Office holders Powers part 18

Section 244 deals with extortionate credit transactions, and applies in the same situation is that section 238 (transfer at undervalue) does.

In order for the section to bite the company has to have been party to a transaction which is for or involves credit being given to the company. The relevant period of time is three years ending with the day on which the company went into administration or liquidation as the case may be. This is therefore different from time provisions for transactions at undervalue or preferences (which concentrate on the commencement of the winding up rather than actually going into liquidation: the commencement of the winding up for example would be when a petition was issued if a winding up order was eventually made, but the relevant timescale for extortionate credit transactions is actual liquidation or administration).

If an application is brought then the presumption is that the transaction was extortionate unless the contrary is proved. Therefore the lender has the onus of showing that the transaction was not extortionate.

In order to consider whether a transaction is extortionate then one has to consider what risk was being accepted by the lender. Having regard to that risk a transaction will be extortionate if either the terms of the lending required grossly exorbitant payments to be made for the loan (whether in any event or if certain events happened: the payments might be one is which are fixed, or it might be for example that the interest rate goes up to exorbitant levels if for example payment is missed) or the loan otherwise grossly contravene ordinary principles of fair dealing.

It is not enough that the bargain was a bad one. The word used for either trigger event to characterise it as exorbitant is "grossly". It has got to be a really bad transaction, one that one would not expect any company to enter into. For example, if the lender was a connected person or company there may be a suspicion that the aim was purely to enrich that company at the expense of creditors generally. Alternatively the position may be that the loan is a ridiculously poor one to take out and was only taken out having regard to the fact that if it worked fine and if it didn't work the creditors would be the ones left with the problem. However it has to be really extreme to be exorbitant for these purposes. It should also be borne in mind that when companies are in financial difficulty there can be considerable risk associated with lending money to them (very easy to lose the lot) and that often the company will be in a particularly poor position so that even in a normal arm's-length bargain it would be likely to end up paying a lot. As against that, the clear purpose of this section is to ensure that creditors are dealt with fairly as a whole and that money which would otherwise be available for creditors generally is not swallowed up in grossly unfair payments pursuant to one particular loan.

If the court decides that this was extortionate credit transaction, and it has wide powers to change the terms or order return of payments or the return of security or taking accounts, or indeed setting aside the whole transaction. These powers are expressly stated to be exercisable concurrently with the powers available in respect of a transaction at an undervalue.

Although the application places the onus on the lender to prove that the transaction was not extortionate, this is not a provision which seems to be widely used by liquidators. That is probably because the loans will normally be made to companies in severe financial difficulties when the risk is regarded as proportionately greater and hence the interest rate or other terms applicable are likely to be relatively harsh even in ordinary commercial dealings. A liquidator would probably need to feel very sure of success before embarking upon such exercises especially when the lender is likely to point to the circumstances and the arm's-length bargaining and say there is nothing grossly unfair about that at all.