Fact pattern (B)

Tarpin Limited is a clothing manufacturer and a 100%-owned subsidiary company of TC Group Limited. Tarpin goes into liquidation. The liquidator investigates the company’s transactions in the period before liquidation and notices that the company has transferred to TC two industrial weaving machines. Consider your advice on the following issues.

Tarpin Limited is a clothing manufacturer and a 100%-owned subsidiary company of TC Group Limited. Tarpin goes into liquidation. The liquidator investigates the company’s transactions in the period before liquidation and notices that the company has transferred to TC two industrial weaving machines.

It is possible that the transfer of these two machines be a preference under s.239 IA. For this to be so, TC would have to be a creditor, or surety or guarantor of a debt of Tarpin. Tarpin would also have had to be influenced by a desire to put TC in a better position on liquidation than it would have been in had the transaction not taken place. This will be presumed as TC is, as a 100% subsidiary, associated with, and thus connected to, Tarpin. Finally, the transaction would have to take place at a “relevant time” within the terms of s.240 IA.

It is also possible that the transfer of the machines by Tarpin to TC might constitute a transaction at an undervalue. This would allow Tarpin’s liquidator to apply to court to have the transaction set aside.

A transaction at an undervalue is a transaction where a company makes a gift to any person and receives either no consideration or consideration worth significantly less than the consideration provided by the company. Here, the liquidator would have to provide evidence to this effect. If, for example, the machines had been transferred by Tarpin to TC for a fair market value, the transfer would not amount to a transaction at an undervalue.

Furthermore, the transaction would not be set aside if it was entered into by Tarpin in good faith and at a time when there were reasonable grounds for believing it would benefit the company. The company would have to provide evidence as to the rationale for the decision taken by the board to transfer the machines. If there were genuine business reasons behind the transfer of the machines, e.g., it was necessary to make a forced sale to TC to maintain cash flow and there were no or limited options to achieve this otherwise, then these might be sufficient grounds to prevent the transaction being set aside.

If the transaction is to be set aside, then the liquidator will have to prove that it took place at a “relevant time” within the definition provided in s.240 IA. For a transaction at an undervalue, this requires the transaction to have taken place within 2 years of the commencement of the winding up. In addition, the company must be insolvent at the time of the transaction or became so as a result. However, this is presumed, subject to proof to the contrary, where a transaction at an undervalue has been entered into with a connected person. Given that Tarpin is a 100% owned subsidiary of TC, it will be associated with and hence connected to TC, and presumed to have been insolvent at the time of the transaction.