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Corporate Laws II
Fraudulent Preference and Voluntary Transfers
Submitted By:
Arvind Srinivas
1555, IV Year,
NLSIU,Bangalore
Date of Submission: 8th September 2011
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I. Introduction
Companies, whether in financial difficulties or otherwise, are frequently either pressured ortempted to treat one or more creditors or class of creditors in a more favorable or preferential
way to the treatment afforded to the general body of creditors. The company's directors may
have loaned capital to the company and will wish to see their capital repaid. Major creditors
will also be keen to ensure that the company trades within agreed credit limits. The
temptation may be to do this at the expense of discharging debts due to other creditors. They
may also be tempted to have payments made to themselves in reduction, for example, of
loans they have made to the company. Major creditors may also become aware of thecompany's financial difficulties and be reluctant to continue to trade with the company unless
they are dealt with on a certain basis.1
The company's general body of creditors may, however, be blissfully unaware of the
company's financial position and might continue to trade with, and grant credit to, the
company not knowing that their exposure is increasing while the exposure of preferred
creditors is being reduced or maintained at a certain level. Protection is given to these small
creditors by declaring transactions void for fraudulent preference as when a company goes
into insolvency, the assets of the company are to be distributed to all creditors on a pro rata
basis.2
It can be thus stated that the underlying principle for the offence of fraudulent preference is
that it is unjust to permit a party, on the eve of insolvency, to make a voluntary disposition
of his property in favour of a particular creditor, leaving the mere husk to the rest, and
therefore, that a transfer made at such a period, and under such circumstances, as evidently
shown that it was made in contemplation of bankruptcy and in order to favor a particular
creditor, should be void.3
1 R Weisberg, Commercial Morality, the Merchant Character, and the History of the Voidable Preference,Stanford Law Review, 1986
2 Id.3 De Tastet v. Carroll(1813) 1 Stark 88.
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What of a situation in which the company is perfectly solvent but is going into winding up?
In such a situation the rule of avoidance of voluntary transfer applies. Voluntary transfer
means any transaction that is aimed to defraud the creditors or the members of the company
when the company is going into winding up. Thus the reasoning behind making voluntary
transfer an offence is similar to that underlying the offence of fraudulent preference. This
research paper aims to study these concepts in detail.4
4 A Ramaiya, Guide to the Indian Companies Act( 15th edn., Nagpur: Wadhwa, 2001), 3719
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II. Fraudulent Preference
2.1 Introduction to Fraudulent Preference
The concept of fraudulent preference is dealt with by s.531 of the Act, The phrase
fraudulent preference originates from the law of insolvency. The emergence of preference
law was closely tied to the concept of fraud, no doubt because early English bankruptcy law
regarded bankrupts as fraudulent.5 As is evident from the expression and its origin, this
aspect of law states that when a person is incapable of paying his debts, then any transfer of
property or payment made in favor of one creditor, with a view to giving that creditor
preference over other creditors is regarded as fraudulent6. As per s. 531, for a transaction to
be held invalid thus, the transaction should have taken place within three months before the
company is deemed insolvent and within six months before the commencement of winding
up proceedings against the company.7
Thus the ingredients of fraudulent preference under s. 531 are as follows:8
there should be transfer of property or payment in favor of one creditor
the transaction must be within three months prior to the company being declared
insolvent
the transaction must be within six months before winding up proceedings are initiated
against the company
2.2 Insolvency laws as the Justification for Fraudulent Preference
In India there are two laws that deal with insolvency. They are the Provincial Insolvency Act
1920 and the Presidency Towns Insolvency Act, 1909. Acts of insolvency as laid down bythese Acts include instances, among other things, wherein the debtor makes any transaction
which would be void as a fraudulent preference if he were to be adjudged an insolvent 9The
5 JC McCoid, Bankruptcy, Preferences, and Efficiency: An Expression of Doubt, Virginia LawReview,1981, 249.
6 S. 531 Indian Companies Act, 1956. See Annexure7 See Barclays Bank v. Homan, (1993) BCLC 680 Ch D for discussion on jurisdiction. It was held that when a
subsidiary of a London company was sold in the U.S., while the court had jurisdiction to grant an injunction
to restrain a party from pursuing proceedings in a foreign jurisdiction, the court should only do so where theforeign proceedings were vexatious or oppressive as between the parties.
8 Supra note 6.9 S. 6 of Provincial Insolvency Act, 1920, S. 107 Presidency Towns Insolvency Act, 1909. See Annexure
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Acts also specify the instances in which the creditor can submit an insolvency petition. These
are10:
If the debt owed is more than Rs. 500
If the debt is a liquidated sum payable at that point or in the future
If the act of insolvency, on the basis of which the petition is presented, took place
within three months before the filing of the petition
When the insolvency laws are examined in the light of corporate insolvency and fraudulent
preference, a problem arises from the fact that the Acts specify that no insolvency petition
shall be presented against any corporation or against any association or company registeredunder any enactment for the time being in force. How then can fraudulent preference be
attributed to a company when no insolvency petition can be filed against the company?
This problem is solved by the wording of s.531 of the Companies Act which says that if a
person in the same situation as the company is in, would be deemed to be insolvent, then the
company itself can be said to be insolvent and thus fraudulent preference can be made out
against that company. The second way in which the section in the Insolvency Acts is
circumvented is through s. 531(2). This section states that the filing of a petition for winding
up or the passing of a resolution for voluntary winding up itself shall be deemed to
correspond to the act of insolvency in the case of an individual11.
Why is fraudulent preference applicable only to insolvent companies? The answer lies in the
two pieces of insolvency legislation. These Acts say that on the making of an order of
adjudication, the whole of the property of the insolvent shall vest in the Court or in a receiver
and shall become divisible among the creditors. The assets of the insolvent company are,
thus, to be distributed to all creditors, on a pro rata basis, and not to one creditor alone
through fraudulent preference.12
10 S. 9 of Provincial Insolvency Act, 1920, S.12 Presidency Towns Insolvency Act, 1909. See Annexure11 S. 531(1) and S. 531(2). See Annexure12 See Note, Preferential Transfers and the Value of the Insolvent Firm, vol. 87, Yale L.J. (1978), 1449
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2.3 Exception to the Rule of Fraudulent Preference
When the company transfers some of its assets to a creditor to whom money is actually due,
under the threat of litigation or the threat of attachment, the transaction will not be deemed to
be fraudulent preference.13 For example in Official Liquidator v. Venkataraman14, wherein
three buses were transferred to a creditor, the Court held that this was not fraudulent
preference as the transaction was brought about by pressure on the company and the
company's management thought that it would be in the best interest of the company to pay
off the debt to that particular creditor.
