Office holders Powers part 14

If the office holder has established the various constituent elements of transaction at an undervalue then there is still a statutory defence provided under section 238(5). That provides that the court will not make an order under section 238 if it is satisfied of two things. The first is that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business. The second is that the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

Once the office holder has established a transaction at an undervalue, the onus of proof on the statutory defence provided under section 238(5) is on the party against whom the claim is made. Therefore the other party to the transaction which is being attacked has got to prove both parts of the defence. This will be on the usual civil standard, namely a balance of probabilities.

The first point to note is that the first part namely the good faith aspect relates to the company, not the recipient. It is about whether the company was acting in good faith and so the recipient showing that it acted in good faith does not satisfy this test. It may thus lead to real evidential problems on behalf of the recipient because the recipient is having to establish precisely why the company acted as it did and to show that that was in good faith and also for the purpose of carrying on its business. Sometimes however the circumstances may demonstrate that. The recipient may be driving a hard bargain in circumstances where it is apparent that so far from the company acting improperly it is doing its best to realise an asset in circumstances of great difficulty. (obviously this is more likely to apply to transactions at undervalue where something is paid since on the face of it it is difficult to see how it would apply in respect of a gift). Let us say that the company has an asset (such as for example a valuable antique) which is worth a lot of money but for which there is no ready market. It might be that ordinarily one would have to spend six months or more trying to realise the value. However, if the company is to be able to save its business, it desperately needs cash. That might be the cash that allows the business to save a valuable contract which otherwise it will be unable to fulfil. In those circumstances £50,000 today might be more important than £250,000 in six months. It goes without saying that, difficult though such a defence is to mount for anyone, a respondent who is in no way connected with the company will find it much easier to establish the defence than a connected party (since there is likely to be a much greater suspicion that the supposed urgency of the transaction had nothing to do with protecting the business of the company and more to do with shifting valuable assets out of the company at bargain prices in favour of family members etc before it went into insolvency).

The first limb is what is known as a subjective test, namely what was the attitude of the company at the time (which will be assessed by reference to the relevant directors). The second part is an objective test namely whether there were reasonable grounds for supposing that the transaction would benefit the company. Both aspects have to be established for the defence to work. Thus, to take the previous example, even if in fact there were reasonable grounds to suppose that this would benefit the company if in fact the company was not acting in good faith then the defence is not made out. Likewise if it was acting in good faith thinking that this would help the company in pursuing its business but looking at it dispassionately there were no reasonable grounds for that belief.

If the transaction at undervalue is made out and the respondent against whom the order is sought fails to make out the statutory defence, then the court considers what relief to grant. We will look next week at what that entails.