A liquidator or administrator (“office holder”) has the power to apply to the Court to set aside transactions entered into and payments made to creditors by a company, prior to insolvency, in certain circumstances.
The two main types of “antecedent transaction” to be aware of are “Transactions at an undervalue” and “Preferences”.
Transaction at an Undervalue
A transaction at an undervalue is an arrangement entered into by the company by which the company gives a third party something (e.g. the transfer of ownership of an asset) but the company receives nothing in return or less than full value.
If this happens the office holder can look back up to 2 years prior to the date when the process of liquidation/administration commenced (e.g. the date of an application to Court or the filing of documents) to see whether any transactions were at an undervalue.
In addition to proving that insufficient value was paid to the company in relation to the relevant transaction, the office holder must satisfy the Court that, at the time that the transaction was entered into, the company was unable to pay its debts or became unable to do so as a result of the transaction.
If the recipient of the company’s asset is “connected” with the company (e.g. a director, shareholder, family members of those persons, group/connected companies etc.) then an inability to pay debts is assumed. The assumption can be rebutted by clear evidence to the contrary.
It is a defence for the company to prove that the transaction was entered into in good faith, for the purpose of the business and for the benefit of the company.
A company gives a preference if it does something which has the effect of putting a creditor in a better position than it would otherwise be in were the company to enter into liquidation (though this Section also applies in an administration). There must be a proven desire on the part of the company to achieve this outcome but this desire will be presumed where the creditor is “connected” with the company (e.g. a Director, shareholder, family members of those persons, group/connected companies etc). The assumption can be rebutted by clear evidence to the contrary.
The office holder can “look back” at payments that happened 6 months prior to the date when the process of liquidation/administration commenced (e.g. the date of an application to Court or the filing of documents) unless the recipient of the preference is connected to the company, in which case the office holder can look back 2 years.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the issues covered above.
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