Valuing an Asset in an Undervalue Transaction Claim: Equitable Value or Market Value?

Introduction

Under section 224 of the Insolvency, Restructuring and Insolvency Act 2018 (“IRDA“), the Court can make remedial orders if an insolvent company gifted an asset to a counterparty for no consideration, or sold that asset to a counterparty “for a consideration…significantly less than the value provided by the company”. The key inquiry in such cases is what value the insolvent company received in the transaction (Value A), against what value the insolvent company provided (Value B). The transaction is at an undervalue if Value A is significantly less than Value B.

However, the apparent simplicity of this regime belies some difficult questions of legal principle. What if the buying counterparty had unique reasons to pay a premium for that asset? How should that premium be dealt with when valuing the asset? To complicate matters, what if the counterparty paid part of the purchase price to third-parties, instead of to the insolvent company?

In SW Trustees Pte Ltd v Teodros Ashenafi Tesemma and others [2024] SGHC 322, the Singapore High Court laid down important principles on how to value the consideration received, and the consideration provided, for undervalue transaction claims under section 224 of the IRDA.

Wilson Zhu and Naomi Lim of Rajah & Tann Singapore LLP successfully represented the counterparty buyer in this case.

Brief Facts

The Claimant sold its main asset, being a minority shareholding in a subsidiary, to the Defendant for a contract price of approximately US$10.8m. The Defendant was that subsidiary’s only other shareholder, and had good commercial reasons to pay a high price for the asset. As a result of the purchase, the Defendant became the sole owner of the subsidiary. In the contractual documents, the Claimant also requested the Defendant to pay approximately half of the contract price to certain third-party nominees, without providing reasons.

Shortly after selling its main asset, the Claimant went into insolvent liquidation. The Claimant and its Liquidator then alleged that the sale of its asset was an undervalue transaction under section 224 of the IRDA on two grounds: (a) first, the asset was worth much more than the contract price of US$10.8m; and (b) second, the Defendant paid part of the contract price to third-parties.

High Court’s Holding

The High Court dismissed the Claimant’s and its Liquidator’s claims, and held that the transactions were not at an undervalue.

Valuing the consideration provided

Although the Claimant sold its asset to the Defendant for US$10.8m, the Claimant’s expert valued the asset at US$15m to US$16m, while the Defendant’s expert valued the asset at only US$1.1m to US$1.9m. Significantly, the parties disagreed on the fundamental basis of the valuation:

• Equitable Value: the Claimant argued that the asset’s value should be its “Equitable Value“. This is the price that reflects the respective interests of a specifically identified buyer and seller, bearing in mind the respective advantages or disadvantages that each will gain from the transaction. This approach looks at what the asset is worth to a specifically identified buyer, who may have special reasons for paying a premium.

• Market Value: the Defendant argued that the asset’s “Market Value” was the correct approach. This is the price that the asset should transact for between a buyer and a seller in an arm’s length transaction, on the open market, with parties having reasonable knowledge and not under any particular compulsion to buy or sell. This approach looks at what the asset is worth to a hypothetical market participant, without taking into account any special advantage that that buyer will attain from the asset.

The High Court held that the Market Value approach was the correct one, for the following reasons:

• First, section 224 of the IRDA is concerned with a comparison between the value of the asset against what the Claimant received, not the value of the asset according to how the Defendant may have subjectively perceived its value to be.

• Second, the purpose of section 244 of the IRDA is to protect an insolvent company’s creditors against a diminution of assets available to them, resulting from a transaction which confers an unfair or improper advantage on the counterparty. The undervalue transaction provisions are engaged when the subject asset could have fetched a significantly higher price when offered to the world at large. This goes to the Market Value of the asset.

• Third, it was illogical to value the asset by considering what it should have been worth subjectively to the Defendant. If the Equitable Value approach were correct, then the Claimant would essentially have to prove that the Defendant subjectively valued the asset higher than the stated purchase price – even if that purchase price exceeded what other buyers might have been willing to pay. Yet, the Court cannot compel the Defendant to purchase the asset at a price higher than it had agreed to pay. The Claimant’s creditors would not have been better off if the Court set aside that transaction, as the asset’s market value was lower than what the Claimant had in fact received.

• Fourth, adopting an Equitable Value approach would mean that the value of the consideration provided by an insolvent company may fluctuate, depending on the identity of the counterparty. This would give rise to uncertainty on whether a transaction may be set aside in the future, and would also lead to unfair outcomes – e.g. if similar assets are sold to different parties, yet only one of the transactions is deemed at an undervalue.

• Finally, the use of the Market Value was supported by English authorities.

The High Court thus accepted the Defendant’s approach towards valuing the asset.

Valuing the consideration received

The other issue was how to value the consideration that the Claimant received, bearing in mind that almost half of the contract price of US$10.8m was paid to third-parties.

The High Court embarked on a detailed forensic inquiry, and found that the bulk of payments made to those third-parties were ultimately flowed back, to discharge various liabilities that the Claimant owed to other creditors. Although the Defendant did not specifically bargain for the flow-back of funds in the contractual documents (and indeed, did not know of the flow-back at the time of the transaction), the Claimant obtained a tangible benefit because its debts were reduced. The High Court therefore accepted that it was relevant to value both the direct and indirect benefit accruing to the Claimant.

That said, the Defendant also paid certain sums to third-parties, for which neither party led evidence on how the sums were applied. Accordingly, the High Court declined to find that the Claimant received any benefit from those sums.

Concluding Words

The Court’s power to reverse the effects of an undervalue transaction is very a powerful tool in the hands of a Liquidator. However, the burden is always on the Liquidator to prove all elements of the claim. In this decision, the Court provided timely and valuable guidance on how it will approach issues of valuing the consideration provided and received by an insolvent company. In particular, the Court adopted the Market Value approach. This clarifies that it is the asset’s value to a hypothetical market participant, and not its special value to an identified buyer, that is relevant in a section 224 IRDA claim.

For further queries, please feel free to contact our team member set out on this page.