Avoidable Transactions Flashcards
(12 cards)
What is the statutory time limit for challenging a transaction at an undervalue under the Insolvency Act 1986?
A. Two years prior to the onset of insolvency
B. Six months prior to the onset of insolvency
C. Five years prior to the onset of insolvency
D. There is no statutory time limit
A. Two years prior to the onset of insolvency
Explanation: Under s238 IA 1986, a liquidator or administrator can challenge a transaction at an undervalue that occurred within two years before the onset of insolvency, regardless of whether the transaction was with a connected person.
To successfully establish a preference under s239 IA 1986, which of the following must be proven?
A. That the company was influenced by a desire to prefer the creditor
B. That the transaction involved a connected person only
C. That the transaction occurred after insolvency began
D. That the creditor demanded the payment
A. That the company was influenced by a desire to prefer the creditor
Explanation: For a transaction to be a preference under s239, there must be evidence that the company acted with a subjective desire to prefer the creditor — not merely under pressure. This is especially important where the creditor is not connected, since no presumption applies.
Which of the following is a valid defence to a transaction at an undervalue under s238 IA 1986?
A. The company did not receive legal advice
B. The transaction was approved by a shareholder resolution
C. The company entered the transaction in good faith for the purpose of carrying on its business
D. The consideration was paid in instalments
C. The company entered the transaction in good faith for the purpose of carrying on its business
Explanation: The defence to a TUV is that the company acted in good faith and for the benefit of the business, with reasonable belief that the transaction would help the company.
Which of the following is required to successfully challenge a transaction defrauding creditors under s423 IA 1986?
A. That the transaction occurred within 12 months of insolvency
B. That the transaction was with a connected person
C. That the company was insolvent at the time
D. That there was intent to prejudice creditors
D. That there was intent to prejudice creditors
Explanation: A claim under s423 focuses on the intent to put assets beyond creditors’ reach or otherwise prejudice their interests. Insolvency or timing is not required.
A company sells a £100,000 machine to a related company for £10,000, six months before going into administration. What type of voidable transaction is most likely to apply?
A. Preference under s239
B. Floating charge avoidance under s245
C. Transaction at an undervalue under s238
D. Transaction defrauding creditors under s423
C. Transaction at an undervalue under s238
Explanation: Selling for significantly less than value meets the test for TUV. Because the sale was to a related party, insolvency is presumed, and the timing is within the 2-year limit.
A company grants a floating charge to its bank to secure an existing overdraft with no new lending, one month before entering administration. What is the likely outcome?
A. The floating charge is valid in full
B. The floating charge is void unless new money was advanced
C. The floating charge is automatically upheld due to insolvency
D. The floating charge is a valid preference
B. The floating charge is void unless new money was advanced
Explanation: Under s245, a floating charge securing existing debt within 12 months of insolvency is void unless it secured new money or value provided after its creation.
A company repays a large unsecured loan to a supplier 4 months before liquidation. The supplier is not a connected person. What must be shown to treat this as a voidable preference?
A. That the company was influenced by a desire to prefer the creditor
B. That the supplier requested immediate payment
C. That the payment was made after insolvency commenced
D. That the company had more than one creditor
A. That the company was influenced by a desire to prefer the creditor
Explanation: Under s239, when dealing with a non-connected person, the liquidator must prove that the company was influenced by a desire to prefer that creditor. No statutory presumption of desire applies in this case.
A company granted a floating charge to a parent company with no new consideration 18 months before entering liquidation. What is the effect?
A. The floating charge is voidable only if insolvency is proven
B. The floating charge is valid in all circumstances
C. The floating charge is automatically void if the company was connected and no new consideration was provided
D. The floating charge converts into a fixed charge
C. The floating charge is automatically void if the company was connected and no new consideration was provided
Explanation: A floating charge to a connected person is void if no new consideration is given, regardless of whether the company was insolvent.
A director causes the company to transfer a warehouse to his brother for £1, while the market value was £300,000. This occurs 23 months before administration. What is the most appropriate remedy?
A. The brother must pay market rent for the building
B. The transfer can be set aside as a preference
C. The transaction may be challenged under s238 as a transaction at an undervalue
D. No remedy is available because the director is not a party
C. The transaction may be challenged under s238 as a transaction at an undervalue
Explanation: The transaction was for significantly less value, within 2 years and to a connected person, which means insolvency is presumed unless rebutted.
A liquidator suspects that a company gave security to a creditor one month before insolvency, without receiving any further credit. What is the most efficient legal basis to invalidate the charge?
A. s423 – transaction defrauding creditors
B. s245 – avoidance of floating charges
C. s214 – wrongful trading
D. s239 – preference
B. s245 – avoidance of floating charges
Explanation: s245 allows automatic invalidation of a floating charge within 12 months if it secured no new money, which applies here. It avoids the need for intent or purpose.
A company transferred assets to a third party before any insolvency, intending to put them beyond the reach of potential litigation. No insolvency ever occurred. What claim is most appropriate?
A. s239 – preference
B. s245 – floating charge
C. s238 – transaction at an undervalue
D. s423 – transaction defrauding creditors
D. s423 – transaction defrauding creditors
Explanation: s423 can apply even if the company is solvent. The key test is intent to defraud or prejudice current or future creditors.
Which of the following best describes the remedy under a successful s238 or s239 claim?
A. The transaction is criminalised and fines are issued
B. The court must order disqualification of directors
C. The court can restore the company to the position it was in before the transaction
D. The counterparty becomes liable for all company debts
C. The court can restore the company to the position it was in before the transaction
Explanation: The court has a discretionary power to order restoration, which might include repayment of money, returning property or other measures to benefit the estate.
