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Adjustment of prior transactions - Coggle Diagram
Adjustment of prior transactions
S.238 - 246 of IA1986 allow a liquidator to adjust certain pre-liquidation transactions if these transactions harm the creditors interests or undermine the pari passu principle
These include
Transactions at an undervalue
Preferences
Extortionate credit transactions
Invalid floating charges
Transactions at an undervalue
s.238 of IA1986 provides that a liquidator or administrator may apply to the court for an order where the company has at the relevant time entered into a transactions at an undervalue
A company enters into a transaction at an undervalue if
The company makes a gift to a person or otherwise enters into a transaction with a person on terns that provide for the company to receive no consideration
The company enters into a transaction with a person for a consideration the value of which in money or moneys wroth is significantly less than the value in money or moneys worth of the consideration provided by the company
Not all transactions at an undervalue will fall within s.238. In order to obtain a remedy under s.238, the transaction must have been entered into at the relevant time, which requires the following two conditions to be satisfied
The transaction was entered into within a 2 year period ending on the onset of the company's insolvency
When the company entered into the transaction, it was unable to pay its debts or it became unable to pay its debts as a consequence of the transaction
S.249 provides that a person is connected with a company if
They are a director or shadow director of the company
They are an associate of a director or shadow of the company
They are an associate of the company
Remedies
If a company does enter into a transaction at an undervalue at the relevant time, the liquidator or administrator may apply to the court for an order
The court may then make an order as it thinks fit for restricting the position to what it would have been if the company had not entered into that transaction
The court cannot make an order if it is satisfied that
The company entered into the transaction in good faith and for the purpose of carrying on its business
At the time it entered into the transaction, there were reasonable grounds for believing that the transaction would benefit the company
Preferences
S.239 provides that an administrator or liquidator can apply to the court for an order where the company has at the relevant time, given a person a preference
A company gives a preference to a person if
That person is one of the company's creditors or a surety or guarantor for any of the company debts or other liabilities
The company does anything or suffers anything to be done which has the effect of putting that person into a position which in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done
A preference will only fall within s.239 if it was given at the relevant time
In the case of a preference which is given to a person connected with the company within a period of 2 years ending on the date of onset of insolvency
In the case of a preference which is not also a transaction at an undervalue and which is not given to a connected person, within a period of six months ending on the date of the onset of insolvency
Remedies
The liquidator or administrator may apply to the court
The court may make an order as it thinks fit to restore the position to what ti would have been if the company had not given the preference
This will depend upon the nature of the preference and could include
Where the preference involves repayment of a loan, the court may order the creditor to return the repaid sum to the company
Where the preference involves releasing a creditor from an obligation, the court may renew the obligation
Where the preference involves the granting of security to a creditor, the court may set aside the security
Extortinate credit transactions
S.244 provides that a liquidator or administrator may apply to the court for an order where the company has entered into an extronriate credit transaction
The following conditions must be satsified
The company is or has been a party to a transaction for, or involving the provision of, credit to the company
The credit transaction is extortionate -menaing that having regard to the risk accepted by the person providing the credit
The terms of the transaction are or were such as to require grossly exorbitant payments to be made
The transaction otherwisegroslly contravened ordinary principles of fair dealing
The transaction was entered into within a 3 year period prior to the day on which the company entered administration or went into liquidation
Remedies
If a credit transaction meets the conditions, the court can make an order which may contain one or more of the following
A provision setting the transaction aside
A provision varying the terms of the transaction
A provision requiring a party to the transaction to pay to the liquidator or administrator any sums paid by the company
A provision requiring any person to surrender any property held as security fo the purposes of the transaction
Avoidance of certain floating charges
S.245 allows a liquidator or administrator to invalidate certain floating charges made prior to insolvency
No application to the court is required
A floating charge can be invalidated if it was made at the relevant time
In the case of a chaerge which is created in favour of a person connected with the company, within a period of 2 years ending on the date of the onset of insolvency
In the case of a charge which is created in favour of any other person within a period of 12 months ending on the date of the onset of insolvency