Purpose
This concerns loss of value from an individual, whether through gifts or a significant imbalance in consideration, to the individual’s detriment at a time when he/she is insolvent.
Who may bring a claim?
A trustee in bankruptcy (s.339(1)).
What is a transaction at an undervalue? – s.339(3)
- A gift; or
- a transaction by the bankrupt in consideration of marriage; or
- a transaction for a consideration the value of which in money or money’s worth is significantly less than the consideration provided by the bankrupt.
When and how can the transaction be avoided?
The transaction is voidable if it took place within the ‘relevant time’ (s.339(1) – in the five years preceding the date of presentation of the petition leading to the bankruptcy (s.341(1)(a)).
It must be proved that the individual was insolvent (on a cash-flow or liabilities exceeding assets basis) at the time of the transaction or became insolvent as a result of it only if the date of the transaction was two to five years before the date of presentation of the petition (s.341(2)).
Insolvency of the bankrupt is presumed (subject to rebuttal) where a transaction at an undervalue is entered into with an ‘associate’ of the bankrupt (s.341(2) and see s.435).
Sanction
The court has a discretion to make an order to restore the position as if the individual had not entered into the transaction (s.339(2)). Section 342(1) provides a non-exhaustive list of the types of restoration order that the court has power to make under s.339 (and also under s.340 in relation to voidable preferences).
Any such order should not prejudice a subsequent purchaser from the party which transacted at an undervalue with (or received a preference from) the bankrupt individual, provided he/she was acting ‘in good faith and for value’ (s.342(2)).
However, under s.342(2A) there is a rebuttable presumption that an acquisition by a subsequent purchaser was not in good faith where the subsequent purchaser either:
- had notice of the relevant surrounding circumstances (i.e. the transaction at an undervalue or preference) and of the relevant proceedings; or
- was an associate of or connected with either the bankrupt individual or the person who transacted at an undervalue with (or received a preference from) the bankrupt individual.
In such circumstances, the burden of proof shifts to the subsequent purchaser to show good faith.