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What are voidable transactions in an insolvency process?
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Which transactions could be challenged and overturned in insolvency?
Voidable transactions, also known as antecedent transactions, are transactions that take place in the lead-up to an insolvency process that may be set aside. Potentially, they can create serious problems for the directors of insolvent companies. If you enter into a voidable transaction and your company is subsequently wound up, you could become personally liable to repay the company for the benefit of its creditors.
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A voidable transaction is a transaction a company enters into when it is insolvent, or shortly before it becomes insolvent, which is at risk of being challenged or overturned by a liquidator or administrator. The legislation intends to prevent the directors of insolvent companies from stripping the company’s assets for their own benefit or the benefit of connected parties at the expense of their creditors.
When a company is in financial difficulty and there’s a risk of insolvency, the legal duties of the directors shift. Rather than running the company for the benefit of its shareholders, they must minimise their creditors’ losses and protect and preserve company assets for their benefit. Any transaction that occurs in the period leading up to or during a company’s insolvency (either liquidation or administration) that goes against this legal duty could be challenged.
If a liquidator, administrator or official receiver finds that you have entered into a voidable transaction, they can force the third party who benefited from the transaction to repay monies to the company. If they cannot recover the asset from the third party, you could be made personally liable for the shortfall. They could also start proceedings against you for breach of duty.
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Several transactions can be voidable or antecedent, including:
- Transactions at undervalue
- Preferential transactions
- Fraudulent transactions
- Wrongful trading
- Extortionate credit transactions
- Avoidance of floating charges
Transactions at undervalue
A transaction at undervalue occurs when you transfer an asset to a third party (typically a connected party such as a family member) either with no money changing hands or at less than its true value. If the company is insolvent, this type of transaction has the effect of depriving creditors of the money they’re owed.
If you plan to sell a business asset when your company is struggling financially, you should always have the asset independently valued by a RICS-qualified surveyor.
If your company is at risk of insolvency, you must ensure that you maximise the returns of all your creditors and treat them equally. A preferential transaction occurs if you pay one creditor ahead of others and put them in a better position than the creditor group as a whole.
For example, paying a supplier that you have a long-held relationship with in full while still owing money to other creditors such as HMRC and lenders could be seen as a preferential transaction. Similarly, if you have a business loan with a personal guarantee, you might be tempted to repay that loan first to protect your personal finances.
Fraudulent transactions are transactions you enter into intentionally to reduce the return for your creditors and put assets beyond their reach. There can also be some overlap with preferential transactions and transactions at undervalue. However, the key here is that you intend to defraud creditors or prejudice the interests of someone who may make a claim.
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As a director, you are obliged to act in the best interests of the company. If you don’t and create a loss for the company that reduces the returns available to its creditors, you could be made personally liable for that loss. Common examples of misfeasance include the misappropriation of funds or taking a high salary despite knowing the company is struggling.
Wrongful trading occurs when you continue to trade despite knowing there is no realistic prospect that the company could recover and avoid insolvency. You risk being made personally liable for the additional losses you incur that worsen the creditors’ position.
Extortionate credit transactions
If an administrator or liquidator finds that you have a loan arrangement at an interest rate or with charges that are ‘grossly exorbitant’, it can set that transaction aside. The court will decide whether a credit transaction is unfair based on the level of risk to the lender, the security you’ve given and the terms you’ve agreed to.
Avoidance of floating charges
If, during the 12 months leading up to the start of insolvency proceedings, an unsecured creditor obtains a floating charge on a loan you already have with it, the floating charge can be voided. This is to prevent an unsecured creditor from furthering their position at the expense of other unsecured creditors.
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If you enter into a voidable transaction leading up to or during an insolvency procedure, the consequences can be severe. The administrator or liquidator can commence proceedings to recover any assets that are the subject of voidable transactions. If the asset cannot be recovered from the beneficiary, you could be made personally liable to the company for the benefit of its creditors.
Depending on the particular transaction, you may also be fined or banned from acting as a director for up to 15 years. You could even face a prison sentence in cases where serious misconduct or fraud is discovered.
The best advice is to contact a licensed insolvency practitioner as soon as you know your company is at risk of insolvency. Our nationwide team can provide advice and recommendations on any issues arising from company transactions and concerns you may have about your position as a company director.
Further Reading on What are voidable transactions in an insolvency process?
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