Set out in section 297 of the Companies Act 1993 (“the Act”); a transaction undervalue is a statutory power granted to a Liquidator to recover money where a party receives more value than they provided to the Company in liquidation.
1.1 – Criteria for a Transaction Undervalue
Liquidators can only pursue transactions undervalue provided certain criteria is met; most notably:
- The Company was insolvent at the time of the transaction or was insolvent as a result of the transaction.
- The transaction was entered into within the specified period which is:
- Two years prior from the date of the commencement of the liquidation.
- In the case of appointments by order of the Court two years prior from the making of the application to place the company into liquidation, and the period between the making of the application and commencement of the liquidation.
- In the case of a liquidation where an application was made, but a liquidator was appointed by the shareholders, or the board of directors (provided an event specified in the constitution of the Company has occurred) the period of two years before the making of the application and ending on the date at the end of the ending on the date and time of the commencement of the liquidation.
The Act defines transaction in section 292(3) of the Act to mean any of the following steps by the company:
(a) Conveying or transferring the Company’s property.
(b) Creating a charge over the Company’s property.
(c) Incurring an obligation
(d) Undergoing an execution process.
(e) Paying money (including paying money in accordance with a judgement or an order of a court).
(f) Anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.
1.2 – Calculation
Section 297(1) of the Act sets out the formula for allowing Liquidators to recover the difference in value (C in the formula below):
The calculation for a transaction undervalue (per section 297(1) of the Act) is as follows:
“A – B = C”
A is the value received by the person.
B is the value that the Company received from the person.
C is the value the liquidator may recover from the person.
It should be noted that value is generally considered to be market value.
For example, if equipment with a market value of $30,000.00 was sold to the shareholder of the Company for $10,000.00; then after applying the formula above, the Liquidator may be entitled to claim $20,000.00 from the person who purchased the equipment.
Applying the formula above:
The value provided by the company (A) $30,000.00 less the value received from the shareholder (B) $10,000.00 equals $20,000.00 (C).