Challenging voidable transactions

A liquidator or administrator seeking to challenge any voidable transaction (except for a transaction defrauding creditors under s.423) will need to ask the following questions in each case:

1. Did the transaction involve a ‘connected person’ or ‘associate’?
2. Did the transaction take place within the ‘relevant time’?
3. Was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction?
4. Is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?

 

Type of Transaction	Relevant time prior to onset of insolvency?	Is insolvency required at date or as a result of transaction?	Presumption available? (If yes, burden of proof shifts)
s. 238 Transaction at an undervalue –  unconnected person	2 years	Yes	No
s. 238 Transaction at an undervalue – connected person	2 years	Yes	Yes – insolvency is presumed
s. 239 Preference – unconnected person	6 months	Yes	No
s. 239 Preference – connected person	2 years	Yes	Yes – ‘desire to prefer’ is presumed
s. 245 Avoidance of floating charges  – unconnected person	12 months	Yes	No
s. 245 Avoidance of floating charges  – connected person	2 years	No	No
s. 423 Transactions defrauding creditors	No relevant time	No	No

 Notes to table:

1. ‘Connected persons’ with the company (s.249) – are directors (including shadow directors), associates of directors and associates of the company.

   ‘Associates’ of director/company (s.435) – include spouses, business partners, employees, relatives (widely defined in s.435(8)), certain trustees, a company which is controlled by the director and a company which is itself associated with the company in question, where both are mutually controlled by some other company or person.

2. The ‘relevant time’ periods are defined in s.240(1) for the purposes of ss.238 and 239 and in s.245(3) for the purposes of s.245. They are calculated backwards beginning with the ‘onset of insolvency’.
3. The ‘onset of insolvency’ is (ss.240(3) and 245(5)):
   1. Administration: date of filing of application (court procedure) or notice of intention to appoint or (if none) appointment (out-of-court procedure).
   2. Liquidation: date of commencement of winding up (date of resolution for members’ or creditors’ voluntary winding up or date of presentation of petition for compulsory winding up (s.129)).
4. Where insolvency is required, it must have been the case either at the date of the transaction or as a result of it (ss.240(2) and 245(4)). Insolvency means ‘inability to pay debts’ under s.123 i.e. the company is insolvent on either the cash flow or balance sheet basis. Please note that “insolvency” has a wider definition for voidable transaction purposes than it has for wrongful trading purposes (in the latter case, “insolvency” is restricted to balance sheet insolvency only).