Preferences – transaction at an undervalue – validation orders – valuation – Insolvency Act s.127
The purchaser of commercial property from SMC Properties applied for retrospective validation of the purchase. The transaction had taken place in March 2014 and a winding up order had been made in respect of SMC one month later (the winding up petition having been presented in February 2014). The buyer asserted that the transaction had been made in good faith, at arm’s length, and had been at fair market value. The liquidator argued that the transaction had been made at an undervalue and should be declared void.
In exercising its discretion to validate, the High Court found that the purchaser had not known of the presentation of the petition when agreeing to purchase, that the transaction had been made in good faith and at arm’s length within the context of a pressing secured creditor who would have taken possession and sold the property as a mortgagee in possession if not paid. As to whether there had been a sale at an undervalue, the court considered that investment, rather than owner-occupation, was the appropriate basis. The liquidators adduced evidence of value of approximately £900,000. The purchase price had been £850,000. The Court applied a 5% margin of error to the liquidators’ valuation and held that the general body of creditors had not suffered significantly, if at all.
Section 127 of the Insolvency Act 1986 aims to prevent improper alienation of property by making post-petition transactions void. The court held that the underlying policy was to prevent and remedy breaches of the principle that the company’s assets should be distributed rateably among creditors of the same class. The court is concerned to balance the buyer’s interests against the company’s creditors’. In this case, the purchaser’s lack of knowledge of a winding up petition having been presented was weighed against the minimal element of undervalue when assessing the overall good faith of the transaction.
The case highlights the practical importance of carrying out insolvency searches against vendors and the advisability of obtaining valuations to justify the value paid, particularly where the seller is in financial difficulties.