The exception to the rule of fraudulent preference facilitates the inference that the operative
ingredient of fraudulent preference is the intention with which the impugned transaction was
undertaken by the debtor company.15
2.4 Intention to Prefer
Whether a transaction is deemed to be fraudulent preference or not has been decided not on
the basis of the result of the transaction but on the intention underlying the transaction. The
reasoning behind this is the interpretation of the words 'with a view to giving him a
preference'. The word view has been interpreted to mean intention. Based on the facts of the
case the dominant intention of the debtor is determined.16
For example in F.L.E. Holdings Ltd. Re17, wherein a company deposited title deeds with a
bank to secure overdraft facilities, but the charge was not registered, the transaction was held
void for want of registration but was not deemed to be fraudulent preference. It was held that
the dominant intention of the company was to not prefer the bank over other creditors but to
maintain good relations with the bank in order to secure the status of the company as a going
concern18. Thus where the intention of the company is to benefit itself and not prefer a
13 When a compromise is reached between creditor and company, connivance and not merely transfer has to beshown by the official liquidator as held in Krishna Tulpule v. Monark Enterprises, (1992) 74 Comp Cas 89.
Also see N.V. German, Bankruptcy, Pressure as a Defence and Fraudulent Preferences, vol. 8, Alta. L.Rev., 1970, p.154
14 Official Liquidator v. Venkataraman, (1966) 1 CompLJ 243 AP15 Sethna's Indian Company Law (JMJ Sethia ed., 11th edn., New Delhi: Modern Law Publishers, 2005), 430316 Id17 F.L.E. Holdings Ltd. Re, [1976] 1 WLR 1409
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creditor over other creditors, there is no fraudulent preference. Similarly in Wills v. Corfe19it
was held that when the court was trying to determine the existence of fraudulent preference,
the court has to take into account the state of mind of the directors to see whether there was
an overriding intention to prefer one creditor over others.20
2.5 Liability of creditor fraudulently preferred
In cases where the creditor making an advance evinces a promise from the company to
execute a charge21 at his request, such a charge, even though for value, will be inferred to be
fraudulent and and unenforceable, in the absence of other circumstances. In this instance, the
purpose of the parties will be deemed to be to accord the creditor the right to be preferred at
his request.
A presumption of preference is created when payment is made to directors even when the
precarious position of the company's financial state is known22. Similarly when payment is
made to director with a view to help them clear their loans and such payment is made shortly
before the company stops trading, a presumption of preference is created.23
The recipient of a fraudulent preference automatically becomes a constructive trustee
towards the company for the benefits that he has received and such being the case, is bound
to return the same to the company24. As far as directors are concerned, when a transfer is
18 See Official Liquidator v. Ashok Kumar Dalmia And Ors., (1999) 98 CompCas 269 Raj. InP. Vishwanathanv. Official Liquidator (1984) 56 Comp Cas 52 Delhi, it was held that when certain machinery was
transferred in the ordinary course of business, there was no fraudulent preference. Also in Shaw Wallace(2001) 107 Comp Cas 30 Cal, it was held that a court ordered payment could not amount to fraudulent
preference.19 Wills v. Corfe, 1998 2 BCLC 75 Ch Dr.. See Anon., Winding up - fraudulent preference - company
repaying directors' loans shortly before going into creditors' voluntary liquidation, C.L. Pract. 1998, 5(10),275-276.
20 T.W. Cutts Re, (1956) All ER 537; Eric Holmes Ltd. Re , 2 All ER 333; Tansukharai v. Official Liquidator,AIR 1952 Mad 595. See Also A. Keirse, Object and effect: the vexed question of intent in fraudulent
preference cases.C.L. Pract. 2005, 12(7), 182-185.21 The creditor is also bound to get the charge executed and registered in order to inform all other creditors of
the fact that the company's assets are not free from encumbrances.Book22 Katz v. McNally, (1999) BCC 291 CA23 Pierson Ltd. Re, (1999) BCC 26 Ch D24 Clasper Group Services Ltd. Re, 1989 BCLC 143 Ch D.
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made in insolvent circumstances and the directors are unable to rebut the intention to prefer,
then they are guilty of fraudulent preference.25
S.532 and s.533 are also to be taken note of at this point. S.532 says that a transfer of all or
any property by a company to a trust for the general benefit of its creditors is void. S.533
provides that if any property comprised in a charge or a mortgage is a benefit received by a
fraudulently preferred creditor, then the creditor would be surety towards the security holder
to the extent of the interest held by that security holder.26
2.6 The U.K. Position
S. 239 Insolvency Act 1986 deals with fraudulent preference27
. This section is very similar to
the Indian s.531. It states that fraudulent preference occurs when a transaction is made or
allowed to be made by the company in favor of a creditor or director with a view to pacing
that creditor in a position of advantage over other creditors when the company goes into
insolvent liquidation. S. 240 and S.241 of the Insolvency Act, 1986 discuss the applicability
and remedies available respectively28.
2.7 Distinguishing Features of the U.K. Position
One distinguishing feature of the UK law on fraudulent preference is that it states, explicitly,
for the need for intention to prefer to be proved. This particular section emphasizes that there
can be no fraudulent preference unless the desire of the company to place that particular
creditor in a position of advantage is proved. The ruling in F.L.E. Holdings Ltd. Re29 is
represented here in statutory form.30
The second distinguishing feature of the UK position is the creation of a category of
connected persons31. A person is deemed to be connected to the company if he or she is a
director, shadow director, associate of directors or shadow directors or an associate of the
companies. The term associate is further defined by the Act and includes relatives, persons in
25 Transworld Trading Re, (1999) BPIR 628 Ch D26 S. 532, 533 of Indian Companies Act, 1956. See Annexure27 S. 239 Insolvency Act 1986. See Annexure28 See Generally JC McCoid, Bankruptcy, Preferences, and Efficiency: An Expression of Doubt, Virginia
LawReview, 1981, 249.29 Supra note 14.30 Pennington's Company Law, (8th edn., London: Butterworths,2001), 4731 S.249 of the Insolvency Act, 1986. See Annexure
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control of the company and could even be another company 32. The importance of this
classification is that if the person, in whose favor, the transaction is made, falls within the
category of connected persons, then there is a presumption that there has been fraudulent
preference of that person over other creditors.33
32 S.435 of the Insolvency Act, 1986. See Annexure33 V Finch, Corporate insolvency law: perspectives and principles, (Cambridge University Press, 2002, p.543
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III. Avoidance of Voluntary Transfers
3.1 Introduction to Avoidance of Voluntary Transfers
S. 531-A of the Companies Act 1956 states that any transfer of property, whether movable or
immovable, undertaken by the company within one year before the presentation of a winding
up petition or the passing of a resolution for voluntary winding up, is void against the
liquidator.34
3.2 Exceptions to. s.531-A
There are two instances in which a transfer as described above will not fall under the aegis of
s.531-A. These are35:
a transfer of property made in the ordinary course of the business of the company
a transfer or delivery of property made in favor of a purchaser or encumbrancer in
good faith and for valuable consideration.
