Antecedent-Transactions-A-complete-guide-for-company-directors

Antecedent Transactions: A complete guide for company directors

Before a company goes through formal insolvency processes like liquidation, there are specific transactions called antecedent transactions. These transactions can be undone by a liquidator or administrator if the company was insolvent when they happened or if they led to insolvency later on.

The person in charge looks at the company’s activities up to two years before the insolvency date to find antecedent transactions that could be reversed. This process called ‘setting aside’ the transaction, aims to get back the involved asset.

In the UK, insolvency laws allow for recovering funds in this way to improve returns for unsecured creditors and make sure assets are distributed fairly. The liquidator examines preferential payments, transactions at a lower value, and other transactions or arrangements made by the directors.

 

Preferential payments

These kinds of transactions create a preference, meaning one creditor gets an advantage over others. Preferential payments include transferring assets and making cash payments.

The debtor must have a ‘desire to prefer’ as part of their thinking before making the transaction, influencing their decision. The company’s records will be checked for preferential payments up to six months before insolvency.

If a connected party is involved, like a family member or another director, the time period is two years before insolvency. Examples of preferential payments include repaying a loan from a director’s relative and transferring a business asset to a family member. For a connected party, ‘desire to prefer’ is assumed.

For a liquidator to take legal action against a director, the company must have been insolvent when the payment was made or became insolvent because of the transaction.

Sometimes, directors repay a creditor just to avoid constant pursuit and pressure, not necessarily wanting to create a preference. Depending on the situation, the liquidator may still see it as a preferential payment.

 

Dealings at an underfrvalue

Undervalued transactions often involve transferring ownership of assets to a third party without receiving any money in return, or getting a much lower payment for the asset than its actual market value.

The liquidator often examines the transfer of business assets, like trading names, contracts, or property. They can look back on the company’s activities for up to two years before the insolvency date.

To make a case for this kind of arrangement, the person in charge must show that the transaction happened when the company was insolvent or that making the arrangement later led to the insolvency event.

 

Misfeasance

Directors must act in the company’s best interests. If they fail in this duty, causing a financial loss for the company and reducing returns for creditors, the liquidator may see it as misfeasance or wrongdoing.

The breach could involve misusing funds or taking a high salary when the director knows the company is financially struggling. While these actions aren’t illegal, they are inappropriate given the circumstances.

 

Dishonest trading

Intentionally defrauding creditors while trading is a serious matter that can lead to director disqualification, and in severe cases, a prison sentence. The crucial element here is the ‘intention’ to defraud, distinguishing it from wrongful trading.

A liquidator can take legal action against anyone knowingly involved in fraudulent activities, not just the directors. Deliberately avoiding paying company debts is a common example. In such cases, the court may decide that those found guilty must contribute financially for the benefit of creditors.

 

Illegal trading

When a company is insolvent or directors anticipate insolvency, they must cease trading to optimise returns for creditors. Continuing to trade in such situations may lead to allegations of wrongful trading, exposing directors to personal liability for the company’s debts.

During the liquidation process, the appointed insolvency practitioner will examine director’s conduct before insolvency and may take action if wrongful trading is identified.

Wrongful trading instances can involve trading while insolvent, accepting customer deposits, and incurring additional debt.

 

Dispositions of property

The liquidator or administrator will investigate the disposal of company property by directors in the period before insolvency. The transaction will also be examined to determine if a preference has been established.

 

Null floating charges

During an insolvency process, floating charge holders are prioritised for payment over unsecured creditors. If the company has not been paid for the asset(s) covered by a floating charge, the charge may be deemed invalid.

 

Excessive credit transactions

If a credit arrangement results in the company paying excessive interest or having clearly unfair terms, the office holder may seek court approval to adjust or recover the payments. 

 

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Potential effect for directors

Directors could face disqualification for up to 15 years if proven guilty of misconduct and become liable for some or all of the company’s debts. In cases of serious misconduct or fraud, directors may even face a prison sentence.

This is a concerning matter for company directors who may engage in arrangements or transactions thinking they are acting within the law. It’s a complex area, and seeking professional assistance is the best way to ensure you are not at risk of personal liability.

Vanguard Insolvency can provide guidance on antecedent transactions and any aspect of company insolvency. We can advise on your position as a director if you’re concerned about potential allegations and offer a free confidential same-day consultation.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.