A company heading for liquidation often pays the creditors who press hardest. Section 340 of the Companies Act 1997 allows the liquidator to unwind that.
Section 340(1) — “transaction”
(a) a conveyance, transfer, or other disposition of property by the company; (b) the giving of a security or charge over the company’s property; (c) the incurring of an obligation by the company; (d) the acceptance by the company of execution under a judicial proceeding; (e) the giving of a release or waiver by the company; (f) the payment of money by the company, including payment under a judgment or order of a court;
and includes a transaction entered into, given effect to, or required to be given effect to because of an order of a court.
Paragraphs (d) and (f), and the closing words, put the point beyond doubt: paying a judgment debt, or submitting to execution, can be a voidable transaction. A creditor who sues and recovers in the final months before a liquidation is in no better position than one who was paid without proceedings.
Section 340(2) — when a transaction is voidable
(a) was made (i) at a time when the company was unable to pay its debts as they became due in the ordinary course of business, and (ii) within the specified period; and
(b) enabled another person to receive more towards satisfaction of a debt than the person would otherwise have received or be likely to have received in the liquidation,
unless the person entered into the transaction with the company in good faith in the ordinary course of business and had no reasonable grounds for suspecting that the company was unable to pay its debts as they became due in the ordinary course of business.
| Period | Length | Effect |
|---|---|---|
| Specified period — s 340(5) | One year before commencement of the liquidation; and, for a Court appointment, one year before the application plus the period from the application to the order | The transaction must fall within it to be voidable at all |
| Restricted period — s 340(6) | Three months before commencement; and, for a Court appointment, three months before the application plus the period from the application to the order | A transaction within it is presumed, unless the contrary is proved, to have been made when the company could not pay its debts |
Inside the three months, the liquidator need not prove insolvency — it is presumed, and the recipient must prove the contrary. Between three months and one year, the liquidator must prove the company was in fact unable to pay its debts at the time.
Both periods are extended where the liquidator was appointed by the Court, by the time taken between the application and the order. Otherwise a company could delay a contested application and let the clock run out on its preferences.
In determining whether a transaction took place in good faith, no account is to be taken of any intent or purpose on the part of the company to (a) enable another person to receive more than they would in the liquidation; (b) reduce or cancel another person’s liability for a debt incurred by the company; or (c) contribute towards satisfying another person’s liability for such a debt.
Good faith is assessed on the recipient’s side. The directors’ motives — including a wish to protect a guarantor, which paragraphs (b) and (c) squarely address — neither save nor condemn the transaction.
The defence has three cumulative elements: good faith, in the ordinary course of business, and no reasonable grounds for suspecting inability to pay. A supplier who put the company on stop credit, demanded cash before delivery, or agreed a payment plan for arrears will struggle with all three.
Section 340B — the set-aside procedure
A liquidator who wishes to set aside a transaction or charge voidable under section 340 or 340A shall file a notice with the Court and serve it as soon as practicable on the other party or charge holder, and on any other party from whom the liquidator intends to recover.
The notice shall be in writing; state the liquidator’s postal, email and street addresses; specify the transaction or charge; describe the property or state the amount to be recovered; state that the person may object by written notice of objection received within 20 working days; state that the objection must contain full particulars of the reasons and identify any documents evidencing them; state that the transaction will be set aside if the person does not object; and state that if they do object, the liquidator may apply to the Court.
The transaction or charge is automatically set aside as against a person served if that person has not objected by a written notice of objection received by the liquidator within 20 working days after service.
This is the most consequential deadline in Part XVIII for an ordinary trade creditor. Doing nothing is not neutral — it is defeat. And under subsection (4), the objection must contain full particulars and identify supporting documents; a bare denial may not qualify.
Under subsection (5), a transaction not automatically set aside may still be set aside by the Court on the liquidator’s application. Objecting buys a hearing, not immunity.
Section 341 — what the Court may order
(a) a person to pay the liquidator sums fairly representing the benefits received;
(b) a person to pay the company an amount equal to some or all of the money paid under the transaction;
(c) property transferred to be restored to the company;
(d) property to be vested in the company where it represents, in a person’s hands, the proceeds of sale of property or money transferred;
(e) the release or discharge, in whole or in part, of a debt, charge, security, or guarantee given by the company;
(f) an agreement, or specified provisions of it, to have been void at and after the time it was made or a specified later time;
(g) an agreement to be varied, and if the Court thinks fit to have had effect as varied from the outset;
(h) an agreement or provisions to be unenforceable;
(i) security to be given for the discharge of an order;
(j) the extent to which a person affected may claim as a creditor in the liquidation.
Paragraph (j) matters to the recipient: a creditor who repays a preference is generally restored to the position of claiming the original debt in the liquidation, and the order says so.
Section 342 — the limits on recovery
(1) Setting aside a transaction, or an order under section 341, does not affect the title or interest of a person in property acquired (a) from a person other than the company, (b) for valuable consideration, and (c) in good faith.
(2) Recovery may be denied wholly or in part where (a) the person from whom recovery is sought received the property in good faith and has altered his position in the reasonably held belief that the transfer was valid and would not be set aside, and (b) in the Court’s opinion it is inequitable to order recovery or recovery in full.
(3) Nothing in the Land Registration Act (Chapter 191) restricts the operation of section 340 or 341.
Indefeasibility of registered title under the Land Registration Act would otherwise be an answer to an order restoring land to the company. Section 342(3) removes that objection. A registered transfer of land can be unwound as a voidable transaction — though a subsequent purchaser who acquired from someone other than the company, for value and in good faith, is protected by subsection (1).
Subsection (2) is a change of position defence, and it is discretionary: both good faith reliance and inequity must be shown, and relief may be partial.
Sources
- Companies Act 1997 — ss 335, 340, 340A, 340B, 341, 342, 343–347
- Land Registration Act (Chapter 191)
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.