Defining the “Transaction” and Tightening the s.238 Defence: Commentary on TAQA Bratani Ltd & Ors v Fujairah Oil and Gas UK LLC & Ors [2025] EWCA Civ 1669

Defining the “Transaction” and Tightening the s.238 Defence: Commentary on TAQA Bratani Ltd & Ors v Fujairah Oil and Gas UK LLC & Ors [2025] EWCA Civ 1669

1. Introduction

This Court of Appeal decision provides a significant restatement and clarification of the law on “transactions at an undervalue” under s.238 of the Insolvency Act 1986 (“IA 1986”), particularly in a group corporate context and where intra‑group dividends are used to “clean up” a company before a sale.

The case concerns the sale of a North Sea oil and gas operator, RockRose UKCS8 LLC (“UKCS8”), by its parent RockRose Energy Limited (“RockRose”) to Fujairah International Oil & Gas Corporation (“FIOGC”), and the simultaneous use of a very substantial upstream dividend (US$84.7m) to eliminate an intercompany receivable owed by RockRose to UKCS8. After UKCS8’s insolvency, the claimants (the TAQA group companies and Spirit Energy) sought relief under s.238 IA 1986 (among other causes of action), asserting that the dividend was a transaction at an undervalue that prejudiced creditors.

Dias J at first instance accepted that there was an undervalue, but held that the statutory defence in s.238(5) applied and dismissed the claim. On appeal, the Court of Appeal (delivering a single leading judgment, with Newey LJ and Vos MR agreeing) allowed the appeal, holding that the defence under s.238(5) was not available and that the matter should be remitted to the Commercial Court to determine the appropriate remedy.

The judgment is doctrinally important in three main respects:

  • It clarifies how to identify the relevant “transaction” for s.238 purposes where several steps form part of a wider commercial arrangement.
  • It narrows and sharpens the defence in s.238(5), insisting on a company‑centred and objective analysis of “benefit”.
  • It distinguishes between “consideration” for s.238(4) and collateral benefits that may instead be taken into account at the remedial stage under s.238(3).

2. Factual and Procedural Background

2.1 The parties and the Brae field

  • UKCS8: A Delaware LLC (formerly RockRose UKCS8 LLC), holder of interests in the Brae area of the North Sea and operator of the Brae complex.
  • Claimants: Two TAQA group entities and Spirit Energy Resources Ltd, all joint venture participants in the Brae field alongside UKCS8.
  • Defendants: RockRose (UKCS8’s then parent), entities in the Viaro group, and Mr Francesco Mazzagatti (owner/controller of Viaro).

Decommissioning security was governed by Decommissioning Security Agreements (“DSAs”) between the claimants and UKCS8. Each year UKCS8, as operator, issued a “Provision Invoice” for decommissioning security. Participants had to pay in cash by 15 December or provide acceptable “Alternative Provision” by 1 December. Persistent default by a participant triggered powerful protective mechanisms, including:

  • Other participants covering the shortfall in security and operational expenditure.
  • Rights to lift the defaulter’s petroleum.
  • Ultimate forfeiture of the defaulter’s joint venture interest.

2.2 The RockRose and Viaro transactions

In February 2019, RockRose acquired UKCS8 (and Marathon’s Brae interest). In July 2020, it was announced that Viaro would acquire RockRose for US$248m, largely funded using RockRose’s own cash. TAQA had objected that this funding method risked leaving UKCS8 unable to meet DSA obligations, but ultimately withdrew its opposition.

On 30 September 2020, UKCS8 was issued a Provision Invoice for c.US$110m. No Alternative Provision was made by 1 December, and no payment was made by 15 December 2020. On that date:

  • RockRose entered into a short share purchase agreement (“SPA”) to sell its membership interest in UKCS8 to FIOGC for US$1.
  • Completion was conditional, inter alia, on FIOGC providing security for decommissioning obligations (clause 3.2.2) and UKCS8 being separated from certain group entities.
  • Clause 3.4 of the SPA stated that, on completion, “the Company and its Subsidiaries shall waive the right to receive any amounts … due to them from the Seller’s Group” – i.e. intra‑group receivables owed by RockRose’s group to UKCS8 and its subsidiaries.

