Office holders Powers part 15

If the court finds that there has been a transaction at an undervalue and no statutory defence is made out, then the court will make a declaration to that effect and then under section 238(3) the court is to "make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.". What the court has to do is decide what it thinks is the most appropriate remedy. In order to do that it is given certain specific powers.

These various powers are set out in section 241. The specific provision is expressly without prejudice to the availability of any other remedy. Thus the statutory provision is giving specific remedies, not cutting down any general remedies which may otherwise exist. These powers are also subject to certain limitations as regards the rights of third parties which we will hereafter consider.

The first thing which the court can do under section 241(1)(a) is require any property transferred under the transaction to be transferred to the title of the company. Thus in the example given last week, if an antique was transferred at an undervalue the court can order that it is transferred back to the company. Of course as part of this the court will consider the terms of transfer back. Money may have been paid by the recipient, or in some circumstances expense may have been undertaken in improving an asset. (Repair of the antique so as to make it more valuable etc). The court will consider all the circumstances in order to decide what is the just and appropriate thing to do. That of course does not necessarily mean that the person who has incurred expense would get it back, it means that that is one of the factors that the court will consider in deciding what it is just to do.

Under section 241(1)(b) the court can also transfer property back to the company if it represents in any person's hands the proceeds of sale of property or monies transferred by the company. This can be useful in a number of instances. It effectively is utilising a remedy known as "tracing", which is a way of following property even when it emerges in a different form. Subject to the rule about protecting third parties (to be dealt with hereafter) it can have two beneficial effects. One is that the property can be followed into another form and treated as still being the property of the company, so that if the person against whom the application is made has become insolvent it represents the company's property rather than an asset available for distribution amongst that person's creditors generally. On insolvency someone else's property is not available for creditors generally, just as secured property is not, (secured property being where someone has security such as where a building society has a mortgage over your house) but otherwise the available assets are administered so that each of the creditors receives a fair share of the assets. Where someone's assets, after costs, only cover half their debts, then this means that instead of some creditors being paid in full and others getting nothing, (that is obviously apart from secured creditors who still had the benefit of their security) , creditors in such an instance all would receive 50p in the pound on their debt. The other potentially beneficial effect here is where the property has been converted into something else and that becomes worth much more. Thus if the transfer out of the insolvent company was of shares in company A, and those are swapped for shares in company B which is then subject to a takeover so that those shares shoot up in value, that would mean that return of the property could mean the shares in company B going back to the insolvent company which would obviously lead to a much bigger benefit to it and hence its creditors.

Next week we will look at some of the other orders which can be made under section 241.