3.3 Protection of Members of Company
This section also seeks to protect members of the company from being defrauded in
anticipation of winding up. In A Company Re36a false prospectus was issued and money so
gathered was used to make payments to creditors. When a validation order was sought with
respect to these payments, the court held that no such order could be issued when the
payments were made at the cost of the members, even when the company was perfectly
solvent and the winding up petition was presented on grounds of public interest.
3.4 Good Faith, Ordinary Course of Business and Adequate Consideration
Section 531-A of the Act provides that any transfer of property or goods made by a company
within one year before the presentation of a winding up petition against it will be void unless
such transaction was in the ordinary course of business. In principle, the same tests as to
34 S. 531-A of the Companies Act 1956. See Annexure35 Id.36 A Company Re, (2000)1 BCLC 528 Ch D.
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intent as in Section 531 apply to a transaction challenged under Section 531A of the Act and
the onus is on the official liquidator seeking to avoid the transaction to establish that the
transfer was not made in the ordinary course of the company's business or that it was not
made in good faith37 or for valuable consideration. As to whether the transaction is made in
good faith or for valuable consideration will depend on the facts of a given case. If there is
no consideration or the consideration is inadequate, there may arise a presumption of want of
good faith38. Even if there is adequate consideration, the official liquidator may attempt to
establish that a valuable asset of the company was sought to be shielded against the claims of
the company's creditors. The official liquidator's challenge would not hold if he cannot
establish lack of bona fides on the part of the transferee. 39
3.5 The UK Position
Originally s.625 of the U.K. Companies Act, 1985, similar to the Indian s. 531-A, laid down
that any transfer aimed at defrauding members or creditors of the company within before two
months of the petition for winding up is presented would be void. However ss.488-650 of the
1985 Act was repealed by the Insolvency Act of 1986. The 1986 Insolvency Act however
does contain a section that is the equivalent of s.531-A of the Indian Companies Act, 1956.The provision in the Insolvency Act that is closest in intent to s.531-A is s.423. S.423(3)
reflects the adequate consideration aspect of s.531-A40. As with s.239 of the Insolvency Act
s.423 too stresses on the necessity of intention as an ingredient of the offense.
37 Percept Advertising v. M. Ravindran, (2003) 114 Comp Cas 652 Sc.38 Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1986] 60 Comp Cas 77 (P & H)39 In Re: Prudential Capital Markets, (2008) 1 CompLJ 314 Cal40 S.423 Insolvency Act, 1986. See Annexure
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IV. Conclusion
The research paper set out to examine the concepts of fraudulent preference and voluntary
trading and the impact they have on winding up. The first concept, i.e. of fraudulent
preference, was found to apply only in cases where the company was deemed to be insolvent.
Fraudulent preference itself traces its roots back to insolvency law. The justification for
fraudulent preference was found to be the protection of all creditors of a company going into
winding up. The connection with insolvency law lies in the fact that when a company is
declared insolvent, the assets of the company are to be distributed to all creditors on a pro
rata basis.
If a creditor of an insolvent company is placed in a position of advantage over the other
creditors then a fraud is committed at two levels. Firstly the preferred creditor is unfairly
benefitted and secondly the assets of the insolvent company are reduced which in turn
reduces the amounts that would be payed back to the other creditors on a pro rata basis.
Keeping this in mind, s. 531 of the Companies Act, 1956 stipulates that any transaction that
unfairly benefits one creditor of an insolvent company that is going to be wound up will be
deemed to be fraudulent and void. However, there has to be an intention to prefer and no
coercion for the transaction to be void for fraudulent preference. To remedy the situation, the
person who is fraudulently preferred is made liable to the extent of the benefit that he
unfairly received.
Avoidance by voluntary transfer has a justification similar to that underlying fraudulent
preference. It is broader in scope as there is no requirement for the company to be insolvent.
S. 531-A of the Companies Act, 1956 aims to protect creditors and members from being
defrauded in anticipation of winding up. The exceptions to this section are transactions
taking place in the ordinary course of business and transactions carried out in good faith. The
courts have also held that transactions for valuable consideration can be held to be outside
the purview of avoidance of voluntary transfer. Whether the a case falls into one of the
exceptions is based solely on the facts of the case.
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As far as the position of law in the United Kingdom is concerned, both fraudulent preference
and voluntary transfer are dealt with in the Insolvency Act of 1986, even though there need
not be an insolvent company for avoidance by voluntary transfer. The positions of law are
similar to the ones contained in the Indian Companies Act, along with a few distinguishing
features. With respect to fraudulent preference, intention is clearly stated to be an essential
ingredient and there is also a distinction made between persons connected to the company
and persons who are not.
In conclusion it can be safely stated that the offences of fraudulent preference and voluntary
transfer, contained in s.531 and 531-A of the Companies Act, 1956, form an important tool to
protect small and unsecured creditors of a company, whether solvent or insolvent.
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Bibliography
III. Books
1) A Ramaiya, Guide to the Indian Companies Act ( 15th edn., Nagpur: Wadhwa, 2001),
3705
2)Pennington's Company Law, (8th edn., London: Butterworths,2001), 47.
3) Sethna's Indian Company Law (JMJ Sethia ed., 11th edn., New Delhi: Modern Law
Publishers, 2005) 4301
4) V Finch, Corporate insolvency law: perspectives and principles, (Cambridge University
Press, 2002), 543
II. Articles
1) Anon., Winding up - fraudulent preference - company repaying directors' loans shortly
before going into creditors' voluntary liquidation, C.L. Pract. 1998, 5(10), 275-276.
2) A. Keirse, Object and effect: the vexed question of intent in fraudulent preference cases,
C.L. Pract. 2005, 12(7), 182-185.
3) JC McCoid, Bankruptcy, Preferences, and Efficiency: An Expression of Doubt, Virginia
Law Review, 1981, 249.
4) N.V. German, Bankruptcy, Pressure as a Defence and Fraudulent Preferences, vol. 8,
Alta. L. Rev., 1970, p.154
5) Note, Preferential Transfers and the Value of the Insolvent Firm, vol. 87, Yale L.J.