FIOGC provided TAQA with a draft parent company guarantee as proposed Alternative Provision. Amid these negotiations:

  • RockRose’s CFO informed Mr Mazzagatti of an intercompany receivable of c.US$84.7m owed by RockRose to UKCS8.
  • Mr Mazzagatti instructed that this receivable be “extinguished” and made clear he did not intend to “gift” FIOGC an extra US$84m of value.
  • On 24 December 2020 (the SPA completion date), RockRose, as UKCS8’s sole member, approved a dividend equal to the US$84.7m receivable, thereby eliminating it (the “Dividend”).

On the same day:

  • RockRose UKCS9 Ltd (“UKCS9”), which employed group staff, was transferred out of UKCS8’s ownership.
  • RockRose wrote off c.US$53.7m owed to it by UKCS9 (the “pension write‑off”), originally arising from RockRose’s payment of a £39m premium to buy out a historic defined benefit pension scheme. The defendants contended that this pension cost would otherwise have been recharged (largely) to UKCS8 under service arrangements, so the write‑off was a benefit to UKCS8.

2.3 Default under the DSAs and litigation

TAQA did not accept FIOGC’s proposed Alternative Provision as sufficient to cure UKCS8’s default under the DSAs. The resulting default cascade led to:

  • TAQA and other participants lifting UKCS8’s share of production.
  • Further defaults over unpaid operating expenses.
  • Forfeiture of UKCS8’s Brae interest to the other participants.
  • A default judgment against UKCS8 in favour of the claimants.

In June 2022, the claimants issued proceedings alleging:

  • A claim under s.423 IA 1986 (“transactions defrauding creditors”).
  • An unlawful means conspiracy claim.

In December 2022 the claimants presented a winding‑up petition based on the default judgment. UKCS8 was wound up in February 2023. The liquidators then assigned any s.238 claims to the claimants, who amended the proceedings to add a claim under s.238 (“transactions at an undervalue”).

2.4 The Commercial Court judgment

After a four‑week trial in October 2024, Dias J dismissed all causes of action:

  • She accepted that there was a transaction at an undervalue within the relevant period, but held that the s.238(5) defence applied.
  • She rejected the s.423 and conspiracy claims on factual and intent grounds.

On appeal, the claimants did not challenge the findings on s.423 or conspiracy, but said the judge had erred in law on the s.238 analysis, in particular:

  1. Ground 1: The judge wrongly treated the “transaction” as the wider sale arrangement, rather than the Dividend alone.
  2. Ground 2: The judge misapplied s.238(5), especially as to whether there were reasonable grounds to believe the transaction would benefit UKCS8.
  3. Ground 3: The judge wrongly treated the pension write‑off as consideration for the purposes of valuing the undervalue.

The defendants served a Respondent’s Notice, arguing that even if the transaction were limited to the Dividend, the s.238(5) analysis should still be applied by reference to the “wider arrangement”.

3. Summary of the Court of Appeal’s Decision

The Court of Appeal allowed the appeal and remitted the remedy issue to the Commercial Court. The key holdings were:

  1. The relevant “transaction” under s.238 was the Dividend alone, not the broader sale arrangement.
  2. The statutory defence in s.238(5) was not available: there were no reasonable grounds for believing the Dividend would benefit UKCS8, viewed from UKCS8’s own perspective.
  3. The pension write‑off was not “consideration” for the Dividend for s.238(4) purposes, so the undervalue was the full US$84.7m.
  4. However, the pension write‑off may be relevant at the remedial stage under s.238(3) (the “restoration of position” test), as a matter of the court’s discretion.

Accordingly, there was a transaction at an undervalue, within the relevant time, with no available s.238(5) defence. The only remaining question is the appropriate order under s.238(3), now to be decided on remittal.

4. Statutory Framework

4.1 Section 238 IA 1986 – transactions at an undervalue

Section 238 applies where a company goes into liquidation or administration and, at a “relevant time”, has entered into a “transaction at an undervalue” with any person. The liquidator or administrator may apply for an order “restoring the position to what it would have been if the company had not entered into that transaction”.

A “transaction at an undervalue” occurs where:

  • The company makes a gift or otherwise enters into a transaction for which it receives no consideration; or
  • The company enters into a transaction for a consideration significantly less than the value of the consideration it provides.

