Making insolvent company transactions even with the most innocent of motives can be misinterpreted.
Before entering into a formal insolvency procedure, a company director or office holder may seek to protect their financial position by putting assets beyond the reach of creditors. There are a number of ways this can be done, from making preferential payments to creditors that are linked to the insolvent company, to transferring assets at undervalue. This can include the business’s physical assets to key contracts and even its trading name.
Even where the director may be owed substantial amounts of money by the company, creditor’s rights must be demonstrated to have come first.
Under the Insolvency Act 1986, where a company has sold or transferred an asset for less than its full value, the transaction can be ‘set aside’ and effectively reversed. The aim of which is to restore the company to the position it would have been for the benefit of its creditors. This means the beneficiary of the transaction may have to make a payment to the insolvent company or transfer an asset back.
What is an ‘antecedent transaction?’
The word ‘antecedent’ means ‘going before’, so in this case, an antecedent transaction is one that takes place in the run up to insolvency. The overriding principle of company insolvency proceedings is that all unsecured creditors are treated equally. If the administrator or liquidator believes a transaction has taken place to the detriment of the company’s creditors as a whole, they can apply to the court to have those transactions undone or reversed.
The main types of antecedent transaction
There are many different categories of antecedent transaction that an administrator or liquidator can seek to have reversed. In the worst case scenarios transactions may be treated as fraud and can have serious implications for directors.
Transactions may include but not limited to:
• Avoidance of property dispositions
• Undervalued transactions
• Extortionate credit transactions
• Avoidance of floating charges
• Transactions designed to defraud creditors
• Excessive pension contributions
• Giving preference to particular creditors
The two most common examples of antecedent transactions are undervalued and preferential transactions.
Transactions at undervalue
A transaction at undervalue is an arrangement entered into by an officer of the company to transfer an asset to a third party for less than its full value, or for no return at all. This is covered by Section 238 of the Insolvency Act 1986.
An administrator or liquidator can look back up to two years from the date the insolvency procedure commenced to see whether a transaction at undervalue has taken place. For the court to reverse or undo the transaction, the office holder must prove that the asset was sold for less than its true value, and the company was unable to pay its debts at the time of the transaction. Or that the asset was sold for less than its value and the company became insolvent because of the transaction.
In their defence, the company officer must prove that he or she entered into the transaction in good faith and for the benefit of the business.
A company gives preference when it does something that puts a particular creditor in a better position than it would have been in administration or liquidation. This is covered by Section 239 of the Insolvency Act 1986. In many cases, the creditor shown the preference is connected with the company in question. For example, it may be run by a shareholder or a family member, or even the directors themselves.
A company can be found to have given preference if a debt is paid to a creditor that puts it in a better position than in the event of insolvency. As well as making payments to connected companies, a preferential payment could be made to a bank to release a director from a guarantee they have given.
To defend against a payment made in preference, the company officer must show they had no desire to put a creditor in a better position than in the event of insolvency. They must also show they have no connection to the creditor in question.
Where there is a clear benefit or incentive for any ‘connected’ party falling out of any transaction will likely be investigated.
How can company officers avoid antecedent transactions?
Company directors must take care to ensure that full value is achieved when assets are transferred away from the company. They must also make sure all creditors are treated in the same way and that individual creditors are not paid before others, unless the company is able to pay all of its creditors.
Any decisions that may be challenged in the event of company insolvency should be reasoned and properly considered by the board of directors and board minutes should be taken.
How can we help?
If your company is insolvent and you’re worried about a possible antecedent transaction then stop. You must seek professional insolvency advice before entering into any transactions to known third parties. For more information, please call our company directors’ hotline on 08000 746 757, email: [email protected].