What Are Antecedent Transactions In Insolvency?

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When a company is insolvent and enters into liquidation, the appointed insolvency practitioner will be required to investigate the conduct of the directors leading up the the insolvency. This investigation aims to check whether the directors acted appropriately or whether there is evidence of wrongdoing or misfeasance which may have caused or worsened the downfall of the company. If evidence of antecedent transactions is found during this process, the consequences for directors can be severe.

What Are Antecedent Transactions?

Antecedent transactions are best defined as transactions which occurred prior to a company entering into a formal insolvency procedure. Crucially, these types of transactions are those which can be deemed to have worsened the company’s financial position or specifically caused the company to become insolvent.

As per the Insolvency Act 1986, antecedent transactions can be challenged by the insolvency practitioner and ‘set aside’. This action helps to restore the company’s financial position and therefore increase the chances of favourable outcomes for creditors – as if the antecedent transaction had never occurred. 

Types Of Antecedent Transactions

There are a number of different types of antecedent transactions and all will be searched for the the insolvency practitioner when they are investigating director conduct. Typically, the types of transactions they are looking for can be categorised in the following ways:

Preferential Payments

Preferential payments are one of the most common examples of antecedent transactions in insolvency and refer to transactions which may place certain creditors in a favourable position. For example, payments made to family members or business partners which give them an unfair advantage over other creditors will typically be deemed preferential payments. These can be reversed providing they meet certain criteria and timescales which will be assessed by the insolvency practitioner.

Transactions At Undervalue

Transactions at undervalue are another form of antecedent transaction in insolvency. These involve any transactions which can be deemed to show the company disposing of assets for significantly less than their market value or for no value at all. The insolvency practitioner will assess whether or not they believe the director entered into the transaction in good faith, otherwise they may be able to set aside the transaction and redistribute the assets to creditors fairly. 

Wrongful Trading

Directors can also be held personally liable if they are found guilty of continuing to trade while knowing that there was no reasonable prospect of avoiding insolvency. Wrongful trading also applies if it is determined that directors should have known insolvency was on the horizon and therefore this type of antecedent transaction aims to discourage reckless trading and ensure directors act in the best interests of creditors at all times. 

Fraudulent Trading

When a company is deliberately run with the intent to defraud creditors, directors will be guilty of fraudulent trading. Directors who have traded fraudulently can be held personally liable and this type of antecedent transaction can therefore have consequences as serious as a custodial sentence. 

Invalid Floating Charges

Floating charges created within a specific period before insolvency may also be invalidated as antecedent transactions if the company was insolvent at the time. This protection prevents certain creditors from securing debts in a way that disadvantages other unsecured creditors. 

Extortionate Credit

Extortionate credit transactions will also come under scrutiny from the insolvency practitioner. These are credit agreements that require the company to make exorbitant payments, such as in instances where interest rates are too high or payment terms have been exaggerated. When identified, such transactions can be challenged and set aside providing they took place in the three years up to the start of insolvency proceedings. 

Consequences Of Antecedent Transactions

The purpose of finding antecedent transactions is to ensure that insolvency proceedings are carried out in the most effective way possible, with the best interests of creditors prioritised. As we have already covered, the identification of antecedent transactions has an initial impact on a procedural level. Once identified and proven, the insolvency practitioner can apply to have these transactions set aside and recover the assets involved if applicable. This should ensure that creditors get a maximal return when business assets are sold and distributed as per the order of creditors

Consequences for directors will typically vary depending on the type of antecedent transactions found to have taken place. However, directors may be personally liable for the debt if attempts to set aside the transaction are unsuccessful. In instances of misconduct, directors may also be disqualified from acting as a company director in the future and will face criminal proceedings should fraudulent trading have occurred. 

Next Steps For Insolvent Companies

Whether your company is struggling financially or about to enter into insolvency, it is crucial that you act accordingly and are aware of antecedent transactions. You should always seek professional advice at the very earliest signs of insolvency as this will ensure that you are fully aware of the consequences of your actions as well as the next steps as you enter into a formal process. 

For straightforward and transparent advice on insolvency, get in touch with the expert team at My Liquidation today. We will talk you through your next steps and can answer any questions you may have about antecedent transactions so that you act appropriately moving forward. 

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