A key point is that the company must have “entered into” the transaction; this is reinforced by the definition in s.436, which includes “any gift, agreement or arrangement”.

Section 238(5) creates a defence:

The court shall not make an order if it is satisfied that the company (a) entered into the transaction in good faith and for the purpose of carrying on its business and (b) at the time there were reasonable grounds for believing that the transaction would benefit the company.

These conditions are cumulative and conjunctive; both limbs must be satisfied.

4.2 Section 423 IA 1986 – transactions defrauding creditors

Section 423 is also concerned with transactions at an undervalue, but differs in several crucial ways:

  • No insolvency or formal process is required.
  • Any “victim” of the transaction, not just an office‑holder, can apply.
  • The transaction must be entered into for the purpose of putting assets beyond the reach of, or otherwise prejudicing, a creditor or potential creditor (s.423(3)).

The Court of Appeal emphasised that, despite some parallels and overlapping factual evidence, s.238 and s.423 are conceptually distinct and may produce different outcomes.

5. Analysis

5.1 Precedents and Authorities Cited

The judgment engages with and clarifies a number of leading authorities:

  • Cork Committee Report (Cmnd 8558, 1982) – The historical policy foundation for s.238, emphasising the protection of pari passu distribution and scrutiny of pre‑insolvency dispositions that distort creditor outcomes.
  • BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112 (“Sequana CA”) –
    • Confirmed that a dividend can be a “transaction at an undervalue” (for s.423), not a “gift” but a transaction for which the company receives no consideration.
    • Analytical foundation for treating dividends as “transactions” for s.238 as well.
  • Invest Bank PSC v El‑Husseiny [2025] UKSC 4 (“El‑Husseiny”) –
    • Supreme Court discussion of s.423 and the concept of transactions at an undervalue, confirming consistent construction across s.423 and s.238.
    • Provided context on the debtor’s role in orchestrating an “arrangement”.
  • Feakins v DEFRA [2005] EWCA Civ 1513 (“Feakins”) –
    • Illustrated a broad purposive reading of “transaction” under s.423, where a debtor and a third party colluded to strip value from a charged asset.
    • The Court of Appeal distinguished rather than adopted the “wider arrangement” approach advanced by the defendants in the present case.
  • Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143 (HL) (“Brewin Dolphin HL”) –
    • Confirmed that for s.238(4)(b) “consideration” may come from more than one party, and can include obligations undertaken by third parties if they form part of the bargain for which the company parts with value.
    • Distinguished in this case on the facts: there, the collateral lease obligations were clearly part of the agreed sale consideration.
  • Re Ovenden Colbert Printers [2013] EWCA Civ 1408 –
    • Emphasised that for s.238, the company must itself have “entered into” the transaction, involving a step or act of participation; one cannot simply aggregate external acts by others.
    • Relied on here to ground the narrow identification of the “transaction”.
  • Credit Suisse Virtuoso SICAV‑SIF v Softbank Group Corp [2025] EWHC 2631 (Ch) –
    • Recent High Court discussion of how to identify the relevant “transaction” under s.423/s.238 in complex arrangements.
    • Relied on for the proposition that while Morritt LJ’s guidance in Brewin Dolphin is helpful, the statutory text and case‑specific facts remain decisive.
  • Walker v Wimborne (1976) 137 CLR 1 –
    • High Court of Australia decision, repeatedly endorsed in English law, that a company’s interests must be considered separately from its shareholders or group.
    • Used here to underscore that the s.238(5) “benefit” analysis must be from the company’s (UKCS8’s) perspective.
  • Lord v Sinai Securities [2005] 1 BCLC 295 –
    • Cited in argument on whether a transaction must be “necessary” to carry on the company’s business for s.238(5)(a).
    • The Court of Appeal rejected reading a “necessity” test into the statute, confining Lord to its procedural context (summary judgment threshold).
  • Reid v Ramlort [2005] 1 BCLC 331 –
    • Bankruptcy analogue of s.238, confirming the broad discretionary nature of the restorative remedy.
    • Used to support taking into account collateral benefits (like the pension write‑off) at the s.238(3) stage.

