Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
What are Antecedent Transactions for an Insolvent Company?
Antecedent transactions is a legal term for payments made by a company before it enters formal insolvency proceedings. Also known as ‘voidable transactions’, these can include sales of assets at undervalue, preferential payments to certain creditors, or other transactions that unfairly reduce the company’s asset pool.
Once appointed, an insolvency practitioner (IP) has a duty to undertake a retrospective analysis of the company’s affairs, examining antecedent transactions up to two years prior to the declaration of insolvency. In particular, the IP looks for anything which has unfairly diminished the value available to creditors.
Once identified, these transactions can be ‘set aside’ or reversed, effectively recovering assets or funds for the benefit of the company’s estate.
The Insolvency Act 1986 identifies several categories of antecedent transactions, including but not limited to:
Transactions at an Undervalue (Section 238)
Transactions at an undervalue occur when a company transfers assets to a third party for significantly less than their worth, within a certain period before the company enters insolvency. Under UK insolvency law, this period is typically:
Two years prior to insolvency for connected parties (e.g., family members or associated businesses)
Six months prior to insolvency for non-connected parties
Example: A struggling company sells machinery worth £50,000 to a sister company for only £10,000 shortly before declaring bankruptcy.
Preferential Payments (Section 239)
Preferences involve a company giving preferential treatment to one or more creditors over others shortly before insolvency. This may include:
Repaying loans to connected parties
Settling debts with certain creditors while leaving others unpaid
Example: A company pays a substantial debt to a director’s relative while failing to pay external suppliers, then enters insolvency shortly after.
Extortionate Credit Transactions (Section 244)
These involve the company entering into credit agreements with unreasonably high interest rates or harsh terms, particularly when already facing financial difficulties.
Example: A financially struggling company takes out a loan with an interest rate significantly above market average, under conditions likely to exacerbate its financial distress.
Dispositions of Property
This involves the transfer of assets by a company after the commencement of winding-up proceedings or in the lead-up to insolvency.
Example: A company facing financial distress sells a substantial portion of its inventory to an associate at below-market prices or transfers property ownership without clear justification.
Invalid Floating Charges (Section 245)
These are security interests over a company’s assets created or crystallised shortly before insolvency without adequate consideration given to the company in return.
Example: A company grants a lender a floating charge over all its assets for a loan significantly less valuable than the security provided, potentially diminishing the asset pool available to other creditors in insolvency.
Interpreting “Desire to Prefer” in Antecedent Transactions
The seminal case of Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] UKHL 2[1]Trusted Source – Wikipedia – Phillips v Brewin Dolphin Bell Lawrie, [2001] UKHL 2 significantly shaped the interpretation of preferences under Section 239 of the Insolvency Act 1986.
In this ruling, the House of Lords established that the “desire to prefer” a creditor must be a “real, substantial and dominant purpose” of the transaction, not merely an incidental effect. The court emphasised that the company must have a positive wish to improve the creditor’s position in the event of insolvency rather than simply intending to pay a pressing creditor.
This high threshold has made it more challenging for liquidators to successfully challenge payments as preferences, particularly in cases where companies are continuing to trade and make payments in the ordinary course of business.
What are the Potential Consequences for Directors of Antecedent Trading?
Directors involved in antecedent transactions may face serious repercussions, depending on the nature and severity of the transactions. These consequences can include:
Financial Liability: Directors may be personally required to repay the company or creditors for losses resulting from transactions such as undervalued sales or preferential payments.
Disqualification: Courts can ban directors from holding directorial positions or managing a company for up to 15 years.
Criminal Charges: In severe cases, particularly those involving fraudulent trading, directors may face criminal prosecution, potentially resulting in fines or imprisonment.
Legal Costs: Directors often incur substantial legal fees in defending against claims related to antecedent transactions.
It’s crucial for directors to understand that ignorance of the law or unintentional misconduct is not always a defence against these consequences. The court will consider whether the director acted reasonably and responsibly given the circumstances and information available at the time.
Expert Advice
If you’re concerned about the implications of antecedent transactions for your business, it’s crucial to seek expert advice. At Company Debt, we specialise in providing clear, practical guidance and support to directors facing financial challenges. Our team of experts is here to help you understand your legal responsibilities and explore every option available to safeguard your interests.
Don’t hesitate to reach out—use our live chat during working hours, email us at info@companydebt.com, or call us on 0800 074 6757.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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