What are voidable transactions in an insolvency process?

Which transactions could be challenged and overturned in insolvency?

Voidable transactions, also referred to as antecedent transactions, are deals occurring before insolvency, which might be annulled. 

These transactions can pose significant issues for directors of insolvent firms. If you engage in a voidable transaction and your company is later liquidated, you may be personally responsible for repaying the company to benefit its creditors.

 

Understanding voidable transactions-what is it?

A voidable transaction is a deal made by a company when it’s insolvent or shortly before reaching insolvency, and it’s susceptible to challenge or reversal by a liquidator or administrator. 

The law aims to stop directors of insolvent firms from depleting the company’s assets for personal gain or the benefit of associated parties, disadvantaging creditors.

When a company faces financial troubles with a potential for insolvency, the directors’ legal responsibilities change. Instead of operating for the shareholders’ advantage, they are obligated to reduce losses for creditors and safeguard company assets. 

Any transaction in the period preceding or during a company’s insolvency, whether it’s liquidation or administration, conflicting with this legal duty may face challenges.

 

If a liquidator, administrator, or official receiver discovers your involvement in a voidable transaction, they have the authority to compel the third party who gained from the transaction to return funds to the company. 

In case the asset cannot be reclaimed from the third party, you may be held personally responsible for the deficit. Legal actions for breach of duty could also be initiated against you.

 

Exploring some examples of voidable transactions?

Numerous transactions can be deemed voidable or antecedent, such as:

• Preferential transactions
• Fraudulent transactions
• Transactions at undervalue
• Wrongful trading
• Misfeasance
• Extortionate credit transactions
• Avoidance of floating charges

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1. Preferential transactions

If your company faces insolvency risk, it is crucial to maximise returns for all creditors and treat them equitably. A preferential transaction occurs when you prioritise payment to one creditor over others, placing them in a more advantageous position compared to the creditor group as a whole.

An instance of a preferential transaction could be settling the full amount owed to a long-standing supplier, leaving other creditors like HMRC and lenders with outstanding balances. Likewise, prioritising the repayment of a business loan with a personal guarantee may seem tempting to safeguard personal finances.

 

2. Fraudulent transactions

Fraudulent transactions are deliberate dealings aimed at diminishing returns for creditors and placing assets out of their reach. There may be some intersection with preferential transactions and transactions at undervalue. However, the critical aspect is the intent to defraud creditors or harm the interests of potential claimants.

 

3. Transactions at undervalue

A transaction at undervalue happens when you transfer an asset to a third party, often a connected party like a family member, either without any monetary exchange or at a value lower than its actual worth. In the case of insolvency, such transactions can result in creditors being deprived of the money owed to them.

If you intend to sell a business asset during your company’s financial challenges, it’s advisable to obtain an independent valuation from a RICS-qualified surveyor.

 

4. Wrongful trading

Wrongful trading happens when you persist in trading, knowing there’s little chance the company can recover and avoid insolvency. You may face personal liability for the extra losses incurred, further worsening the position of creditors.

 

5. Misfeasance

As a director, you have a duty to act in the company’s best interests. Failure to do so, resulting in a loss for the company that diminishes returns for creditors, may render you personally liable for that loss.

 Examples of misfeasance often involve misusing funds or drawing a substantial salary while being aware of the company’s financial difficulties.

 

6. Extortionate credit transactions

If an administrator or liquidator discovers a loan agreement with an interest rate or charges deemed ‘grossly exorbitant,‘ they can invalidate that transaction. The court will assess the fairness of a credit transaction considering the lender’s risk, the provided security, and the agreed-upon terms.

7. Avoidance of floating charges

If, within the 12 months preceding the commencement of insolvency proceedings, an unsecured creditor secures a floating charge on an existing loan with them, that floating charge can be nullified. This measure aims to hinder unsecured creditors from enhancing their position to the detriment of other unsecured creditors.

 

What happens if you make voidable transactions?

If you engage in a voidable transaction before or during an insolvency process, the repercussions can be significant. 

The administrator or liquidator may initiate legal proceedings to reclaim assets involved in voidable transactions. In the event the asset cannot be retrieved from the beneficiary, you may be held personally accountable to the company for the benefit of its creditors.

Depending on the specific transaction, you might face fines or a directorial ban for up to 15 years. In severe instances involving serious misconduct or fraud, there is even the possibility of a prison sentence.

 

Read More:  

• What are the risks of trading while insolvent
• SEIS/EIS loss relief in insolvency and liquidation
• What is an insolvency practitioner
• How to find an insolvency practitioner
• How does the process work of banks appointing their own insolvency practitioner

 

How can you avoid voidable transactions? 

The optimal guidance is to reach out to a licensed insolvency practitioner at the earliest indication of your company facing insolvency risk.

 Our nationwide team can offer advice and suggestions concerning company transactions and address any concerns you may have regarding your role as a company director.