5.2 Identification of the “Transaction” (Ground 1)

5.2.1 The first instance approach

Dias J treated the “transaction” broadly as:

“the overall arrangement by which UKCS8 was sold to FIOGC, including all the linked steps taken to facilitate the sale and ensure that the company was sold free of cash and debt, including the declaration of the dividend and the release of the inter‑company balances…”

She relied on Feakins to justify treating the Dividend as an inextricable part of a larger commercial scheme (the sale), and therefore to evaluate the s.238(5) defence and “consideration” by reference to this wider arrangement.

5.2.2 The Court of Appeal’s reasoning

The Court of Appeal rejected this “wider arrangement” characterisation. Emphasising s.238(2) and (4), and Kitchin LJ’s analysis in Ovenden Colbert, the court held that:

  • The composite statutory test requires that (i) there is a “transaction”, and (ii) it is one that the company has entered into.
  • The focus must be on what the debtor company (here, UKCS8) actually did – the steps it itself took or agreed to – not on a broader group‑level commercial plan to which it was merely the subject.

Applied to the facts:

  • The SPA was concluded between RockRose and FIOGC. UKCS8 was its subject matter (the membership interest) but was not a party to it.
  • The only transaction into which UKCS8 itself entered was the resolution declaring the Dividend, which extinguished the US$84.7m receivable from RockRose.
  • Although the Dividend arose because RockRose wanted to implement clause 3.4 of the SPA, that linkage did not convert the SPA itself into a transaction “entered into” by UKCS8.

Feakins was distinguished. There, the “transaction” was an arrangement actually made by the debtor, Mr Feakins, with Miss Hawkins, under which they orchestrated the bank’s sale and a surrender of the tenancy to strip out value. In contrast, UKCS8 had no comparable participatory role in the SPA; it was merely the asset being sold.

The court also endorsed the general approach in Brewin Dolphin HL and in Credit Suisse:

  • In Brewin Dolphin, the “transaction” was the share sale agreement under which the company divested itself of the business.
  • Here, analogously, the “transaction” was the Dividend, by which UKCS8 divested itself of the receivable.

5.2.3 Resulting principle

The judgment establishes a clear principle of general application:

For s.238 IA 1986, the “transaction” must be confined to the act or arrangement that the debtor company itself has entered into. The court cannot, merely because several steps are commercially linked, aggregate them into a single “wider arrangement” unless the debtor has actually participated in that wider arrangement.

This significantly limits the scope for defendants to rely on group‑level transaction narratives (such as a “cash‑free, debt‑free” sale) to dilute or recharacterise a specific asset‑stripping step undertaken by the insolvent company itself (here, the Dividend).

5.3 The Defence in s.238(5) – Good Faith, Business Purpose and “Benefit” (Ground 2)

5.3.1 Relationship with s.423 – distinct tests

The Court of Appeal gave an important clarification on the relationship between s.238 and s.423. Dias J had suggested that, because overlapping evidence would often be relevant to both s.238(5) and s.423(3), it would be rare for a s.238 claim to succeed where a s.423 claim failed.

The Court of Appeal expressly disagreed. It pointed out that:

  • s.423(3) imposes a subjective purpose test: the debtor must have acted with a purpose of putting assets beyond the reach of, or otherwise prejudicing, a creditor or potential creditor.
  • s.238(5) instead provides a narrow, conjunctive defence, including:
    • A requirement of good faith and business purpose (s.238(5)(a)); and
    • An objective requirement that there were reasonable grounds for believing the transaction would benefit the company (s.238(5)(b)).

It follows that:

  • A transaction might fail the s.423 purpose test but still fall foul of s.238 where the objective “benefit” and business purpose tests are not met.
  • The statutory schemes serve different functions, particularly because s.238 is triggered only in a defined insolvency context and is available only to the office‑holder.

5.3.2 The correct s.238(5)(b) question

Once the relevant “transaction” is properly identified as the Dividend, the key question under s.238(5)(b) is:

Were there, in the circumstances prevailing at the time, reasonable grounds for believing that the Dividend would benefit UKCS8?

Two elements are critical:

  • Objective standard: what matters is not merely that the directors or group decision‑makers subjectively believed the transaction would help, but whether there were reasonable grounds for that belief.
  • Company‑centred lens: consistent with Walker v Wimborne, the “benefit” must be assessed from the point of view of the company (UKCS8) as a separate legal entity with its own creditors, not from the perspective of the parent or wider group.

