What is a transaction defrauding creditors?
Claims under s.423 do not necessarily relate to insolvency. However, where there has been a transaction at an undervalue the same circumstances will fulfill the requirements of s.423(1). It must additionally be proved that the intention or purpose of the transaction was to put assets beyond the reach of creditors of the company or otherwise prejudice their interests (s.423(3)). This even includes future creditors who were unknown at the time of the transaction.
Insolvency practitioners may prefer to bring claims under s.238 than under s. 423. The reason is that, under s.238, it need not be proved that the purpose of the transaction was to put the assets beyond the reach of creditors or otherwise prejudice them.
It is a pre-requisite of both a claim under s.423 and under s.238 that the transaction was at an undervalue. Where the challenge is made by an administrator or liquidator, it may therefore be easier to establish the claim under s.238, assuming that the claim satisfies the criteria for challenging an undervalue transaction under the above sections (i.e. ‘relevant time’ and insolvency). The main advantage of a claim under s.423 is that it does not face the risk of becoming time-barred in the same way as a claim under s.238.
Who may bring a claim?
An application to the court to set aside the transaction can be made by any of the following (s.424):
- a liquidator or an administrator;
- a supervisor of a voluntary arrangement; or
- a victim of the transaction in question.
Example: ABC Limited transferred a property to its sister company, CBA Limited, for a value substantially less than market value. At the time of the transaction, ABC Limited had been under pressure from its creditors. A creditor of ABC Limited, as a victim of the transaction, may be able to make an application to the court under s.423 to set aside that transfer if the requisite intent can be shown (although such intent may be difficult to prove).
What is the ‘relevant time’?
There is no ‘relevant time’ or period within which the transaction must have taken place. However, generally speaking, the more recent the transaction, the more likely it is that the applicant will be able to show the necessary intent.
Sanction
The court may make such order as it thinks fit to restore the position to what it would have been but for the transaction in question (s.423(2)). A non-exhaustive list of orders is set out in s.425(1).