Office holders Powers part 13

If the transaction is to be a transaction at an undervalue it has to be a transaction which is at a relevant time as defined in section 240 of the Insolvency Act 1986. These time limits in section 240 apply equally to claims under section 239 (which we will be considering shortly in this series) as they do to claims under section 238. These time limits are also linked to the "onset of insolvency". This date will be different depending on exactly what form of insolvency is involved. If the company has gone into liquidation then the date is the commencement of the winding up. If there is a court order for administration then the date is that on which the application for administration was made, and if the administrator is appointed under either paragraphs 14 or 22 of schedule B1 to the Insolvency Act 1986, the date on which the copy notice of intention to appoint was filed with the court. In any other Administration it is the date of appointment, and there is also express provision for an administration leading to a liquidation.

The relevant time for the purpose of transaction at undervalue is two years ending with the onset of insolvency. However that time is only relevant if at the time of the transaction the company was unable to pay its debts within the meaning of section 123, essentially unable to pay them as they fall due or where its liabilities exceeded its assets. (For a fuller account of the meaning and effect of section 123, see the previous article in this series, Insolvency procedures: Winding up part 6 ). Alternatively if as a result of the transaction the company became unable to pay its debts that will also satisfy the section. However there is a difference between transactions at undervalue with connected persons, and transactions at an undervalue with other persons. If it is a connected person then it is presumed that the company was unable to pay its debts at the time of the transaction unless the connected person proves the contrary (on the normal civil standard of the balance of probabilities). In any other case the onus is on the liquidator etc to establish this as part of the claim.

Connected person is defined in section 249 as a director or shadow director of the company or an associate of such director or shadow director or an associate of the company, with associate having the meaning given by section 435. Director and shadow director are defined in section 251. Anyone properly appointed as a director is a director. Anyone held out as a director by the company who claims to be a director and acts as a director albeit never having been appointed will be treated as a director for this purpose (known as a "de facto" director). Shadow director deals with the different position of someone who never claimed to be a director of the company, but nonetheless is a person in accordance with whose directions or instructions the directors of the company are accustomed to act (although there is an exception to ensure that giving professional advice alone will not lead to someone being a shadow director: otherwise for example a lawyer or an accountant could advise a particular course of conduct as a professional advising the company and then be construed as a shadow director). The court will look objectively to see if the shadow director can be said to be giving instructions or directions to the directors.

Section 435 regarding associates is a relatively complicated section. Various persons are defined as associate of individuals if they are relatives of either the individual or their husband/wife/civil partner (who of course are also associates). The same applies in respect of partners and also employees or employers, (or in respect of companies directors or officers) and there are provisions regarding trustees and those who benefit from trusts as regards where they are to be treated as connected. There are also provisions regarding companies where a person or his associates have control of more than one company (namely the directors are accustomed to act in accordance with his or her directions or instructions or the person and associates is entitled to exercise or control the exercise of one third of the votes of the company in general meeting) making the companies so controlled associates of one another. Companies are also associated with individuals if those individuals have control or that individual and persons who are that person's associates have control. Of course bear in mind that connected persons are also covered by section 249 as well as associates, so that for example if you were an associate of a director or shadow director you are also someone who is in the same position as a connected person or associate of the company itself.

There are thus many situations where the onus of showing that the company was insolvent at the time falls on the person who undertook the transaction with the company (although of course the liquidator etc still has to prove transaction at an undervalue and relevant time). In other cases the liquidator also bears the burden of showing that the company was insolvent or became insolvent as a result of the transaction.