Antecedent Transactions

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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10th April 2024

Understanding Antecedent Transactions

Antecedent transactions is a term from insolvency law, involving financial actions taken before a company’s formal declaration of insolvency. These transactions can significantly impact creditors’ outcomes and the insolvency process itself.

Once appointed, an insolvency practitioner will undertake a retrospective analysis of the company’s affairs, examining transactions up to two years prior to the declaration of insolvency that might have unfairly diminished the value available to creditors. Once identified, these transactions can be ‘set aside’ or reversed, effectively recovering assets or funds for the benefit of the company’s estate.

My article will explore the nature of antecedent transactions, why they are scrutinised in insolvency cases, and their implications for both the insolvent entity and its creditors.

Transactions Defrauding Creditors

Transactions at an Undervalue

Transactions at an undervalue occur when a company transfers assets to a third party for significantly less than their worth, within a certain period before the company enters insolvency. This can disadvantage creditors, as it reduces the pool of assets available to be distributed among them. Insolvency practitioners scrutinize such transactions to ensure fair treatment of all creditors and may seek to reverse these transactions to recover assets for the benefit of the creditor pool.

Preferences

Preferences happen when a company gives preferential treatment to one or more creditors over others shortly before becoming insolvent. This might include repaying loans to connected parties or settling debts with certain creditors while leaving others unpaid. Like transactions at an undervalue, preferences can be challenged by insolvency practitioners to redistribute assets more fairly among all creditors.

Extortionate Credit Transactions

These involve the company entering into credit agreements with unreasonably high-interest rates or harsh terms that are not in the company’s best interest, especially if these agreements are made when the company is already facing financial difficulties. Insolvency practitioners can look into these transactions to see if they can be adjusted or set aside to protect the interests of the creditors.

Wrongful Trading

Wrongful trading occurs when company directors continue to trade despite knowing the company has no reasonable prospect of avoiding insolvency. This action can worsen the financial position of the company and, subsequently, the return to creditors. Insolvency laws hold directors personally liable for debts incurred during this period if found guilty of wrongful trading.

Fraudulent Trading

This involves business activities carried out with the intent to defraud creditors or for any other fraudulent purpose. It’s a serious offence that can lead to criminal charges against the directors or individuals involved. Insolvency practitioners and courts investigate fraudulent trading to protect creditors and uphold justice.

Misfeasance

Misfeasance refers to the improper performance of lawful acts by company directors or officers, resulting in financial loss to the company or its creditors. This might include actions like misappropriation of funds, negligence, or breach of fiduciary duty. Insolvency practitioners have the authority to pursue claims against those responsible for misfeasance to recover losses for the benefit of creditors.

Dispositions of Property

Dispositions of property involve the transfer of assets by a company after the commencement of winding-up proceedings or in the lead-up to insolvency, without proper authorization or in a manner that disadvantages creditors. These transactions are closely examined and can be overturned if deemed to have been made to evade creditor claims or reduce the assets available for distribution among creditors.

Invalid Floating Charges

Invalid floating charges are security interests over a company’s assets that are created or crystallized shortly before the company enters insolvency, without adequate consideration given to the company in return. These charges can be challenged and potentially invalidated if they are found to give unfair preference to certain creditors or if they were created during a period when the company was insolvent or on the verge of insolvency. The criteria for invalidation typically include charges made within a specific timeframe before the declaration of insolvency and without new value being provided to the company.

What are the Potential Consequences for Directors of Antecedent Trading?

The potential consequences for directors involved in antecedent transactions can be significant and vary depending on the nature and severity of the transactions. Here are some of the key repercussions directors may face:

• Personal Liability: Directors might have to pay back the company or creditors from their own pockets for losses caused by transactions such as undervalued sales or preferential payments.
• Disqualification: Involvement in antecedent transactions can lead to a ban from holding director positions or managing a company for up to 15 years.
• Reputational Damage: Public legal proceedings and the nature of the accusations can harm a director’s professional reputation, impacting future opportunities.
• Criminal Charges: For severe cases, especially fraudulent trading, directors could face criminal charges, leading to fines or imprisonment.
• Civil Proceedings: Creditors or insolvency practitioners may initiate civil actions against directors for recovery of assets or compensation for losses.
• Investigation Costs: Directors might incur substantial legal fees in defending against claims related to antecedent transactions.
• Compensation Orders: Courts can order directors to compensate creditors or the insolvency estate for the financial impact of their actions.