Office holders Powers part 12
Section 238 of the Insolvency Act 1986 gives powers to the office holder (the administrator in administration, the liquidator in liquidation). This is to seek to adjust transactions happening before the administration or the liquidation, transactions which are said to be at an undervalue. This is essentially designed to prevent asset stripping namely a company getting rid of its assets for less than their true worth just before liquidation or administration.
The first thing to consider in connection with section 238 it is whether there is a transaction. Transaction is defined in section 436 where it states that ""transaction" includes a gift, agreement or arrangement, and references to entering into a transaction shall be construed accordingly.". Note the word "includes". This is a very broad definition and the courts consider it should be construed as such. There can be a transaction without there being a binding legal obligation. Sometimes the courts can consider that a series of related transactions can be relevant for this purpose. There has to be some sort of deal with the person against whom the application is launched that can be pointed to.
Crucial is establishing that the transaction (whatever it is) is at an undervalue. Section 238(4) provides that a transaction is at an undervalue if one of two things applies. The first is that the company makes a gift to someone or otherwise entered into a transaction with someone on terms that provide for the company to receive no consideration. Consideration is the legal term for what you get as part of a binding contract bargain. It can be a payment (I will pay you so much) or it can be an asset (my racehorse or car) or a promise (I will do so many hours work on your garden). Thus if the company on the face of it give something away, or entered into a transaction whereby even if not as such a gift it actually gets nothing back in return for the asset, whether it be property or money, then that is a transaction at an undervalue. That of course is the most obvious form of transaction at an undervalue. It is the other sort which can give rise to rather more tricky problems.
The other form of undervalue is if the company entered into a transaction with someone 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. There are therefore to things being looked at. What the company got rid of. What the company received in return. Each of those things has to be looked at in money terms, and for it to be an undervalue what the company receives has to be worth significantly less. That inevitably involves an exercise by which the court views in terms of money value both what the company transferred and what it got back.
Thus the court will have to consider the value of what was provided by the company, (having regard to what could or should have been realised for it on the open market) and then the value that was paid for it (which of course may involve valuing an asset if money was not paid) deciding in percentage terms what the difference is and then deciding whether in all the circumstances that is "significant". It is not possible to say definitely what would be significant in any particular case, since that of course ultimately depends on all the circumstances, but it does make it more difficult both for liquidators to decide exactly whether there is a claim. This is particularly so before the liquidator has gone through a valuation exercise to assess the respective values of what was transferred and what was received.
When looking at the value what is relevant is the value for the recipient which is what has to be assessed. Thus for example a company may have received something which on the open market would only be worth £x, but which for particular reasons is worth double that to the company. Whether the company is the company in liquidation (i.e. the party transferring the asset the conduct of which is being examined by the liquidator), or the party which has received the asset (namely the party against whom the liquidator may be bringing a claim) value for this purpose has to be assessed in terms of what it was worth to that particular party.
Next week we will look at some further issues regarding section 238.