Skip to content

ACCA Applied Skills · Corporate and Business Law (Global) · Insolvency and administration

Karvale Ltd sold a warehouse worth 900,000 to its chairman's spouse for 300,000 nine months before it went into liquidation. Karvale was unable to pay its debts at the time. The spouse argues the sale was made in good faith to help the company. What is the most accurate position regarding a claim by the liquidator for a transaction at an undervalue?

The court may set aside the sale unless Karvale itself acted in good faith to carry on its business, with reasonable grounds to believe the deal would benefit it. The buyer's good faith is irrelevant, no fraudulent intent is needed, and connection to a director makes challenge easier, not harder.

  1. AThe claim fails because the spouse acted in good faith and the buyer's intent is decisive
  2. BThe claim fails because only sales to unconnected parties can be challenged
  3. CThe claim can succeed only if Karvale intended to defraud its creditors
  4. DThe court may set the transaction aside unless Karvale entered it in good faith for the purpose of carrying on its business with reasonable grounds for believing it would benefit the companyCorrect

Explanation

A transaction at an undervalue occurs when the company receives significantly less than the value it gives, and the company is insolvent at the time. The defence is that the company acted in good faith for carrying on its business with reasonable grounds to believe it would benefit. The buyer's good faith alone is not the test. Intent to defraud is not required, and connection to the company does not protect the buyer.

Did you get it right without looking?

One question tells you little. A timed set on Insolvency and administration shows your real accuracy, how long you take and where you lose marks.

Practise Insolvency and administrationFree diagnostic mock

More Insolvency and administration questions