(1978), 1449
6) R Weisberg, Commercial Morality, the Merchant Character, and the History of the
Voidable Preference, Stanford Law Review, 1986
III. Cases
English Cases
1) A Company Re, (2000)1 BCLC 528 Ch D.
2) Barclays Bank v. Homan, (1993) BCLC 680 Ch D
3) Clasper Group Services Ltd. Re, 1989 BCLC 143 Ch D.
4) De Tastet v. Carroll (1813) 1 Stark 88.
5) Eric Holmes Ltd. Re, 2 All ER 333
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6) F.L.E. Holdings Ltd. Re, [1976] 1 WLR 1409
7) Katz v. McNally, (1999) BCC 291 CA
8) Pierson Ltd. Re, (1999) BCC 26 Ch D
9) T.W. Cutts Re, (1956) All ER 537
10) Transworld Trading Re, (1999) BPIR 628 Ch D;
11) Wills v. Corfe, 1998 2 BCLC 75 Ch Dr.
B) Indian Cases
1) Official Liquidator v. Ashok Kumar Dalmia And Ors., (1999) 98 Comp Cas 269 Raj
2) In Re: Prudential Capital Markets, (2008) 1 CompLJ 314 Cal
3) Monark Enterprises v. Kishan Tulpule [1992] 74 Comp Cas 89 (Bom),
4) Official Liquidator v. Venkataraman, (1966) 1 CompLJ 243 AP
5) Percept Advertising v. M. Ravindran, (2003) 114 Comp Cas 652 Sc.
6) Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1986] 60 Comp Cas 77 (P & H),
7) Tansukharai v. Official Liquidator, AIR 1952 Mad 595.
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Annotated Bibliography
I. Articles
1) Anon., Winding up - fraudulent preference - company repaying directors' loans shortly
before going into creditors' voluntary liquidation, C.L. Pract. 1998, 5(10), 275-276.
The article examines whether repayments of directors loans prior to voluntary liquidation are
voidable preferences under s.239. To this end the article makes a detailed study of Wills v
Corfe Joinery Ltd.
2) A. Keirse, Object and effect: the vexed question of intent in fraudulent preference cases,
C.L. Pract. 2005, 12(7), 182-185.
This article looks at the problems faced by the courts in Ireland and England in giving effect
to pre-liquidation transactions that seek to prefer one creditor over another, given the
evidential burden on the liquidator of proving the debtor's intention to make the preference.
The article also compares the legislation concerning fraudulent preference transactions in the
jurisdictions.
3) JC McCoid, Bankruptcy, Preferences, and Efficiency: An Expression of Doubt, Virginia
Law Review, 1981, 249.
This article examines the history of the law of fraudulent preference. The author debates on
the possible methods in which the transaction that is impugned as bringing about fraudulent
preference. In concluding the author claims that the goals of preference law are equality of
distribution and maximization of estate value. Preference law is not fully effective in
achieving these goals because individual creditors have an incentive to ignore or even to
evade it. Its limited efficacy favors more knowledgeable creditors, and its operation creates
substantial uncertainty costs
4) N.V. German, Bankruptcy, Pressure as a Defence and Fraudulent Preferences, vol. 8,
Alta. L. Rev., 1970, p.154
The writer examines the presumption of preference and the manner of rebuttal in cases of
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pressure from creditors. He also examines what constitutes pressure and to this end examines
a series of English legislations and case law.
5) Note, Preferential Transfers and the Value of the Insolvent Firm, vol. 87, Yale L.J.
(1978), 1449
The article claims that preference law tries to impose equality on pre-insolvency behavior so
that that behavior will not make the principle of equality in insolvency distribution
meaningless. A stated companion goal is to maximize the estate from which equal
distribution is to be made.
6) R Weisberg, Commercial Morality, the Merchant Character, and the History of the
Voidable Preference, Stanford Law Review, 1986
The article puts forth a proposition that preference doctrine would seem to be a
central part of insolvency law. It states that if the general purpose of insolvency
law is to ensure a ratable distribution of the debtor's assets among the creditors,
preference law would seem, by definition, to be a primary instrument for
achieving that goal.
II. Cases
A) English Cases
1) A Company Re, (2000)1 BCLC 528 Ch D.
When money was collected from members and payment was made out of this money, for
which a validation order was sought, it was held that even if the company was perfectly
solvent and the winding up petition was only on public interest grounds, payment could nt be
made at the cost of the members.
2) Barclays Bank v. Homan, (1993) BCLC 680 Ch D
In this case there was a discussion on jurisdiction. It was held that when a subsidiary of a
London company was sold in the U.S., while the court had jurisdiction to grant an injunction
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to restrain a party from pursuing proceedings in a foreign jurisdiction, the court should only
do so where the foreign proceedings were vexatious or oppressive as between the parties.
3) Clasper Group Services Ltd. Re, 1989 BCLC 143 Ch D.
A company paid a sum of 2,000 to the son of its owner and managing
director. The son had been employed by the company but was dismissed
a month before the company went into liquidation. As he had not
received the requisite notice of his dismissal he was a creditor of the
company albeit for a relatively small sum. The owner's son lodged the
company funds to his bank account, and immediately withdrew a sum of
3,000. That latter sum was lent to another company acquired by his
father. The ultimate purpose of the payment of 2,000 to the owner's son
was the provision of that sum to the owner's new company. It was held
that the payment in question was a fraudulent preference of the owner's
son
4) De Tastet v. Carroll (1813) 1 Stark 88.
In this case it was held that it was unjust to permit a party, on the eve of insolvency, to make
a voluntary disposition of his property in favour of a particular creditor, leaving the mere
husk to the rest, and therefore, that a transfer made at such a period, and under such
circumstances, as evidently shown that it was made in contemplation of bankruptcy and in
order to favor a particular creditor, should be void.
5) Eric Holmes Ltd. Re, 2 All ER 333
In this case it was held that where a Creditor making an advance takes from the Debtor a
promise to execute the charge at the request of the Creditor, the court will, in the absence of
any other circumstances, readily infer that the purpose of the parties, i.e. the Debtor as well
as the Creditor, was to give the Creditor the right to be preferred on request. Further, such an
arrangement, although for value, is fraudulent and unenforceable, and when the Debtor in
performance of its promise in fact creates a charge at the request of the Creditor, the court
again, in the absence of any other circumstances, will readily infer that the intention of the
Debtor is to prefer the Creditor.
