When a company or individual becomes insolvent, the appointed office-holder – whether a liquidator, administrator, or trustee in bankruptcy – has a duty to examine the affairs and dealings of the insolvent party and will review transactions entered into prior to insolvency to determine whether any unfair or improper dealings took place. The insolvency legislation allows certain transactions to be challenged, and in some cases reversed, if they are found to have put one creditor at an advantage, diminished the value of the estate, or involved misconduct. These are known as antecedent transactions or voidable transactions. This process plays a key role in ensuring fairness among creditors and protecting the integrity of the insolvency regime.
Understanding which transactions may be reviewed – and the risks involved – is essential for company directors, individuals facing personal insolvency, and creditors.
What is an Antecedent Transaction?
An antecedent transaction is a transaction that took place before the commencement of insolvency proceedings, which may be set aside if it meets certain legal criteria. The Insolvency Act 1986 provides the statutory framework for identifying, challenging and reversing such transactions.
Key Types of Antecedent Transactions
1. Transactions at an Undervalue (“TUV”)
A TUV occurs where an asset is gifted to someone else or is transferred for significantly less than it is worth. Examples include transferring property to a family member for nominal consideration or selling assets to a connected party below market value.
Timeframe to challenge TUVs:
- Bankruptcy: up to five years before the bankruptcy order.
- Corporate Insolvency: up to two years before the onset of insolvency.
Requirements:
- Bankruptcy: if the transaction was more than two years before the bankruptcy order, the Trustee in Bankruptcy must prove the individual was insolvent at the time, or become insolvent as a result, of the transaction.
- Corporate Insolvency: it must be proved the company was insolvent at the time, or become insolvent as a result, of the transaction and the payment was not made in good faith nor were there reasonable grounds for believing the transaction would benefit the company.
2. Preferences
- A preference arises when a debtor does something that places one creditor in a better position than others in the event of insolvency. This might include repaying a debt to a particular supplier, lender, or associate, while ignoring others.
- Timeframe for both bankruptcy and corporate insolvency: up to six months prior to insolvency, or two years where the bankrupt/company and the entity receiving the preference are connected.
- Requirements for challenge:
- Subjective test.
- Evidence of intention to put the person/company in a better position than other creditors.
3. Extortionate credit transactions
- Occur when someone provides credit to the bankrupt/company where the terms are grossly unfair, such as excessive interest rates or repayments.
- Timeframe for both bankruptcy and corporate insolvency: 3 years prior to insolvency event.
4. Transactions defrauding creditors
- Occurs when a company/bankrupt enters into a TUV where the intention was to put the asset in question beyond the reach of the creditors.
- The power to challenge transactions to defraud creditors is open to any victim prejudiced, or capable of being so, who can make an application to the court.
- Timeframe for both bankruptcy and corporate insolvency: the person making the application is not limited to transactions which occurred in the two years prior to the onset of insolvency. A transaction can be challenged even if it occurred many years in the past.
5. Other types of antecedent transactions include:
- Invalid floating charges in corporate insolvency.
- Excessive pension contributions in bankruptcy.
Risks for Directors and Individuals
Directors of companies facing insolvency should exercise great caution in the run-up to insolvency. Transactions that may seem commercially or personally reasonable at the time can later be challenged, and advice should be sought before any significant transaction is undertaken during periods of financial distress.
Similarly, individuals entering bankruptcy should be aware that gifts, transfers of property, or repayments to friends or relatives may later be challenged and/or overturned/reversed. Accordingly, it is recommended that professional advice be sought by both directors of companies and individuals before any significant transaction is undertaken during periods of financial difficulty.
How Nelsons Can Help
At Nelsons, our Insolvency & Restructuring team works with companies, individuals, creditors and office-holders to advise on the risks and implications of antecedent transactions. We also support clients who are on the receiving end of legal challenges, helping them to respond appropriately.
If you are concerned about a past transaction, require advice on managing insolvency risk, or are facing a claim in relation to an antecedent transaction, we’re here to help.
Get in Touch
Abbie Fotheringham is an Associate in our expert Restructuring & Insolvency team. Abbie specialises corporate and personal insolvency matters, including advising on trust and property issues within the context of bankruptcy.
If you have any questions in relation to the subjects discussed above, please contact Abbie or another member of the team in Derby, Leicester or Nottingham on 0808 258 0461 or via our online form.