The Court accepted that in answering this question the court must consider all relevant surrounding circumstances – including that the Dividend was one of several steps in a sale to FIOGC – and not look at the Dividend “in a vacuum”. Thus, the broader context is relevant evidence, but the statutory focus remains on the particular transaction (the Dividend) and whether it could reasonably be believed to benefit UKCS8.

5.3.3 The “cash‑free, debt‑free” sale argument

The defendants’ central narrative was that the sale of UKCS8 to FIOGC on a “cash‑free, debt‑free” basis was commercially beneficial to UKCS8, breaking a joint venture deadlock with TAQA and securing an owner willing to stand behind its decommissioning obligations. The Dividend, they said, was merely a “necessary adjunct” to implementing this legitimate deal.

The Court of Appeal dismantled this justification, step by step:

  1. Lack of actual “cash‑free, debt‑free” terms:
    • Clause 3.4 of the SPA required waiver of intra‑group receivables owed to UKCS8 and its subsidiaries.
    • There was no equivalent provision about eliminating debts owed by UKCS8; no adjustment mechanism and no condition that UKCS8 be debt‑free at completion.
    • This undercut the premise that the sale had to be implemented on genuinely “cash‑free, debt‑free” terms.
  2. Who benefitted from clause 3.4 and the Dividend?
    • Clause 3.4 plainly benefitted RockRose, which would otherwise have had to pay or leave outstanding a substantial debt to UKCS8.
    • FIOGC would have had no rational objection to acquiring UKCS8 with an additional US$84.7m asset; indeed that would only enhance the company’s solvency and ability to meet obligations.
    • UKCS8 itself lost a major receivable against its parent without receiving anything in return.
  3. “Usual practice” is not determinative:
    • Evidence that “cash‑free, debt‑free” deals are common does not make the elimination of an asset by an insolvent subsidiary acceptable, especially where the subsidiary gets no compensating benefit.
    • Market practice cannot override the statutory protection of creditors in an insolvency context.
  4. The Dividend was not a “necessary adjunct”:
    • The Court emphasised that the Dividend was not inevitable; other mechanisms could have been used (e.g. extra consideration from FIOGC, novation of the receivable, or leaving the receivable in place).
    • Mr Mazzagatti’s instruction was to remove the receivable regardless of its value, motivated by a desire not to “gift” value to FIOGC – a shareholder‑level consideration, not a UKCS8‑centred one.

Taken together, these points led the Court to conclude that the judge’s characterisation of the Dividend as a “necessary adjunct” to a beneficial sale was wrong in law and factually unsustainable from UKCS8’s perspective.

5.3.4 No reasonable grounds to believe the Dividend would benefit UKCS8

On the judge’s own findings:

  • UKCS8 was balance sheet insolvent when the Dividend was declared.
  • The Dividend stripped out an US$84.7m receivable from an insolvent company.
  • No consideration flowed back to UKCS8 in exchange for that loss.

The Court of Appeal held that, even accepting that the sale of UKCS8 to FIOGC might be beneficial overall, there could not be reasonable grounds for believing that this particular transaction – the upstream Dividend – would benefit UKCS8. It benefitted RockRose alone.

Accordingly, the objective limb in s.238(5)(b) was not satisfied. Because the defence is cumulative, that was enough to defeat it, and the court did not need to determine:

  • Whether the Dividend was unlawful under Delaware law and so incapable of being reasonably believed to be beneficial; or
  • Whether the “good faith and business purpose” limb in s.238(5)(a) was otherwise met.

5.3.5 “For the purpose of carrying on its business” – no “necessity” test

Although it was unnecessary to decide Ground 2 in full, the Court took the opportunity to clarify one point of construction:

  • The phrase “for the purpose of carrying on its business” in s.238(5)(a) does not import a requirement that the transaction be necessary for the continuation of the business.
  • The argument that necessity is required, based on Lord v Sinai, was rejected as an impermissible gloss. Lord was a summary judgment case, and its language must be read in that procedural context.

The standard remains one of business purpose, not strict necessity, although that point did not affect the outcome given the failure of s.238(5)(b).

