Transactions at an Undervalue (TUV)

A TUV is a type of transaction entered into prior to a company entering administration or liquidation, or an individual entering bankruptcy, which can be challenged by an office-holder (whether that be an administrator, liquidator or trustee in bankruptcy).

In respect of companies, a company may have entered into a TUV if all of the following conditions in sections 238 and 240 IA 1986 are fulfilled:

1. the transaction was entered into during the two years ending with the onset of insolvency (the “Relevant Time”) (s. 238(2) IA 1986); and
2. the company makes a gift to a person or otherwise enters into a transaction with a person on terms that provide for the company to receive no consideration (s238(4)(a) IA 1986), or
3. the company enters into a transaction with a person for consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company (s. 238(4)(b) IA 1986); and
4. at the time the transaction was entered into, the company was unable to pay its debts at, or became unable to pay its debts as a result of the transaction (the “Insolvency Requirement”) (s. 240(2), IA 1986).

An individual (A) enters a TUV with another person (B) if the criteria set out in sections 339 and 341 IA 1986 are fulfilled:

1. A makes a gift to B or A otherwise enters into a transaction with B on terms that provide for A to receive no consideration,
2. A enters into a transaction with B in consideration of marriage or the formation of a civil partnership, or
3. A enters into a transaction with B for consideration, the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by A (s. 339A IA 1986); and
4. The transaction was entered into at a time in the period of 5 years ending with the day of the making of the bankruptcy application as a result of which, or (as the case may be) the presentation of the bankruptcy petition on which, the individual is made bankrupt (the “Relevant Time”) (s. 341 IA 1986).

A common example of a TUV would be a company, which has subsequently entered insolvent liquidation, or an individual who has subsequently been made bankrupt, giving a gift to another party or disposes of its property for no financial consideration.

In corporate insolvency, an administrator or a liquidator can make an application to court for an order to set aside any transaction within the period of two years before the date on which the company entered administration or liquidation, if the company was at that time, or as a result of the transaction became, unable to pay its debts as they fell due (s. 238 IA 1986). Administrators and liquidators do not require the permission of a company’s members, creditors or the court to commence proceedings in respect of a TUV.

In personal insolvency, a trustee in bankruptcy has a similar power to make an application to the court to set aside any transaction which took place within the 5 years prior to the making of a bankruptcy order, whereby the individual disposed of any asset as, for example, a gift, in consideration of marriage or for substantially less than the asset was actually worth, if the individual was insolvent at the time or became insolvent as a result of that transaction (s. 339 IA iL1986).

In respect of a TUV that is also a transaction defrauding creditors, a victim of the TUV can also apply to the court for an order that either (i) restores the position to that which it would have been if the TUV had not been entered into (s.423(2)(a)) and (ii) for an order protecting the interests of the person(s) who are victims of the TUV (s. 423(2)(b) IA 1986).

A claim in respect of a transaction defrauding creditors is often referred to as a s.423 claim, by reference to the relevant section of the IA 1986. Section 423 provides a mechanism to challenge TUVs whereby the purpose of the transaction was to put the debtor’s assets out of reach of the debtor’s creditor(s) (the victim(s)), or to otherwise prejudice their interests (s. 423(3) IA 1986). Importantly, the debtor does not need to be insolvent at the time the transaction was entered into, nor do they have to become insolvent as a result.

For the purposes of s. 423 IA 1986, in relation to a TUV a ‘victim’ is to a person who is, or is capable of being, prejudiced by the transaction in question.

To challenge a TUV in personal or corporate insolvency,  an application is filed with the court.

To challenge a transaction as being a TUV, the applicant, i.e. the office-holder, must prove that the criteria for a TUV is met.

It is important to note that where the TUV is entered into with a connected person, there is a rebuttable presumption that the company or the individual was insolvent at the time of the transaction, unless it can be shown otherwise (s. 240(2) IA 1986).

A person is connected with a company if that person is:

• A director of the company.

• A shadow director of the company.

• An associate of a director or shadow director.

• An associate of the company (Section 249, IA 1986).

The term “Associate” is defined in section 435 of the Insolvency Act 1986, however, the definition varies depending on whether the person is considered an associate of an individual or a company. Determining whether a legal or natural person qualifies as an associate under the test in section 435 can be complex. While the section provides some guidance, we strongly recommend seeking legal advice promptly in these situations.

The court may make any order it sees fit to restore the position to that which it would have been, had the TUV not been entered into by the company (s.238(3) IA 1986), providing that the court is not satisfied that s. 238(5)(a) or (b) IA 1986 apply.

If the court makes an order under s.238 IA 1986, the usual order would require the person who entered into the transaction to return either (i) the property or (ii) the value of the property to the company.

In respect of a s.423 claim, the court may make an order avoiding any transaction made at an undervalue and/or protecting the victim’s interests (s. 423 IA 1986).

The court may make any order it sees fit to restore the position to that which it would have been, had the TUV not been entered by the individual (s.339(2) IA 1986).

If the court makes an order under s339 IA 1986, the usual order would require the person who entered into the transaction to return either the property or the value of the property to the estate.