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Antecedent Transactions in Corporate Insolvency

Antecedent transactions in corporate insolvency

When a company has entered a formal insolvency process, certain types of antecedent transaction (those entered into by the company before the start of the insolvency) may be challenged under provisions in the Insolvency Act 1986 (“IA 1986”). Collectively, these are known as reviewable transactions.

The powers to challenge antecedent transactions exist to:

  • Protect the principle of asset distribution that available assets of a company in administration or liquidation must be shared equally among its unsecured creditors; and
  • Help the office holder to achieve the best possible return to the creditors of the insolvent company.

The various ways in which a transaction may be challenged are prescribed by the IA 1986. They are:

  • Transactions at an undervalue (section 238).
  • Preferences (section 239).
  • Extortionate credit transactions (section 244).
  • Invalid floating charges (section 245).
  • Transactions defrauding creditors (section 423).
  • Contribution from past directors and shareholders (section 76).

In addition, there are two common law rules that derive from the core principle that the court will not allow an entity to arrange its affairs to frustrate the legitimate interests of that entity’s creditors in the event of its insolvency.

In most cases, the office holder (or other party capable of bringing the challenge) challenges a transaction by making an application to court. If the challenge succeeds, the court has a wide discretion to make an order undoing the effect of the transaction (for example, by ordering the return of assets to the insolvent company.

The most frequently asked questions concerning antecedent transactions concerns Transactions at an undervalue and Preference, both of which are summarised below.

Transactions at an undervalue

An administrator or a liquidator may apply to the court to ask it to set aside, or make other appropriate order in relation to, a transaction at an undervalue under section 238 of the IA 1986 if:

  • The company:
    • made a gift or otherwise entered into a transaction on terms that the company received no consideration; or
    • entered into a transaction 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.
  • The transaction was entered into during the two years before the onset of insolvency.
  • 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.

Preferences

An administrator or a liquidator may apply to the court to ask it to set aside, or make other appropriate order in relation to, a preference under section 239 of the IA 1986.

A company gives a preference to a person if each of the following apply:

  • That person is:
    • one of the company’s creditors; or
    • a surety or guarantor for any of the company’s debts or other liabilities.
  • 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 company was influenced in deciding to give the preference by a desire to prefer the party.
  • The preference was given during the six months (or two years where the person that has been preferred is connected with the company) before the onset of insolvency.

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.

For further advice please contact our Restructuring and Insolvency team on 0345 20 73 72 8 or email info@thursfields.co.uk

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