5.4 Consideration and the Pension Write‑Off (Ground 3)

5.4.1 The issue

The judge had treated the full US$53.7m pension write‑off (a debt owed by UKCS9 to RockRose, written off on 24 December 2020) as a benefit to UKCS8. Her reasoning was that:

  • Under the group service arrangements, UKCS9’s pension buy‑out cost would ultimately have been recharged (largely) to UKCS8.
  • The write‑off therefore spared UKCS8 from that liability, and should be counted as “consideration” received by UKCS8 as part of the wider arrangement.
  • This reduced the quantified undervalue from US$84.7m (the Dividend amount) to approximately US$31m (Dividend minus pension write‑off).

The Court of Appeal, having already held that the relevant “transaction” was the Dividend alone, reframed the question as:

Is the pension write‑off “consideration” for the Dividend, within the meaning of s.238(4)(b)?

5.4.2 Dividends and “no consideration” – Sequana CA

In Sequana CA, David Richards LJ held that:

  • A dividend is not a “gift” (because it is paid pursuant to rights attached to shares as a return on capital), but
  • It is nonetheless a “transaction on terms that provide for the company to receive no consideration” (the statutory limb now codified in s.423(1)(a) and mirrored in s.238(4)(a)).

The critical point was that when a dividend is paid, “the terms of the dividend do not provide for the company to receive any consideration” (emphasis added).

In the present case, there was nothing in the documentation for the Dividend which referred to, or contemplated, the pension write‑off. There was no express or implied quid pro quo under which UKCS8 paid the Dividend in order to receive the benefit of that write‑off.

5.4.3 Brewin Dolphin HL and third‑party consideration

In Brewin Dolphin HL, the company (AJB) agreed commercially to sell its stockbroking business for £1.25m. Instead of a simple business sale:

  • The business was transferred to a subsidiary (BSL);
  • BSL was sold to Brewin Dolphin for £1; and
  • PCG (Brewin Dolphin’s parent) subleased computer equipment at a rent of £312,500 per year for four years (total £1.25m).

Lord Scott held:

  • The relevant “transaction” was the share sale by which AJB divested itself of the business.
  • Section 238(4)(b) requires identifying the “consideration”, not its provider; consideration can be made up of obligations undertaken by third parties if that is what the company has bargained for.
  • On the facts, the rent under the sublease was clearly part of the agreed consideration for the business (as shown by a contemporaneous memorandum describing the commercial deal).

However, because the sublease was valueless (entered into in breach of the head lease), its value as consideration was treated as zero, although credit was allowed at the remedy stage for a related loan.

5.4.4 Application to the pension write‑off

The Court of Appeal accepted that:

  • Consideration for s.238(4)(b) can come from more than one source, including third parties;
  • Brewin Dolphin illustrates that multiple linked agreements can together form the composite consideration for a single transactional bargain.

But the critical requirement remains that the alleged benefit must be something the company received for its transaction – i.e. as part of the quid pro quo for giving up value.

Here:

  • The only transaction into which UKCS8 entered was the Dividend.
  • The documentation for the Dividend made no mention of the pension write‑off.
  • There was no evidence or finding that UKCS8 declared the Dividend in exchange for the write‑off.
  • Rather, both steps (Dividend and pension write‑off) were actions taken by RockRose within a broader group sale strategy.

The Court concluded that:

The pension write‑off was not consideration “for” the Dividend within s.238(4)(b). It was not part of any bargain into which UKCS8 entered when declaring the Dividend.

Therefore, the value of the consideration for the Dividend was zero, and the undervalue was the full US$84.7m.

5.4.5 Collateral benefits at the remedial stage – s.238(3)

Crucially, the Court was careful to separate:

  • The identification and valuation of consideration under s.238(4), from
  • The separate, discretionary remedial exercise under s.238(3) of “restoring the position to what it would have been if the company had not entered into the transaction”.

Section 238(3) is inherently counterfactual (“but for” the transaction) and confers a broad discretion, as emphasised in Reid v Ramlort and illustrated by the treatment of the loan in Brewin Dolphin.

The Court held that:

  • Even though the pension write‑off was not “consideration” for the Dividend, it may still be relevant at the s.238(3) stage in assessing what order is needed to restore the position, and in doing justice between the parties.
  • The Commercial Court on remittal should be free to consider such collateral matters when shaping the remedy.

