Beyond the preference provisions in section 340, the Companies Act 1997 gives a liquidator four further recovery powers.
Section 343 — uncommercial transactions
(a) it took place within the specified period — one year before commencement, extended by the period from application to order in a Court appointment; and
(b) it was an uncommercial transaction; and
(c) when it took place, the company (i) was unable to pay its debts; or (ii) was engaged, or about to engage, in business for which its financial resources were unreasonably small; or (iii) incurred an obligation knowing it would not be able to perform it when required.
A transaction is uncommercial where, and only where, a reasonable person in the company’s circumstances would not have entered into it, having regard to (i) the benefits, if any, to the company; (ii) the detriment to the company; (iii) the respective benefits to the other parties; and (iv) any other relevant matters.
Sub-paragraphs (ii) and (iii) reach a company that was not yet unable to pay its debts. Undercapitalisation — business for which the financial resources were unreasonably small — and knowingly incurring an obligation it could not perform are independent triggers. A company can be caught before the cash flow test is failed.
“Transaction” has the same wide meaning as in section 340(1), so it includes giving security, incurring obligations, and releases and waivers.
Section 344 — dealings with directors and related persons
Where, within the specified period, the company acquired a business or property from, or the services of — (a) a director, or a nominee, relative, or trustee for a director or a director’s relative; (b) a person, or a relative of a person, who had control of the company; (c) another company controlled by such a person; or (d) a related company —
the liquidator may recover the amount by which the consideration given exceeded the value of the business, property, or services at the time.
Where, within the specified period, the company disposed of a business or property, provided services, or issued shares to any of the same persons, the liquidator may recover the amount by which the value of what was given up exceeded the consideration received.
The specified period here is five years before commencement — extended, in a Court appointment, by the time from application to order. That is five times the reach of sections 340 and 343.
And note what section 344 does not require: no proof of insolvency at the time, and no proof of bad faith. The claim is arithmetic — the company overpaid an insider, or sold to one at an undervalue, and the difference is recoverable. Under subsection (3), the value of a business or property includes goodwill, and control is determined by applying section 6 with necessary modifications.
The issue of shares to an insider is expressly caught by subsection (2) — shares issued cheaply to a director in the years before failure are recoverable to the extent of the shortfall. Compare the ordinary rules on consideration for shares in sections 43 to 47.
Section 340A — voidable charges
A charge is voidable by the liquidator if (a) it was given within the specified period (one year, extended as above), and (b) immediately after the charge was given, the company was unable to pay its due debts. A charge given within the restricted period (three months, extended as above) carries a presumption of that inability.
But subsection (2) excludes a charge that secures money actually advanced or paid, or the actual price or value of property sold or supplied, or any other valuable consideration given in good faith by the grantee at or after the time of the giving of the charge; and a charge in substitution for a charge given before the specified period.
Substitution (s 340A(4)) does not protect the charge to the extent that the amount secured, or the value of the property subject to it, exceeds that of the existing charge at the date of substitution. Refinancing cannot be used to enlarge security.
Purchase money security (s 340A(5)) is excluded from subsection (1) altogether where the charge secures the unpaid purchase price of property and the instrument is executed within 30 days after the sale — or, for an estate or interest in land, within 30 days after final settlement.
Appropriation (s 340A(6)): payments received by the chargee after the charge was given are deemed appropriated, so far as necessary, to new advances, new supplies, and other new consideration given in good faith. This is the running-account rule — it prevents a chargee dressing up security for old debt as security for new money.
Section 345 — charges in favour of officers and associates
Where a company creates a charge in favour of a person who is — or of persons at least one of whom is — a relevant person, and within six months after the creation of the charge the chargee purports to take a step in enforcement without the Court’s leave, the charge and any powers it purports to confer are, and shall be deemed always to have been, void.
A “relevant person” is a person who is, or has been at any time in the six months ending when the charge is created, an officer of the company — including, for a registered overseas company, an agent — or a person associated with such a person in relation to the creation of the charge.
Under subsection (2), appointing a receiver, or entering into possession or assuming control of property to enforce the charge, whether directly or by an agent, is a step in enforcement.
Under section 345(3), the Court may give leave where satisfied that (a) immediately after the creation of the charge the company was able to pay its debts as they became due in the ordinary course of business, and (b) in all the circumstances it is just and equitable.
The penalty for not asking is severe and retrospective: the charge is deemed always to have been void. A director who takes security for a loan to the company must wait six months before enforcing, or apply for leave.
Two savings: subsection (4) preserves the underlying debt — only the security falls; and subsection (5) protects a person who purchased property for value from the chargee, its agent, or a receiver, in good faith and without notice that the charge was created in favour of a relevant person. Under subsection (6), the onus of proving that purchase is on the person asserting it.
Section 347 — floating charges in the last six months
Where a company in liquidation created a floating charge during the six months ending on the commencement of the liquidation, the charge is void as against the liquidator except so far as it secures —
(a) an advance paid to the company, or at its direction, at or after that time and as consideration for the charge; (b) interest on such an advance; (c) the amount of a liability under a guarantee or other obligation undertaken at or after that time for the company’s benefit; (d) an amount payable for property or services supplied at or after that time; (e) interest on such an amount.
(3) The section does not apply where it is proved that the company was able to pay its debts immediately after the charge was created.
(4) Paragraphs (a) and (b) do not apply to an advance applied, directly or indirectly, to discharge an unsecured debt owed to the chargee or, where the chargee is a body corporate, to a related entity of it. Lending new money that goes straight back to repay the lender’s old unsecured debt secures nothing.
(5) Paragraphs (d) and (e) do not apply so far as the amount exceeds the market value of the property or services when supplied.
(6) Where a debt secured by the charge was discharged out of the company’s money or property during those six months, the liquidator may recover from the chargee, as a debt due to the company, the unsecured amount less realisation costs — the part of the realised amount that would have been unsecured under subsection (2), less the costs of enforcement attributable to realising it.
“Related entity” in section 347 has the same meaning as in section 346(5).
Sources
- Companies Act 1997 — ss 6, 43–47, 254, 340, 340A, 341, 343–347
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.