Corporate insolvency: unwinding antecedent transactions

The person challenging the transaction can do so by making an application to court. If the challenge is successful, the court has wide discretion to make an order to undo the transaction's effect.

Given the current economic climate, directors should be mindful of entering into transactions which the courts may unwind. In times of financial difficulties, it is ever more important that directors act in the company's best interests to maintain profits and growth.

This article will focus on two of the main transactions which are subject to challenge: preferences and transactions at an undervalue.

Preferences

The procedure for challenging preferences is set out at s.239 of the Insolvency Act 1986. Under the Act, a company gives a person a preference when:

• That person is one of the company's creditors or a surety or guarantor for any of the company's debts or other liabilities; and
   
• The company does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.
   
• That person is one of the company's creditors or a surety or guarantor for any of the company's debts or other liabilities; and
   
• The company does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.

The following conditions must also be satisfied for a preference to be present:

• The company was influenced in deciding to give the preference by a desire to prefer the party; and
   
• The preference was given during the six months (or two years where the person that has been preferred is connected with the company – see below for more detail on connected persons) before the onset of insolvency; and
   
• The company was unable to pay its debts at the time of the transaction or became unable to pay its debts as a result of it.

Transactions at an undervalue

The procedure for challenging transactions at an undervalue is set out at s.238 of the Insolvency Act 1986. The definition under the Act of a transaction at an undervalue is when a company enters into a transaction with a person and:

• The company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration; or       
   
• The company enters into a transaction with that person for a consideration, the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company.

There are two further conditions which must also be satisfied:

• The transaction was entered into during the two years before the onset of insolvency; and
   
• The company was unable to pay its debts at the time of the transaction or became unable to pay its debts as a result of the transaction.

Connected persons

As referenced above, there are different time limits for a preference if a party was 'connected' with the company. This is set out at s.249 of the Insolvency Act 1986 as:

• A director or shadow director of the company or an associate of such a director or shadow director; or
   
• An associate of the company.

'Associate' is defined at s.435 of the Act as:

• Husband, wife or civil partner
   
• A relative of the individual or their husband, wife or civil partner. 'Relative' includes brother, sister, uncle, aunt, nephew, niece, lineal ancestor, or lineal descendant.

It is worth noting that stepchildren and adopted children also come within this definition.

Consequences

If the court finds that the transaction was either at an undervalue or a preference, they can order that it is unwound. 

This means the transaction is null and void, and the asset is returned to the company. Unwinding the transaction allows funds to be released by the liquidator or administrator to help pay off the company's creditors.

Furthermore, the consequences for the directors of the company could include:

• Disqualification
   
• Personal liability for the debt if the asset's true value cannot be recovered
   
• A fine

Contact our solicitors 

The financial failure of a company can place enormous pressure on business owners and significantly impact customers, employees, investors, landlords, lenders and suppliers. 

If you have any questions about corporate insolvency or director disqualification matters, our solicitors can help you understand your options and protect your interests in this complex area of law.

We have solicitors in London, Brighton, East Sussex, and Cumbria, and we work with businesses across the UK.