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6) F.L.E. Holdings Ltd. Re, [1976] 1 WLR 1409
It was held that where the mortgage was given under the honest belief that it would be in the
interests of the company to do so and that the company would be able to get further advances
from the same creditor by showing good faith, it was held that no fraudulent preference was
involved. It was stated that what matters is the motive and if it is found that the company
intended to give an improper advantage to one creditor, in the light of all the facts and
circumstances disclosed, the transaction will be set aside.
7) Katz v. McNally, (1999) BCC 291 CA
The group of companies went into administration in 1990 with a deficit in excess of GBP 8
million. The administration orders were replaced by winding up orders and liquidators were
appointed who argued that the payments made to two directors were preferential payments. It
was held that the presumption as to the intention behind payments to connected persons
under the Insolvency Act 1986 had not been rebutted, so that the two directors were liable to
repay the sums they had received.
8) Pierson Ltd. Re, (1999) BCC 26 Ch D
Brian D Pierson (Contractors) Ltd built and maintained golf courses. It fell into difficulty
after contracting parties failed to pay on two projects. It went into insolvent liquidation in
January 1996. The liquidator, amongst others, applied for a contribution for wrongful trading
for the period after June 1994. The court considered whether at that point in time the
directors ought to have realised that there was no reasonable prospect of avoiding insolvent
liquidation.
9) T.W. Cutts Re, (1956) All ER 537
It was stated that if a debtor, knowing himself to be insolvent and knowing, also, that
bankruptcy is imminent, deliberately elects to pay his oldest friend or closest relative, and to
leave his other creditors unpaid or with little chance of being paid, it is irrelevant, to
determining his state of mind, that he made the selection because of the love he bore his
friend or relative or because of his hopes for general, but unspecified favors from them in the
future.
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10) Transworld Trading Re, (1999) BPIR 628 Ch D;
Where a security was provided to a creditor at a time when the company was in insolvent
circumstances and the directors were unable to rebut their desire to prefer, they were held to
be guilty of fraudulent preferences.
11) Wills v. Corfe, 1998 2 BCLC 75 Ch Dr.
Here, directors were payed in order to clear their loans to the company and it was held that
this amounted to fraudulent preference. It was also held that when the court was trying to
determine the existence of fraudulent preference, the court has to take into account the state
of mind of the directors to see whether there was an overriding intention to prefer one
creditor over others
Indian Cases
1) Official Liquidator v. Ashok Kumar Dalmia And Ors., (1999) 98 Comp Cas 269 Raj
The facts of the case were that Company Petition No. 4 of 1991 was filed on March 13,
1991, for winding up of Ashoka Oil Products Pvt. Ltd. It was alleged that the properties of
the company were being transferred fraudulently to defraud the creditors. It was held that if
the company is on the verge of closure then no preference can be given to one creditor vis-a-
vis others. The provisions of Sections 531 and 531A are meant to protect the rights of other
creditors so that if the company in liquidation makes the sale, the proceeds may be
proportionately distributed. It was seen whether favor had been given to respondents and if
the object of executing sale deed was tainted with the element of fraud, dishonesty or
preference
2) In Re: Prudential Capital Markets, (2008) 1 Comp LJ 314 Cal
The facts of the case are that Company Petition No. 4 of 1991 was filed on March 13, 1991,
for winding up of Ashoka Oil Products Pvt. Ltd. It was alleged that the properties of the
company were being transferred fraudulently to defraud the creditors. It was held that the
provisions of Sections 531 and 531A are meant to protect the rights of other creditors so that
if the company in liquidation makes the sale, the proceeds may be proportionately
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distributed. When the action of the directors cannot be considered to be bona fide or in good
faith or in the ordinary course of business, the intention to give preference to a few of the
creditors to the exclusion of others is proved and to be considered fraudulent.
3) Monark Enterprises v. Kishan Tulpule [1992] 74 Comp Cas 89 (Bom),
Here a resolution not being passed by board of directors, but the company accepting the
consideration and implementing the transaction, failure to pass resolution was held not to
vitiate the transaction. The question with regard to Section 531 was considered and it was
observed that unless a transaction of transfer of a company's property amounts to a
fraudulent preference under the bankruptcy law or insolvency law and it is entered into
within a period of six months prior to commencement of winding up of the company, the
transaction in question cannot be treated as void under Section 531(1). The burden of
proving that the impugned transaction was not entered into in the ordinary course of business
or in good faith and for valuable consideration would be on the official liquidator or creditors
impugning the transaction.
4) Official Liquidator v. Venkataraman, (1966) 1 CompLJ 243 AP
Three buses were transferred to a creditor, the Court held that this was not fraudulent
preference as the transaction was brought about by pressure on the company and the
company's management thought that it would be in the best interest of the company to pay
off the debt to that particular creditor.
5) Percept Advertising v. M. Ravindran, (2003) 114 Comp Cas 652 Sc.
The first respondent was an Administrator of a company under winding up proceedings
before the Company Judge had filed Company Application NO. 260/02 in Company Petition
No. 130 of 1990 seeking a direction to the petitioner herein to hand over keys of certain
properties which according to the administrator, belonged to the company under winding up.
The petitioner herein in the said application contended that it is the bona fide purchaser for
valuable consideration of the property in question hence application of the administrator
should not be allowed. It was held that the onus is on the official liquidator seeking to avoid
the transaction to establish that the transfer was not made in the ordinary course of the
company's business or that it was not made in good faith.
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6) Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1986] 60 Comp Cas 77 (P & H),
The case of the petitioner was that he was a creditor of Haryana Rubber Industries (P.) Ltd. ,
against which the petition for winding up was presented on August 21, 1980. It was ordered
to be wound up on March 5, 1981. Mr. Gian Singh was its chairman who died in 1979. The
company, after his death, stopped functioning in January, 1979. R.K. Grover, respondent No.
2, in collusion with the State Bank of India, respondent No. 3, sold a boiler known as
Lancashire boiler of the company having a market price of more than five lakh rupees for a
paltry amount of Rs. 85,000 to Sandeep Paper Mills Pvt. Ltd., respondent No. 1, on February
15, 1980. It was alleged that the transfer was not in the ordinary course of business of the
company and that it was not bona fide and for valuable consideration. It was observed that an
application for annulment of a transfer under Section 531A can be allowed on proof either
that there was no consideration for the transaction or that the consideration was so inadequate
as to raise the presumption of want of good faith.
7) Tansukharai v. Official Liquidator, AIR 1952 Mad 595.
