Voidable transaction cases
Main articles: Fraudulent conveyance, Undervalue transaction, Voidable preference, Voidable floating charge, and Unjust enrichment
Since the Fraudulent Conveyances Act 1571, transactions entered into by a bankrupt have been voidable if they would result in assets otherwise available to creditors becoming unduly depleted or particular creditors becoming unjustly enriched.[158] Initially transactions made only with the intention of depriving creditors of assets, or perverting the priorities for order of distribution were vulnerable, while the modern approach of the Insolvency Act 1986 contains more provisions that unwind transactions simply because their effect is deprivation of assets available to creditors. Reminiscent of the 1571 Act, under the Insolvency Act 1986 section 423, a company may recover assets if they were paid away for "significantly less than the value" of the thing, and this was done "for the purpose of" prejudicing other creditors' interests. In Arbuthnot Leasing International Ltd v Havelet Leasing Ltd (No 2)[159] Scott J held that the motive of the company or its directors was irrelevant, so that even though Havelet Leasing Ltd's lawyers had advised (quite wrongly) that their scheme of starting another company and transferring assets to it would be lawful, because the scheme's purpose was to put the assets out of other creditors' reach it breached section 423.
The rule in section 423 applies at any time before insolvency and requires proof of intention to prejudice other creditors, but other provisions have limits set before the date of winding up and require no proof of bad intent. Under section 238, transactions at an undervalue may be avoided regardless of their purpose, but only up to two years before the onset of insolvency.[160] For example, in Phillips v Brewin Dolphin Bell Lawrie Ltd[161] the liquidators of an insolvent company, AJ Bekhor Ltd, claimed rescind the transfer of assets to a subsidiary, whose shares were then purchased by the investment management house Brewin Dolphin for £1. The only other consideration given by Brewin Dolphin was the promise to carry out a lease agreement for computers, which itself was likely to be unwound and therefore worthless. The House of Lords held that the total package of connected transactions could be taken into account to decide whether a transaction was undervalued or not, and held that this one was.
Under IA 1986 section 127 operates to declare every transaction void entered after the presentation of a winding up petition unless it has the approval of the court. In Re Gray’s Inn Construction Co Ltd[162] Buckley LJ held that courts would habitually approve all contracts that were plainly beneficial to a company entered into in good faith and the ordinary course of business. The predominant purpose of the provision is to ensure unsecured creditors are not prejudiced, and the company's assets are not unduly depleted. In this case, however, because a host of transactions honoured by the company's bank, that was in overdraft, between the presentation and the winding up petition being granted meant unprofitable trading, the deals were declared void.[163]
Voidable preferences
Main articles: Fraudulent conveyance, Undervalue transaction, Voidable preference, Voidable floating charge, and Unjust enrichment
Since the Fraudulent Conveyances Act 1571, transactions entered into by a bankrupt have been voidable if they would result in assets otherwise available to creditors becoming unduly depleted or particular creditors becoming unjustly enriched.[158] Initially transactions made only with the intention of depriving creditors of assets, or perverting the priorities for order of distribution were vulnerable, while the modern approach of the Insolvency Act 1986 contains more provisions that unwind transactions simply because their effect is deprivation of assets available to creditors. Reminiscent of the 1571 Act, under the Insolvency Act 1986 section 423, a company may recover assets if they were paid away for "significantly less than the value" of the thing, and this was done "for the purpose of" prejudicing other creditors' interests. In Arbuthnot Leasing International Ltd v Havelet Leasing Ltd (No 2)[159] Scott J held that the motive of the company or its directors was irrelevant, so that even though Havelet Leasing Ltd's lawyers had advised (quite wrongly) that their scheme of starting another company and transferring assets to it would be lawful, because the scheme's purpose was to put the assets out of other creditors' reach it breached section 423.
The rule in section 423 applies at any time before insolvency and requires proof of intention to prejudice other creditors, but other provisions have limits set before the date of winding up and require no proof of bad intent. Under section 238, transactions at an undervalue may be avoided regardless of their purpose, but only up to two years before the onset of insolvency.[160] For example, in Phillips v Brewin Dolphin Bell Lawrie Ltd[161] the liquidators of an insolvent company, AJ Bekhor Ltd, claimed rescind the transfer of assets to a subsidiary, whose shares were then purchased by the investment management house Brewin Dolphin for £1. The only other consideration given by Brewin Dolphin was the promise to carry out a lease agreement for computers, which itself was likely to be unwound and therefore worthless. The House of Lords held that the total package of connected transactions could be taken into account to decide whether a transaction was undervalued or not, and held that this one was.
Under IA 1986 section 127 operates to declare every transaction void entered after the presentation of a winding up petition unless it has the approval of the court. In Re Gray’s Inn Construction Co Ltd[162] Buckley LJ held that courts would habitually approve all contracts that were plainly beneficial to a company entered into in good faith and the ordinary course of business. The predominant purpose of the provision is to ensure unsecured creditors are not prejudiced, and the company's assets are not unduly depleted. In this case, however, because a host of transactions honoured by the company's bank, that was in overdraft, between the presentation and the winding up petition being granted meant unprofitable trading, the deals were declared void.[163]
Voidable preferences