This is doctrinally significant: it reinforces a clean conceptual separation between:

  • The test for whether a transaction is at an undervalue and the extent of that undervalue (s.238(4)); and
  • The flexible, equitable calibration of relief after an undervalue is established (s.238(3)).

5.5 Overall Legal Reasoning and Structure

Stepping back, the Court’s reasoning moves through a logical sequence:

  1. Purpose of s.238 – drawing on the Cork Report, the Court reaffirms that:
    • The primary aim is to protect the pari passu distribution to creditors by unwinding pre‑insolvency transactions that unfairly deplete the insolvent estate.
    • Shareholders (and, implicitly, parent companies) rank behind creditors in the statutory distribution waterfall.
  2. Identify the relevant transaction – applying s.238(2)–(4) and s.436:
    • The transaction must be one the company itself “entered into”.
    • UKCS8 entered into the Dividend transaction, not the SPA.
  3. Is that transaction at an undervalue?
    • On Sequana principles, the Dividend is a “transaction on terms that provide for the company to receive no consideration”.
    • The parties had agreed at trial that there was an undervalue; the only dispute was about quantum (US$84.7m vs US$31m).
    • The Court held that the undervalue was US$84.7m.
  4. Is the statutory defence in s.238(5) available?
    • The court must ask whether, viewed in its actual context but from UKCS8’s perspective, there were reasonable grounds for believing the Dividend would benefit UKCS8.
    • The answer was “no”. The Dividend benefitted RockRose by removing its debt; it harmed UKCS8 by stripping a major asset.
  5. Remedy under s.238(3) – because the defence fails, the court must consider appropriate restorative relief.
    • This is remitted to the Commercial Court, which may factor in collateral benefits (such as the pension write‑off) in crafting a just outcome.

6. Complex Concepts Simplified

6.1 “Transaction at an undervalue”

A company enters into a transaction at an undervalue if:

  • It gives something away for nothing; or
  • It gets back significantly less than what it gives up.

Example: If an insolvent company pays a large dividend to its parent, cancelling a debt owed by the parent, but receives nothing back, that is a transaction at an undervalue.

6.2 “Entered into a transaction”

This does not mean “anything that happens within a group”. The company must itself take a legal step or enter an arrangement (e.g. signing an agreement, passing a resolution). It is not enough that:

  • The company is the subject of someone else’s contract; or
  • Its assets are affected as a result of decisions made entirely over its head.

6.3 The s.238(5) defence – three limbs

The defence only applies if all of the following are met:

  1. Good faith: The company genuinely acted honestly, without intending to prejudice creditors.
  2. Business purpose: The transaction was undertaken for the purpose of carrying on the company’s business (not purely to confer a shareholder windfall or extract value).
  3. Reasonable grounds to believe in benefit: Objectively, there were reasonable grounds for believing that the transaction would benefit the company itself (not merely its group or shareholders).

If any limb fails, the defence fails.

6.4 “Cash‑free, debt‑free” deals

In M&A practice, “cash‑free, debt‑free” is a shorthand for commercial pricing assumptions – the buyer does not pay extra for cash and does not assume certain debts. It is not a legal requirement to remove all cash or debt. Crucially:

  • Parties are free to price and structure deals differently.
  • An insolvent subsidiary cannot justify stripping out assets for no return simply by invoking “market practice” or “cash‑free, debt‑free” rhetoric.

6.5 “Consideration” and collateral benefits

For s.238(4) purposes, “consideration” is what the company receives in return for what it gives up. It can:

  • Come from more than one party; and
  • Include obligations undertaken by third parties, if that is part of the agreed bargain.

But not every contemporaneous benefit counts as “consideration”. If a group parent forgives a different company’s debt in a way that indirectly benefits the debtor company, that may be a collateral benefit but not “consideration for” the specific transaction at issue.

Such collateral benefits are:

  • Not used to reduce the undervalue under s.238(4); but
  • Can be taken into account at the remedy stage under s.238(3) when deciding what order is needed to restore the estate and do justice.

