What Are Antecedent Transactions For An Insolvent Business?
Antecedent transactions are ones that occurred prior to a company beginning formal corporate insolvency proceedings. Specifically, they are transactions that took place while the company was insolvent or led to the company’s insolvency.
When a company enters insolvency proceedings, the appointed insolvency practitioner or administrator looks for antecedent transactions. Under the Insolvency Act 1986, these transactions can be challenged and reversed by the office holder.
Antecedent transactions are reversed to put an insolvent company back in the position it was before the transaction was made. This means fairer returns for a company’s creditors if a company is liquidated.
If you want to learn more about how assets are divided among creditors, we’ve written previously on which creditors get paid first when a company goes into insolvency or administration.
Types of antecedent transactions
There are a number of types of antecedent transactions. However, they usually take the following forms:
Preferential payments
A preferential payment is a payment where one creditor is put in a better position than the others in the lead-up to a company’s insolvency.
A payment can be considered preferential if:
- There are reasonable grounds to assume that the payee desired to put a creditor in a better position than others. If a payment is made to a family member or another connected person, this is automatically assumed to be the case.
- The company could not afford the payment when it was made or became insolvent because of it.
- The payment occurred six months before the company became insolvent if made to an unconnected person or two years before if made to a connected person, such as a family member.
For transactions where all three of the above are true, a court can issue an order restoring the position of the company to what it would have been had the transaction not been entered into.
Transactions at an undervalue
A transaction at an undervalue occurs when a company transfers business assets to a third party and receives either no payment in return or a payment significantly below the asset’s true market value. The assets can include company property, equipment, and stock.
A transaction at an undervalue can be repealed if it occurred two years before an insolvency and either directly led to insolvency or was made while the company was already insolvent.
An insolvent company can defend a transaction at an undervalue if it can prove that there were reasonable grounds to think that it would benefit the company.
Transactions defrauding creditors
There are distinct similarities between a transaction at an undervalue and a transaction defrauding creditors. Both are transactions where the payment received for the transfer of a business asset is considerably less than the asset’s true market value.
The difference is that a transaction defrauding creditors does not have to have occurred within two years of a company becoming insolvent. But for a transaction defrauding creditors to be recognised, it must be proved that it was the intention, not just a consequence, of the transaction to put assets beyond the reach of creditors.
Extortionate credit transactions
Extortionate credit transactions occur when a third party offers credit to a company at very high rates of interest or under unfair terms. An insolvency practitioner or administrator can look back three years prior to a company becoming insolvent and apply to a court to alter this agreement or recover funds.
Invalid floating charges
Certain floating charges can be deemed invalid and set aside. For a floating charge to be considered invalid, it must have been made in the year prior to insolvency (or two years prior if it relates to a connected party) and was only given to secure existing lending.
It must also be proven that the company became insolvent because of the charge or that the company’s debts could not be paid off when the charge was made. If the lender is a connected party then the charge is automatically set aside.
For more on floating charges, read our article on the differences between floating charges and fixed charges.
Wrongful trading
Wrongful trading occurs when a company continues trading despite being insolvent. Trading while insolvent may reduce returns for creditors if the company is liquidated.
Directors are obligated to act in the best interests of a company’s creditors – this usually means they must stop trading immediately when a company becomes insolvent.
Examples of wrongful trading include company directors paying themselves high salaries the company can’t afford or allowing a company’s debts to build up excessively.
A liquidator may reverse transactions that occurred when a company was insolvent. Directors guilty of wrongful trading can face disqualification from the position for 15 years and can become liable for some company debts.
Previously we’ve written about misfeasance, closely linked to wrongful trading.
Fraudulent trading
Fraudulent trading is similar to wrongful trading. However, fraudulent trading occurs when a director acts with the intent to defraud a company’s creditors. This is treated as a criminal, rather than a civil, offence and may lead to a prison sentence.
A common example is deliberately not paying off company debts or knowingly entering into transactions that the company could not afford to complete. It must be proven that individuals involved in fraudulent trading acted with the intention to defraud.
Final thoughts: What are antecedent transactions for an insolvent business?
Antecedent transactions are transactions that occurred prior to a company becoming insolvent. Under the Insolvency Act 1986, they can be reversed by the order of a court if proven by a company’s insolvency practitioner or administrator.
We have explored some forms of antecedent transactions, from a transaction at an undervalue to extortionate credit transactions. While many antecedent transactions can simply be reversed, if this is impossible, directors may become personally liable.
If you’ve recently resigned as the director of a company, we’ve previously written about how long a director is liable for after resignation.
In certain cases, directors may be found guilty of misconduct and disqualified for 15 years, or, in the case of fraudulent trading, may face criminal charges.
If you think your company may become insolvent or already is, seek professional advice from a trusted insolvency practitioner immediately.
Here at Hudson Weir, we are a team of highly qualified chartered accountants and insolvency practitioners. If you have any queries, please don’t hesitate to get in touch.
