UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
Transactions Defrauding Creditors A transaction may be set aside by the court as a trans - action defrauding creditors if the transaction was at an undervalue and the court is satisfied that it was made for the substantial purpose of putting assets beyond the reach of a person who is making, or may make, a claim against the company, or of otherwise prejudicing the interests of a person in relation to the claim which that person is making or may make. Any “victim” of the transaction (with the leave of the court if the company is in liquidation or administration) may bring a claim under this provision, which is not lim - ited to liquidators or administrators. There is no statu - tory time limit to initiate the challenge (subject to the normal statutory limitation periods) and the company does not need to be insolvent at the time of, or as a result of, the transaction. If the court determines that the transaction was a transaction defrauding creditors, the court may make such order as it sees fit to restore the position to what it would have been if the transaction had not been entered into and to protect the interests of the “vic - tims” of the transaction. 7.7 Set-Off Rights Set-off of mutual debts in insolvency (liquidation and administration) is mandatory and self-executing. 7.8 Out-of-Court v In-Court Enforcement See 7.1 Impact of Insolvency Processes for a descrip - tion of pre-pack sales. Consensual restructurings and semi-consensual restructurings (involving some type of enforcement action) are typically effected outside of court unless a statutory creditor compromise is required (see 7.9 Dissenting Lenders and Non-Con- sensual Restructurings ). 7.9 Dissenting Lenders and Non-Consensual Restructurings Scheme of Arrangement Although not an insolvency proceeding, under Part 26 of the CA06 the English courts have jurisdiction to sanction a scheme of arrangement that effects a compromise of a company’s liabilities between a com - pany and its creditors (or any class of its creditors). An English company or, provided certain conditions are met to engage the jurisdiction of the English court, a
will not make an order if it is satisfied that the com - pany entered into the transaction in good faith and for the purpose of carrying on its business and that, at the time it did so, there were reasonable grounds for believing the transaction would be beneficial. If the court determines that the transaction was a transaction at an undervalue, the court will make such order as it sees fit to restore the company to the posi - tion it would have been in had it not entered into the transaction. Preferences A liquidator or administrator can apply to the court for an order to set aside a preference. A transaction will only be a preference if, at the time of the transaction or as a result of the transaction, the company was or became unable to pay its debts (as defined in Section 123 of the IA86). The transaction can be challenged if the company enters into insol - vency within a period of six months (if the beneficiary of the security or the guarantee is not a connected person) or two years (if the beneficiary is a connect - ed person, except where such beneficiary is a con - nected person by reason only of being the company’s employee) from the date the company grants the pref - erence. A transaction will constitute a preference if it has the effect of putting a company’s creditor (or a surety or guarantor for any of the company’s debts or liabilities) in a better position than it would otherwise have been in the company’s insolvent liquidation with - out the transaction. However, a court will not make an order unless the company was influenced by a desire to prefer the recipient. If, however, the beneficiary of the transaction was a connected person it is presumed that the company desired to prefer that person unless the contrary is shown. If the court determines that the transaction was a pref - erence, it will make such order as it sees fit to restore the company to the position it would have been in had it not entered into the transaction.
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