This was an application to vary the order of the Official Liquidator of the Andhra Paper Mills
Co., Ltd., disallowing the claim of the applicant to have a charge over the movable assets of
the company for a certain sum. The liquidator admitted that the amount claimed was due, but
he disallowed the claim to rank as secured creditor on the ground that the document creating,
the security was not registered with the Assistant Registrar of Joint Stock Companies,
Cocanada. It was held that the mere fact that the money was paid within three months prior
to the presentation of the petition for winding up is not by itself sufficient to avoid the
transfer or payment as invalid under Section 231.
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Annexure
Relevant Sections
I. Indian Companies Act, 1956
A) S.531
Fraudulent preference
(1) Any transfer of property, movable or immovable, delivery of goods, payment, execution
or other act relating to property made, taken or done by or against a company within six
months before the commencement of its winding up which, had it been made, taken or done
by or against an individual within three months before the presentation of an insolvency
petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent
preference, shall in the event of the company being wound up, be deemed a fraudulent
preference of its creditors and be invalid accordingly:
Provided that, in relation to things made, taken or done before the commencement of this
Act, this sub-section shall have effect with the substitution, for the reference to six months,
of a reference to three months.
(2) For the purposes of sub-section (1), the presentation of a petition for winding up in the
case of a winding up by the Tribunal, and the passing of a resolution for winding up in the
case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the
case of an individual.
B) S.531A.
Avoidance of voluntary transfer.
Any transfer of property movable or immovable, or any delivery of goods, made by a
company, not being a transfer or delivery made in the ordinary course of its business or
in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if
made within a period of one year before the presentation of a petition for winding up by
the Tribunal or the passing of a resolution for voluntary winding up of the company,
shall be void against the liquidator.
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C) S.532.
Transfers for benefit of all creditors to be void
Any transfer or assignment by a company of all its property to trustees for the benefit of all
its creditors shall be void.
D) S.533
Liabilities and rights of certain fraudulently preferred persons
(1) Where, in the case of a company which is being wound up, anything made, taken or done
after the commencement of this Act is invalid under section 531 as a fraudulent preference of
a person interested in property mortgaged or charged to secure the companys debt, then
(without prejudice to any rights or liabilities arising apart from this provisions), the person
preferred shall be subject to the same liabilities, and shall have the same rights, as if he had
undertaken to be personally liable as surety for the debt, to the extent of the mortgage or
charge on the property or the value of his interest, whichever is less.
(2) The value of the said persons interest shall be determined as at the date of the transaction
constituting the fraudulent preference, and shall be determined as if the interest were free of
all encumbrances other than those to which the mortgage or charge for the companys debt
was then subject.
(3) On any application made to the Tribunal with respect to any payment on the ground that
the payment was a fraudulent preference of a surety or guarantor, the Court shall have
jurisdiction to determine any questions with respect to the payment arising between the
person to whom the payment was made and the surety or guarantor and to grant relief in
respect thereof, notwithstanding that it is not necessary so to do for the purposes of the
winding up, and for that purpose may give leave to bring in the surety or guarantor as a third
party as in the case of a suit for the recovery of the sum paid. This sub-section shall apply,
with the necessary modifications, in relation to transactions other than the payment of money
as it applies in relation to payments of money.
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II. Provincial Insolvency Act, 1920
A) S.641
Acts of insolvency
(1) A debtor commits an act of insolvency in each of the following cases, namely:
(a) if, in India or elsewhere, he makes a transfer of all or substantially all his property to a
third person for the benefit of his creditors generally;
(b) if, in India or elsewhere, he makes a transfer of his property or of any part thereof with
intent to defeat or delay his creditors;
(c) if, in India or elsewhere, he makes any transfer of his property, or of any part thereof,
which would, under this or any other enactment for the time being in force, be void as a
fraudulent preference if he were adjudged an insolvent;
(d) if, with intent to defeat or delay his creditors,
(i) he departs or remains out of the territories to which this Act extends,
(ii) he departs from his dwelling- house or usual place of business or otherwise absents
himself,
(iii) he secludes himself so as to deprive his creditors of the means of communicating with
him;
(e) if any of his property has been sold in execution of the decree of any Court for the
payment of money;
(f) if he petitions to be adjudged an insolvent under the provisions of this Act;
(g) if he gives notice to any of his creditors that he has suspended, or that he is about to
suspend, payment of his debts; or
(h) if he is imprisoned in execution of the decree of any Court for the payment of money.
(2) Without prejudice to the provisions of sub- section (1), a debtor commits an act of
insolvency if a creditor, who has obtained a decree or order against him for the payment of
money (being a decree or order which has become final and the execution whereof has not
been stayed), has served on him a notice (hereafter in this section referred to as the
insolvency notice) as provided in sub- section (3) and the debtor does not comply with that
41 S.9 of the Presidency Towns Insolvency Act, 1909 is pari materia this section.
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notice within the period specified therein: Provided that where a debtor makes an application
under sub- section (5) for setting aside an insolvency notice:
(a) in a case where such application is allowed by the District Court, he shall not be deemed
to have committed an act of insolvency under this sub- section; and
(b) in a case where such application is rejected by the District Court, he shall be deemed to
have committed an act of insolvency under this sub- section on the date of rejection of the
application or the expiry of the period specified in the insolvency notice for its compliance,
whichever is later: Provided further that no insolvency notice shall be served on a debtor
residing, whether permanently or temporarily, outside India, unless the creditor obtains the
leave of the District Court therefor.
B) S.842
Exemption of corporation, etc., from insolvency proceedings.
No insolvency petition shall be presented against any corporation or against any association
or company registered under any enactment for the time being in force.
C) S.943
Conditions on which creditor may petition
(1) A creditor shall not be entitled to present an insolvency petition against a debtor unless--
(a) the debt owing by the debtor to the creditor, or, if two or more creditors join in the
petition, the aggregate amount of debts owing to such creditors, amounts to five hundred
rupees, and
(b) the debt is a liquidated sum payable either immediately or at some certain future time,
and
(c) the act of insolvency on which the petition is grounded has occurred within three months
before the presentation of the petition:
Provided that where the said period of three months referred to in clause (c) expires on a day
when the Court is closed, the insolvency petition may be presented on the day on which the
Court re- opens.
42 S.107 of the Presidency Towns Insolvency Act, 1909 is pari materia this section.43 S.12 of the Presidency Towns Insolvency Act, 1909 is pari materia this section.
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(2) If the petitioning creditor is a secured creditor, he shall in his petition either state that he
is willing to relinquish his security for the benefit of the creditors in the event of the debtor
being adjudged insolvent, or give an estimate of the value of the security. In the latter case,
he may be admitted as a petitioning creditor to the extent of the balance of the debt due to
him after deducting the value so estimated in the same way as if he were an unsecured
creditor.
