Transactions At An Undervalue – An Overview

What is an antecedent transaction?

When a company becomes insolvent, certain types of transactions that the company entered into prior to insolvency may be subject to challenge, and at risk of being overturned. These are known as reviewable (or antecedent) transactions.

This will typically cover transactions at an undervalue (explored further below) and also transactions wrongly preferring one creditor over another (preferences), or moving, transferring or concealing assets to prevent creditors from recovering their debts (transactions defrauding creditors).

What is a transaction at an undervalue?

Transactions at an undervalue are provided for in section 238 of Insolvency Act 1986 (IA 1986).

Section 238 IA 1986 applies where a gift or transaction is either made for no consideration, or the money received was significantly less than the actual value of the consideration provided by the company. The gift or transaction in issue must have been entered into during the two years prior to the onset of insolvency, and in circumstances where the company was unable to pay its debts at the time, or became unable to pay its debts as a result of the transaction.

Where a case to set aside a transaction at an undervalue is brought, it is for the liquidator or administrator to prove to the court that these factors are established. However, where the transaction was made with a connected person (such as a director), there is a presumption that the company was insolvent at the time, unless it can be shown otherwise.

A number of other defences apply and the Court will not set aside a transaction at an undervalue if it is satisfied the company entered into the transaction in good faith and for the purpose of carrying on business, and at the time there were reasonable grounds for believing that the transaction would benefit the company.

Taqa Bratani Ltd and other companies v Fujairah Oil and Gas UK Llc (formerly known as Rockrose UKCS8 LLC) and others [2025] EWCA Civ 1669

The Court of Appeal recently clarified the approach in identifying relevant transactions under section 238 IA 1986, and the application of the defence under section 238(5) IA 1986 in Taqa Bratani Ltd and other companies v Fujairah Oil and Gas UK Llc (formerly known as Rockrose UKCS8 LLC) and others [2025] EWCA Civ 1669.

Background

UKCS8’s parent company sold UKCS8 to a third party for US$1. Prior to the sale being completed, UKCS8’s parent company declared a dividend of US$84.7 million in its own favour, removing the debt the parent company owed to UKCS8.

The petitioning creditors brought a claim to set aside the dividend as a transaction at an undervalue under section 238 IA 1986.

The High Court judge dismissed the claim on the basis that the defence under section 238(5) IA1986 applied. Underpinning the judge’s rationale was the finding that the relevant transaction for the purposes of section 238 IA 1986 was the wider arrangement for the sale of UKCS8 to the third party, rather than the dividend. The judge considered the dividend to be an afterthought adopted at the last minute to give effect to the wider arrangement. By considering the wider arrangement as the relevant transaction, the judge found that the transaction fell within the defence under section 238(5) IA 1986.

The petitioning creditors appealed to the Court of Appeal, challenging the High Court judge’s identification of the “transaction” for the purposes of section 238 IA 1986, and the resultant application of the defence under section 238(5) IA 1986.

Decision

The Court of Appeal allowed the appeal, and set aside the dividend as a transaction at an undervalue.

Overturning the High Court judgment, the Court of Appeal found that the relevant transaction for the purposes of section 238 IA 1986 was the dividend alone, not the wider arrangement. The Court found that the relevant transaction under section 238 IA 1986 must have been entered into by the company, which suggests that the company has taken some step or act of participation.

Consequently, the Court found that the relevant transaction under section 238 IA 1986 could not have been the wider sale arrangement of UKCS8’s parent company to a third party due to the fact UKCS8 were not a party to this transaction. The Court concluded that the parties to the wider sale arrangement were the parent company and the third party. Unlike the wider sale arrangement, UKCS8 were a party to the dividend. The Court therefore concluded that the dividend was the relevant transaction under section 238 IA 1986.

When considering the defence under section 238(5) IA 1986, the Court found that the correct question to ask was whether there were reasonable grounds for believing that the dividend would benefit UKCS8, not the parent company. The Court found no reasonable grounds for believing the dividend would benefit UKCS8. Therefore, the defence under section 238(5) IA 1986 did not apply and an order was made to set aside the dividend as a transaction at an undervalue.

Key takeaways

When assessing transactions under section 238 IA 1986, the Court’s assessment will be underpinned by the principle that companies exist as separate legal entities. Therefore, any transaction that a liquidator may seek to challenge as a transaction at an undervalue, must have been entered into by the insolvent company itself, not a parent company.

Similarly, in the application of the defence available to insolvent companies under section 238(5) IA 1986, the relevant question to ask is whether there are reasonable grounds for believing that the transaction would benefit the insolvent company.

Company directors need to be mindful, particularly in times of financial difficulty, that not only current, but historic transactions may come under scrutiny.

If you require further assistance or have any questions about the topics raised in this article, please get in touch with the team at Thomson Snell & Passmore.