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#10111 - Challenging Antecedent Transactions - Business Law and Practice

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Ground of challenge Conditions for successful challenge Timing issues Who can bring a challenge?

Transaction at an undervalue

(section 238)

The company transferred an asset to another party for no consideration, or for significantly less than the asset's true value.

The company was insolvent at the time of the transaction or became insolvent as a result of the transaction. The company's insolvency is presumed if the transaction was with a connected person.

The challenge will fail if the transaction was made in good faith, for the purpose of carrying on business and there are reasonable grounds to believe the transaction was for the benefit of the company.

Any transaction in the two-year period before the onset of insolvency.

The action must be brought within six years of the onset of insolvency.

Liquidator (with appropriate sanction)

Administrator

Preference

(section 239)

The transaction put the creditor in a better position than it would otherwise have been in on the company's insolvency.

The company was influenced by the desire to prefer the creditor. This intention is presumed where the transaction was with a connected person.

The company was insolvent at time of the transaction or became insolvent as a result of the transaction.

Any transaction during the six-month period before the onset of insolvency.

A transaction with a connected person in the two years before the onset of insolvency.

The action must be brought within six years of the onset of insolvency.

Liquidator (with appropriate sanction)

Administrator

Extortionate credit transaction

(section 244)

 The terms of the credit transaction either require the company to make grossly exorbitant payments or otherwise grossly contravene the ordinary principles of fair dealing.

Any transaction providing credit to the company made in the three years before the administration or liquidation.

The action must be brought within six years of the company going into administration or liquidation (whichever is the earlier).

Liquidator

Administrator

Avoidance of floating charges

(section 245)

The company was insolvent at the time of granting the floating charge or became insolvent as a result of the transaction in which the floating charge is granted.

Where the charge is granted in favour of a connected person there is no need to establish insolvency.

Does not apply to financial collateral arrangements.

Any floating charge created in the 12 months before the onset of insolvency.

A floating charge created in favour of a connected person in the two years before onset of insolvency.

No application to court required: charge automatically invalid except to the extent that it secures fresh lending to the company.

Applies in administration and liquidation.

Transactions defrauding creditors

(section 423)

The transaction was entered into at an undervalue for the purpose of putting assets beyond the reach of a creditor so as to frustrate an actual or potential claim that the creditor has against the company.

No insolvency requirement.

Any transaction at an undervalue entered into by the company.

The action must be brought within six years of the transaction taking place.

Liquidator (with appropriate sanction)

Administrator

Any other party prejudiced by transaction (with the court's permission).

Financial Services Authority or Pensions Regulator.

Connected person

A party who is adirectororshadow director, anassociateof such a director or an “associate” of the company (section 249). A party is associated with an individual if, for example a family relation (either directly or by marriage) and associated with a company if employed by the company. A company is associated with another company if, for example, the same person has control of both companies (section 435).

Onset of insolvency

The precise date of the onset of insolvency depends on the insolvency procedure in question. Broadly, it is the date on which the administration or liquidation started.

Administration (section 240(3)(a)-(c))

In administration, the onset of insolvency is the date on which:

  • The application to court for an administration order is issued.

  • A notice of intention to appoint an administrator is filed at court.

  • Otherwise, the date on which the appointment of an administrator takes effect.

Liquidation (section 240(3)(e))

In liquidation, the onset of insolvency is the date on which:

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