Q&As

Is it possible for security to be set aside as a transaction at an undervalue or a preference?

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Published on LexisPSL on 07/08/2019

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • Is it possible for security to be set aside as a transaction at an undervalue or a preference?
  • Preferences
  • Transactions at an undervalue

Is it possible for security to be set aside as a transaction at an undervalue or a preference?

In summary, it is possible for the grant of security to be set aside as a preference. The position is less straightforward, however, in respect of applications to set aside the grant of security as a transaction at an undervalue.

Preferences

A transaction entered into with a creditor of the insolvent company or bankrupt can be set aside as a preference (under ss 239 and 340 Insolvency Act 1986 (IA 1986) respectively) where:

  1. the company or individual gave a preference in fact to the creditor by doing something (or permitting something to be done) with the effect of putting that creditor into a position which, in the event of the company or individual entering liquidation or bankruptcy, would be better than if the act had not been done (IA 1986, ss 239(4) and 340(3))

  2. the company or individual was influenced by a desire to prefer the creditor (IA 1986, ss 239(5) and 340(4)), and

  3. the preference was given at a relevant time, which is defined in IA 1986, ss 239(2) and 240 in respect of corporate insolvency and IA 1986, ss 340(1) and 341 in respect of bankruptcy

The definition of a preference in IA 1986, ss 239(4) and 340(3) is broad (covering ‘anything’ that has the effect of preferring

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