7. Likely Impact and Practical Implications

7.1 Strengthening creditor protection in group restructurings

This decision reinforces that:

  • Insolvent or near‑insolvent subsidiaries cannot be used as conduits to transfer value up the group (e.g. via dividends) without receiving something of genuine value in return.
  • Attempts to justify such transfers by reference to “group strategy” or “transaction economics” will be scrutinised from the subsidiary’s own standpoint.

In practice, this will:

  • Make it harder for parents and private equity sponsors to rely on “wider deal” arguments to defend upstream value extractions close to insolvency.
  • Encourage more careful structuring (e.g. paying additional consideration to the subsidiary, or novating inter‑company debts to the buyer) if assets are to be removed.

7.2 Narrowing the s.238(5) defence

The judgment confirms that s.238(5) is a narrow and demanding defence:

  • It is not enough that the overall group deal makes commercial sense or even that it may keep the business alive.
  • The specific transaction at undervalue must be capable of being reasonably viewed as beneficial to the company itself.
  • Where a transaction plainly strips out a major asset from an insolvent company without compensation, the scope for invoking s.238(5) is extremely limited.

Liquidators and administrators may therefore be more inclined to bring s.238 claims against parents and affiliates over intra‑group dividends and other asset transfers during distress.

7.3 Clarifying the interaction between s.238 and s.423

The Court’s insistence that s.238 and s.423 can diverge in outcome is important. It means:

  • Even where intent to prejudice creditors (for s.423) cannot be proved, an undervalue may still be unwound under s.238 if the s.238(5) defence fails.
  • Office‑holders should consider s.238 in its own right, not merely as a “backup” to s.423.

7.4 Evidential and advisory implications

For transactional lawyers and insolvency practitioners:

  • Board minutes and internal records will be critical – they should explicitly address the impact on the particular company (not just the group) when value is extracted.
  • Legal sign‑offs on distributions should consider not only company law solvency tests (including foreign law tests for foreign entities) but also the objective “benefit” test in s.238(5)(b).
  • Valuation and recharge mechanisms should be documented where group companies are bearing or sharing costs (e.g. pension buy‑outs). If a write‑off is relied on as a benefit to a subsidiary, the legal and factual basis should be carefully recorded.

7.5 Specific to natural resources and decommissioning security

In the context of oil and gas joint ventures and decommissioning security arrangements:

  • Operators and participants should anticipate that attempts to “strip out” value from distressed participants will be closely examined after insolvency.
  • Where DSAs or similar security instruments are in place, removing value from the operator shortly before default is particularly vulnerable to challenge.

8. Conclusion

The Court of Appeal’s judgment in TAQA Bratani v Fujairah Oil and Gas UK makes three principal contributions to insolvency law:

  1. Identification of the “transaction”: It firmly anchors s.238 in the transaction actually entered into by the debtor company, resisting invitations to treat multi‑step group deals as a single “wider arrangement” where the debtor has not itself participated in all steps.
  2. Narrowing and objectifying the s.238(5) defence:
    • “Benefit” must be assessed from the company’s own perspective, not that of its parent or group.
    • The standard is objective – were there reasonable grounds for the belief, not merely a sincere subjective view?
    • Shareholder‑facing rationales (such as avoiding “gifting” value to a buyer) cannot justify stripping assets from an insolvent company.
  3. Separating consideration from collateral benefits:
    • Only benefits forming part of the quid pro quo for the company’s transaction count as “consideration” for s.238(4).
    • Other contemporaneous benefits may still be relevant, but at the remedial stage under s.238(3) as part of the court’s discretionary effort to restore the position and achieve justice.

Substantively, the case reaffirms the primacy of creditor protection and pari passu distribution in insolvency law, particularly in corporate groups. Procedurally, it gives office‑holders a clearer route to challenge pre‑insolvency intra‑group transfers, especially upstream dividends, even where those transfers occur within ostensibly legitimate commercial transactions.

On remittal, the Commercial Court will have to determine the appropriate restorative order, taking into account the full US$84.7m undervalue while also considering any collateral benefits, such as the pension write‑off, as part of the equitable balancing exercise under s.238(3). Whatever the precise outcome on quantum, the legal framework within which that discretion is exercised has now been substantially clarified.

Case Details

Year: 2025
Court: England and Wales Court of Appeal (Civil Division)

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