Reviewable transactions

There are a number of reviewable historic transactions that can be challenged once a company has entered a formal insolvency procedure. These include, but are not limited to:

  • Preferences
  • Transactions at an undervalue
  • Transactions defrauding creditors

Preference transactions

Examples of situations where a company may be deemed to have made a preference transaction include payment to an unsecured creditor ahead of others or the grant of security to a previously unsecured creditor.

A preference transaction takes place if the following criteria apply:

  • The party is a creditor or a surety/guarantor of the insolvent company’s debts or liabilities
  • An action of the company puts the party in a better position if the company goes into insolvent liquidation
  • It can be established that the company actively wished to place the party in a better position
  • The preference is made at least six months (or two years if a connected party) prior to the company’s insolvency
  • The company was unable to pay its debts at the time of the transaction or that the transaction itself led to the company being unable to pay its debts

If the application is successful, the Court has several remedial options available. It can require any property or proceeds of sale to be returned to the company, release or discharge security given by the company or require security to be provided to it, or require any person receiving a financial benefit from the company to reimburse it. Any obligations owed to the company that were released or discharged can be reinstated or new obligations imposed.

Transactions at an undervalue

If an insolvent company made a gift or was involved in a transaction where the company either received no payment or a payment that was significantly less than the true value, a Court application can be made to set aside the transaction. This applies if the relevant transaction was entered into within two years prior to the company entering administration or liquidation and if the company was unable to pay its debts at the time of the transaction or that the transaction itself led to the company being unable to pay its debts.

A liquidator or administrator acting for an insolvent company can make a Court application to set aside any transaction at an undervalue.

The remedies available to the Court are the same as those that apply to preference transactions (see above).

The application will be rejected if the company entered into the transaction in good faith for business reasons and that reasonable grounds existed that the transaction would be beneficial to the company.

Transactions defrauding creditors

Whilst transactions defrauding creditors are often pursued after a company becomes insolvent, they can be also pursued when a company is still solvent. The aim of the provision is to prevent companies from disposing of assets to the detriment of its creditors.

The transaction can be set aside under s423 of the Insolvency Act if its purpose was either to place assets beyond the reach of creditors or prejudice their interests in making a claim. This is a subjective test and the Court must be satisfied that the outcome was positively intended.

An application to set aside a transaction which defrauds creditors can be made by the company liquidator or administrator, a person prejudiced by the transaction, the Financial Services Authority or the Pensions Regulator.

The remedies available to the Court are the same as those that apply to preference transactions (see above).

Misfeasance/Breach of Statutory Duty

In addition to the above, a director of the Company can be personally liable for allowing a reviewable transaction to take place, as either a breach of statutory duty pursuant to the Companies Act 2006 and/or misfeasance pursuant to Section 212 Insolvency Act 1986.

If you have any concerns that an action you are to take would fall within one of the above categories, or are being pursued in respect of such an action, or are looking to pursue such a claim, our specialist team of lawyers can assist in relation to any of the above.