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Understanding Antecedent Transactions

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On 28 March 2020, the Government announced new insolvency measures to support businesses under pressure as a result of the coronavirus outbreak. The Government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months. You can find out more here. Directors must still be mindful of their fiduciary duty to creditors and shareholders and early advice is always the best protection against any criticism.

Antecedent Transactions: A complete guide for company directors

Antecedent transactions are specific types of transaction that were made prior to a company’s insolvency. They may be reversible by a liquidator or administrator if the company was insolvent at the time they were made, or caused the company to become insolvent at a later date.

The office holder looks back at the company’s affairs for up to two years prior to the date of insolvency, with a view to identifying antecedent transactions and reversing them. This is known as ‘setting aside’ the transaction, or recovering the asset involved.

UK insolvency legislation makes provision for money to be recovered in this way to increase returns for unsecured creditors, and ensure a fair distribution of assets. The liquidator will look for preferential payments and transactions at an undervalue, as well as a range of other antecedent transactions or arrangements made by the directors.

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Preferential payments

These types of transaction create a preference, which means that a creditor has been placed in a beneficial position when compared with other creditors. Preferential payments include the transfer of assets as well as cash payments.

A ‘desire to prefer’ must be an apparent part of the debtor’s thought process prior to making the transaction, and must have influenced their decision. The company’s records will be scrutinised for preferential payments for up to six months prior to the date of insolvency.

If a connected party is involved, such as a family member or another director, the time period is two years prior to insolvency. Examples of preferential payments include the repayment of money loaned to the company by a director’s relative, and the transfer of a business asset to a family member.

In order for a liquidator to bring such a case against a director, the company must have been insolvent at the time the payment was made, or have become insolvent as a result of the transaction.

In some instances, directors choose to repay a certain creditor solely to stop the relentless pursuit and pressure, rather than deliberately wishing to create a preference. Depending on the circumstances, however, this may still be viewed as a preferential payment by the liquidator.

Transactions at an undervalue

Transactions at an undervalue often include the transfer of asset ownership to a third party where no money is received in return, or the receipt of a considerably lower payment for the asset in comparison to its true market value.

Transfer of business assets such as the trading name, contracts or property, are often placed under scrutiny by the liquidator, who can look back in the company’s affairs for a period of two years prior to the date of insolvency.

When making a case for this type of arrangement, the office holder must prove the transaction took place when the company was insolvent, or that making the arrangement later caused the insolvency event.

Misfeance

Directors have an obligation to act in the best interests of the company. A breach of this duty resulting in a financial loss for the company, and therefore a reduction of creditor returns, may be viewed as misfeance or wrongdoing by the liquidator.

The breach might involve the misappropriation of funds, or taking a high salary when the director is aware of the company’s poor financial position. These actions are not illegal, but are inappropriate considering the situation.

Wrongful trading

When a company is insolvent, or the directors know that it will become insolvent, they must stop trading in order to maximise creditor returns. Carrying on in trade under these circumstances could lead to accusations of wrongful trading, and result in personal liability for some of the company’s debts.

In a liquidation process the appointed insolvency practitioner will investigate director conduct during the period leading up to insolvency, and may take action if instances of wrongful trading are found.

As well as trading whilst insolvent, these can include accepting deposits from customers and taking on additional debt.

Fraudulent trading

Trading with the intent to defraud creditors is a serious issue that can result in director disqualification, or even a prison sentence in the most serious cases. The ‘intention’ to defraud is a crucial aspect, and differentiates this from wrongful trading.

A liquidator may bring an action against anyone who was knowingly involved in fraudulent activity, rather than solely the directors. A common example is deliberately avoiding the payment of company debts – in these cases the court might decide that guilty parties must contribute financially for the benefit of creditors.

Dispositions of property

Disposal of company property by directors in the time leading up to insolvency will be investigated by the liquidator/administrator. The transaction may also come under scrutiny to identify whether a preference has been created.

Invalid floating charges

Floating charge holders receive payment ahead of unsecured creditors during an insolvency process. If the company has not received payment for the asset(s) over which a floating charge is held, the charge may be regarded as invalid.

Extortionate credit transactions

If a credit arrangement has been made whereby the company has paid excessive levels of interest, or the terms were clearly unfair, the office holder may wish to apply to the court for an adjustment or recovery of the payments.

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Potential ramifications for directors

Directors can be disqualified for up to 15 years if allegations of misconduct are proven, and become liable for some or all of the company’s debts. In some cases where serious misconduct or fraud has been discovered, directors may also face a prison sentence.

This is clearly a topic of concern for company directors, who may undertake arrangements or transactions under the assumption that they are acting lawfully. It is a complex area, and seeking professional assistance is the best way to ensure you are not under threat of personal liability.

Real Business Rescue can offer advice on antecedent transactions and any other aspect of company insolvency. We will advise on your position as a director if you’re worried about potential allegations, and offer a free confidential same-day consultation.

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