Connected party transactions must be at fair market value
Another issue that may come back to bite directors if their company enters liquidation or administration is a Transaction at Undervalue (“TAU”) which derives from S.238 of the Insolvency Act 1986 (“IA96”).
A TAU applies when the company makes a gift to or enters a transaction with a person to receive no consideration or significantly less consideration than ought to have been paid.
The transaction needs to have happened within the two year period prior to the liquidation or administration.
Such a transaction tends to happen when directors transfer company assets into their own personal names and don’t pay for them or pay significantly less than fair market value or, perhaps when they are under pressure from a creditor, they give the creditor a company asset/s in lieu of physical payment.
What are the consequences?
Usually we will try and reach an out of court settlement with the party concerned to repay the shortfall between what was actually paid (if anything) and what ought to have been paid.
If we are unable to reach an out of court agreement we have the power from the IA86 to apply to court for an order that the party restores the position to what it would have been had the transaction not been entered into.
Is there a defence?
Yes, if the transaction was entered into in good faith and the transaction was for the benefit of the business and at the time of the transaction there were reasonable grounds for believing that the transaction would benefit the company.
What will the insolvency practitioner (“IP”) need to prove?
Other than the gift and timescale elements referred to above, the IP will need to prove that the company was effectively insolvent at the time of the transaction or rendered insolvent due to the transaction. If the transaction was with a connected party such as a director however then insolvency is presumed and the onus is on the director to prove the company was solvent.