D) S.2844
Effect of an order of adjudication
(1) On the making of an order of adjudication, the insolvent shall aid to the utmost of his
power in the realisation of his property and the distribution of the proceeds among his
creditors.
(2) On the making of an order of adjudication, the whole of the property of the insolvent
shall vest in the Court or in a receiver as hereinafter provided, and shall become divisible
among the creditors, and thereafter, except as provided by this Act, no creditor to whom the
insolvent is indebted in respect of any debt provable under this Act shall during the pendency
of the insolvency proceedings have any remedy against the property of the insolvent in
respect of the debt, or commence any suit or other legal proceeding, except with the leave of
the Court and on such terms as the Court may impose.
(3) For the purposes of sub- section (2), all goods being at the date of the presentation of the
petition on which the order is made, in the possession, order or disposition of the insolvent in
his trade or business, by the consent and permission of the true owner, under such
circumstances that he is the reputed owner thereof, shall be deemed to be the property of the
insolvent.
44 The corresponding section in the Presidency Towns Insolvency Act is s. 17.s.17. Effect of order of adjudication.
On the making of an order of adjudication, the property of the insolvent wherever situate shall vest in theofficial assignee and shall become divisible among his creditors, and thereafter, except as directed by this
Act, no creditor to whom the insolvent is indebted in respect of any debt provable in insolvency shall,during the pendency of the insolvency proceedings, have any remedy against the property of the insolvent in
respect of the debt or shall commence any suit or other legal proceeding except with the leave of the Courtand on such terms as the Court may impose: Provided that this section shall not affect the power of any
secured creditor to realize or otherwise deal with his security in the same manner as he would have been
entitled to realize or deal with it if this section had not been passed.
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(4) All property which is acquired by or devolves on the insolvent after the date of an order
of adjudication and before his discharge shall forthwith vest in the Court or receiver, and the
provisions of sub- section (2) shall apply in respect thereof.
(5) The property of the insolvent for the purposes of this section shall not include any
property (not being books of account) which is exempted by the Code of Civil Procedure,
1908 (5 of 1908 ), or by any other enactment for the time being in force from liability to
attachment and sale in execution of a decree.
(6) Nothing in this section shall affect the power of any secured creditor to realise or
otherwise deal with his security, in the same manner as he would have been entitled to realise
or deal with it if this section had not been passed.
(7) An order of adjudication shall relate back to, and take effect from, the date of the
presentation of the petition on which it is made.
III. Insolvency Act, 1986
A) S.423
Transactions defrauding creditors.
(1)This section relates to transactions entered into at an undervalue; and a person enters into
such a transaction with another person if
(a)he makes a gift to the other person or he otherwise enters into a transaction with the other
on terms that provide for him to receive no consideration;
(b)he enters into a transaction with the other in consideration of marriage [F1or the formation
of a civil partnership]; or
(c)he enters into a transaction with the other for a consideration the value of which, in money
or moneys worth, is significantly less than the value, in money or moneys worth, of the
consideration provided by himself.
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(2)Where a person has entered into such a transaction, the court may, if satisfied under the
next subsection, make such order as it thinks fit for
(a)restoring the position to what it would have been if the transaction had not been entered
into, and
(b)protecting the interests of persons who are victims of the transaction.
(3)In the case of a person entering into such a transaction, an order shall only be made if the
court is satisfied that it was entered into by him for the purpose
(a)of putting assets beyond the reach of a person who is making, or may at some time make,
a claim against him, or
(b)of otherwise prejudicing the interests of such a person in relation to the claim which he is
making or may make.
(4)In this section the court means the High Court or
(a)if the person entering into the transaction is an individual, any other court which would
have jurisdiction in relation to a bankruptcy petition relating to him;
(b)if that person is a body capable of being wound up under Part IV or V of this Act, any
other court having jurisdiction to wind it up.
(5)In relation to a transaction at an undervalue, references here and below to a victim of the
transaction are to a person who is, or is capable of being, prejudiced by it; and in the
following two sections the person entering into the transaction is referred to as the debtor.
B) S.239
Preferences (England and Wales).
(1)This section applies as does section 238.
(2)Where the company has at a relevant time (defined in the next section) given a preference
to any person, the office-holder may apply to the court for an order under this section.
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(3)Subject as follows, the court shall, on such an application, make such order as it thinks fit
for restoring the position to what it would have been if the company had not given that
preference.
(4)For the purposes of this section and section 241, a company gives a preference to a person
if
(a)that person is one of the companys creditors or a surety or guarantor for any of the
companys debts or other liabilities, and
(b)the company does anything or suffers anything to be done which (in either case) has the
effect of putting that person into a position which, in the event of the company going into
insolvent liquidation, will be better than the position he would have been in if that thing had
not been done
(5)The court shall not make an order under this section in respect of a preference given to
any person unless the company which gave the preference was influenced in deciding to give
it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b).
(6)A company which has given a preference to a person connected with the company
(otherwise than by reason only of being its employee) at the time the preference was given is
presumed, unless the contrary is shown, to have been influenced in deciding to give it by
such a desire as is mentioned in subsection (5).
(7)The fact that something has been done in pursuance of the order of a court does not,
without more, prevent the doing or suffering of that thing from constituting the giving of a
preference.
C) S.240
Relevant time under ss. 238, 239.
(1)Subject to the next subsection, the time at which a company enters into a transaction at an
undervalue or gives a preference is a relevant time if the transaction is entered into, or the
preference given
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(a)in the case of a transaction at an undervalue or of a preference which is given to a person
who is connected with the company (otherwise than by reason only of being its employee), at
a time in the period of 2 years ending with the onset of insolvency (which expression is
defined below),
(b)in the case of a preference which is not such a transaction and is not so given, at a time in
the period of 6 months ending with the onset of insolvency,
(c)in either case, at a time between the making of an administration application in respect of
the company and the making of an administration order on that application, and
(d)in either case, at a time between the filing with the court of a copy of notice of intention to
appoint an administrator under paragraph 14 or 22 of Schedule B1 and the making of an
appointment under that paragraph.
(2)Where a company enters into a transaction at an undervalue or gives a preference at a time
mentioned in subsection (1)(a) or (b), that time is not a relevant time for the purposes of
section 238 or 239 unless the company
(a)is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of
Part IV, or
(b)becomes unable to pay its debts within the meaning of that section in consequence of the
transaction or preference;
but the requirements of this subsection are presumed to be satisfied, unless the contrary is
shown, in relation to any transaction at an undervalue which is entered into by a company
with a person who is connected with the company.
