to creditors who are secured by a personal guarantee signed by a director

4.   Payments to creditors where their services are needed in any re-start company of the director.

5.   Payments to some suppliers and not others, e.g. paying suppliers local to you and not paying HMRC when you know the Company is unlikely to be able to pay any further amounts to its creditors.

The Liquidator has powers to recover these preference payments through the Courts.

The time periods for reviewing such preferences are:

• 2 years prior to the creditors meeting in relation to transactions with parties connected to the company.

• 6 months prior to the creditors meeting in relation to any other transactions.

The detailed law is set out at Sections 239 to 241 of The Insolvency Act 1986. As preferences are illegal acts it might be easily appreciated why any preference payments initiated by a director count against him in directors disqualification proceedings.

As always, should you wish to discuss Transaction at an Undervalue, Preference payments or any other insolvency matter in more detail, please do not hesitate to get in contact. Telephone: 01326 340 579, Email: ale@purnells.co.uk