Transactions at an Undervalue

Definition and Legal Requirement

A Transaction at an Undervalue is when a company makes a gift or transaction to a person on terms that provide for the company to receive no consideration or consideration that is significantly less than its true market value.

Once a company enters into Administration or Liquidation, the appointed Administrator or Liquidator is required by law to investigate whether or not any Transactions at an Undervalue have occurred. This will be done by collating and analysing the company’s financial statements, books and records, asset register and bank statements.

For a Transaction at an Undervalue claim to be successful it will have to have been made within the “relevant time”.  The “relevant time” is 2 years leading up to the “onset of insolvency”.

The 2 year time frame is the same for all persons entering into the transaction irrespective as to whether or not they are a “connected” or “unconnected” to the company.

Ramifications

When an Administrator or Liquidator establishes that a Transaction at an Undervalue has been made there are a number of ramifications, the most important being:

  • Details of the Transaction will form part of the Directors’ conduct report that the Administrator or Liquidator is required to submit to the Insolvency Service. This will have some impact upon the Insolvency Service’s decision to commence disqualification proceedings;
  • The Directors may be made liable in part or in full for the company’s debts, irrespective as to whether or not they were the direct recipients of the transaction; and
  • Recovery may be made from party or parties that received the benefit or there may be a reversal of the transaction.

Defence

The most important element to establishing a Transaction at an Undervalue is that it was not made in good faith.

If it can be demonstrated that the company entered into the transaction in good faith for the purposes of carrying out its business, the claim may be defeated. It will also have to be shown that at the time of the transaction there were reasonable grounds for believing that the transaction would benefit the company.

Frequently Asked Questions

There are numerous transactions that could be considered to be at an undervalue. These include such things as gifting assets to someone for no consideration or selling assets for a sum considerably lower than their true market value. Such things as guarantees for debts, the sale of life policies for terminally ill people and transactions with a person in consideration of marriage or a civil partnership have all been found to be Transactions at an Undervalue.

The “relevant time” is calculated from working backward from the “onset of insolvency”. However, a time is not a “relevant time” unless the company was, at the moment the transaction was made, unable to pay its debts as they fell due or became so as a consequence of the transaction.

There are various scenarios which determine the “onset of insolvency”. These are broadly to do with when insolvency proceedings are commenced. Commencement would be the date that a Winding Up Petition was presented against a company, or when the Notice of Intention to Appoint and Administrator was filed, or when the Directors of a company resolve to place a company into Creditors Voluntary Liquidation.

A “connected” party” is either a Director or a Shadow Director or an “associate” of a Director or Shadow Director. An “associate” covers a wide and varied selection of relationships including spouse, civil partner, partnership and trustee.

There are various lines of defence available to Transaction at an Undervalue claims. For example, it may be demonstrated that the asserted Transaction at an Undervalue was made in good faith for the purposes of benefitting the company. Alternatively, that the company was not insolvent at the time or as a result of the transaction.

The defences to a claim can be demonstrated a number of ways, which could include having the assets in question professionally valued, obtaining board approval before the transaction happened and making a transparent record of the transaction providing the reasoning behind why it took place.

When the beneficiary of the transaction is a connected party or an associate, insolvency is presumed. This means that the onus is on the beneficiary to show that the company was not insolvent at the time of the transaction.