(3)For the purposes of subsection (1), the onset of insolvency is:
(a)in a case where section 238 or 239 applies by reason of an administrator of a company
being appointed by administration order, the date on which the administration application is
made,
(b)in a case where section 238 or 239 applies by reason of an administrator of a company
being appointed under paragraph 14 or 22 of Schedule B1 following filing with the court of a
copy of a notice of intention to appoint under that paragraph, the date on which the copy of
the notice is filed,
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(c)in a case where section 238 or 239 applies by reason of an administrator of a company
being appointed otherwise than as mentioned in paragraph (a) or (b), the date on which the
appointment takes effect,
(d)in a case where section 238 or 239 applies by reason of a company going into liquidation
either following conversion of administration into winding up by virtue of Article 37 of the
EC Regulation or at the time when the appointment of an administrator ceases to have effect,
the date on which the company entered administration (or, if relevant, the date on which the
application for the administration order was made or a copy of the notice of intention to
appoint was filed), and
(e)in a case where section 238 or 239 applies by reason of a company going into liquidation
at any other time, the date of the commencement of the winding up.
D) S.241.
Orders under s. 238, 239.
(1) Without prejudice to the generality of sections orders under 238(3) and 239(3), an order
under either of those sections with respect to a transaction or preference entered into or given
by a company may (subject to the next subsection)-
(a) require any property transferred as part of the transaction, or in connection with the
giving of the preference, to be vested in the company,
(b) require any property to be so vested if it represents in any person's hands the application
either of the proceeds of sale of property so transferred or of money so transferred,
(c) release or discharge (in whole or in part) any security given by the company,
(d) require any person to pay, in respect of benefits received by him from the company, such
sums to the office- holder as the court may direct,
(e) provide for any surety or guarantor whose obligations to any person were released or
discharged (in whole or in part) under the transaction, or by the giving of the preference, to
be under such new or revived obligations to that person as the court thinks appropriate,
(f) provide for security to be provided for the discharge of any obligation imposed by or
arising under the order, for such an obligation to be charged on any property and for the
security or charge to have the same priority as a security or charge released or discharged (in
whole or in part) under the transaction or by the giving of the preference, and
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(g) provide for the extent to which any person whose property is vested by the order in the
company, or on whom obligations are imposed by the order, is to be able to prove in the
winding up of the company for debts or other liabilities which arose from, or were released
or discharged (in whole or in part) under or by, the transaction or the giving of the
preference.
(2) An order under section 238 or 239 may affect the property of, or impose any obligation
on, any person whether or not he is the person with whom the company in question entered
into
the transaction or (as the case may be) the person to whom the preference was given ; but
such an order-
(a) shall not prejudice any interest in property which was acquired from a person other than
the company and was acquired in good faith, for value and without notice of the relevant
circumstances, or prejudice any interest deriving from such an interest, and
(b) shall not require a person who received a benefit from the transaction or preference in
good faith, for value and without notice of the relevant circumstances to pay a sum to the
office holder, except where that person was a party to the transaction or the payment is to be
in respect of a preference given to that person at a time when he was a creditor of the,
company.
(3) For the purposes of this section the relevant circumstances, in relation to a transaction or
preference, are-
(a) the circumstances by virtue of which an order under section 238 or (as the case may be)
239 could be made in respect of the transaction or preference if the company were to go into
liquidation, or an administration order were made in relation to the company, within a
particular period after the transaction is entered into or the preference given, and
(b) if that period has expired, the fact that the company has gone into liquidation or that such
an order has been made.
(4) The provisions of sections 238 to 241 apply without prejudice to the availability of any
other remedy, even in relation to a transaction or preference which the company had no
power to enter into or give.
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E) S.249
Connected with a company.
For the purposes of any provision in this Group of Parts, a person is connected with a
company if
(a) he is a director or shadow director of the company or an associate of such a director or
shadow director, or
(b) he is an associate of the company,
and associate has the meaning given by section 435 in Part XVIII of this Act.
F) S.435
Meaning of associate.
(1) For the purposes of this Act any question whether a person is an associate of another
person is to be determined in accordance with the following provisions of this section (any
provision that a person is an associate of another person being taken to mean that they are
associates of each other).
(2)A person is an associate of an individual if that person is
(a)the individuals husband or wife or civil partner,
(b)a relative of
(i)the individual, or
(ii)the individuals husband or wife or civil partner, or
(c)the husband or wife or civil partner of a relative of
(i)the individual, or
(ii)the individuals husband or wife or civil partner.
(3)A person is an associate of any person with whom he is in partnership, and of the husband
or wife or civil partner or a relative of any individual with whom he is in partnership; and a
Scottish firm is an associate of any person who is a member of the firm.
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(4)A person is an associate of any person whom he employs or by whom he is employed.
(5)A person in his capacity as trustee of a trust other than
(a)a trust arising under any of the second Group of Parts or the M1Bankruptcy (Scotland) Act
1985, or
(b)a pension scheme or an employees share scheme ,
is an associate of another person if the beneficiaries of the trust include, or the terms of the
trust confer a power that may be exercised for the benefit of, that other person or an associate
of that other person.
(6)A company is an associate of another company
(a)if the same person has control of both, or a person has control of one and persons who are
his associates, or he and persons who are his associates, have control of the other, or
(b)if a group of two or more persons has control of each company, and the groups either
consist of the same persons or could be regarded as consisting of the same persons by
treating (in one or more cases) a member of either group as replaced by a person of whom he
is an associate.
(7)A company is an associate of another person if that person has control of it or if that
person and persons who are his associates together have control of it.
(8)For the purposes of this section a person is a relative of an individual if he is that
individuals brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant,
treating
(a)any relationship of the half blood as a relationship of the whole blood and the stepchild or
adopted child of any person as his child, and
(b)an illegitimate child as the legitimate child of his mother and reputed father;
and references in this section to a husband or wife include a former husband or wife and a
reputed husband or wife and references to a civil partner include a former civil partner and a
reputed civil partner.
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(9)For the purposes of this section any director or other officer of a company is to be treated
as employed by that company.
(10)For the purposes of this section a person is to be taken as having control of a company if
(a)the directors of the company or of another company which has control of it (or any of
them) are accustomed to act in accordance with his directions or instructions, or
(b)he is entitled to exercise, or control the exercise of, one third or more of the voting power
at any general meeting of the company of or another company which has control of it;
and where two or more persons together satisfy either of the above conditions, they are to be
taken as having control of the company.
(11)In this section company includes any body corporate (whether incorporated in Great
Britain or elsewhere); and references to directors and other officers of a company and to
voting power at any general meeting of a company have effect with any necessary
modifications.