Key takeaways
Transactions before insolvency may face scrutiny
Liquidators can reverse deals that unfairly reduce company value.
Directors may face personal risk
Claims could lead to compensation or asset return.
Defending claims requires strong evidence
Clear records and rationale help defend against legal challenges.
Once a company enters an insolvency process (such as administration or liquidation), certain transactions carried out before the process began can be challenged. These challenges can be made by an insolvency office holder under various statutory provisions of the Insolvency Act 1986. These are what are generally referred to as “antecedent transactions”. The aim of these provisions is to allow the insolvency office holder to bring legal claims to recover the value lost to the company (and its insolvency creditors) as a result of the transactions in question.
The most common form of antecedent transaction claims are:
transactions at an undervalue
preference claims
transactions defrauding creditors.
Antecedent transaction claims are often coupled with:
breach of director duties’ claims
claims for wrongful trading or fraudulent trading
where the claims are brought against current or former directors of the company.
About Hill Dickinson’s Restructuring & Insolvency team
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From reorganisation and turnaround to restructuring debt and dealing with pension scheme deficits, our aim is to help improve returns to stakeholders and avoid formal insolvency where possible. We offer pragmatic, commercial advice to directors, shareholders, investors, banks and lenders as well as government regulatory bodies, with particular experience of working with companies in the professional services space.
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Types of antecedent transactions
There are several types of antecedent transactions under the Insolvency Act 1986:
Preference
Transaction at an undervalue
Transaction defrauding creditors
Extortionate credit transactions
Avoidance of certain floating charges
We go on to give some examples of these types of transactions below.
What triggers an antecedent transaction claim?
Antecedent transaction claims are usually brought by an administrator or a liquidator of a company.
There are several circumstances that could mean that a transaction is considered to be an antecedent transaction.
For example, where a company enters into a transaction with another party and the value that the company receives in return is significantly less than the value it provides to the other party, this could be a transaction at an undervalue.
Another example would be when a company:
enters into a transaction that puts another party (eg one of the company’s creditors) in a better position than it would have been on the insolvent liquidation of the company, and
the company was influenced by a desire to prefer the other party to the transaction
This could be a preference.
In both examples, it is also necessary to show that the company was unable to pay its debts or became unable to pay its debts as a result of the complained of transaction.
In limited circumstances, someone other than an administrator or liquidator could bring an antecedent transaction claim. For example, someone who was prejudiced by a transaction could bring an antecedent transaction claim. In these cases it may not be necessary to show that the company was insolvent or in an insolvency process at the time of the transaction. However, it is necessary to show that the purpose of the transaction was to put assets beyond the reach of the company’s creditors or that it prejudiced the claimant’s interests in respect of a claim that they have against the company.
Director liability & legal risk
The court has a wide range of powers to reverse antecedent transactions. These powers include ordering the unsuccessful party to transfer the assets that they received as part of the complained of transaction to the insolvent company. The aim is to allow the insolvency office holder to then sell that asset for the benefit of all the insolvent company’s creditors.
The court also has a wide range of powers for claims that are usually coupled with antecedent transaction claims (such as breach of director’s duties) including the payment of compensation. The court will determine the amount of compensation, which could be significant. As well as paying their own costs, the unsuccessful party to such a claim may be ordered to pay the other party’s costs as well. Liability can therefore be significant.
Parties faced with antecedent transaction claims will need to carefully consider how to fund them. For example, company directors faced with such claims may want to check if they have Directors & Officers Liability Insurance (D&O insurance) which, depending on the terms of the policy, could provide cover for the costs incurred for such claims.
Challenging or defending a claim
The bases on which antecedent transaction claims could be challenged or defended vary depending upon the type of transaction and the factual background. For example:
providing contemporaneous evidence from the time of the transaction of both the value of the asset transferred and the value received by the company and the rationale for the transaction
demonstrating that the complained of transaction falls outside of the relevant ‘look back’ period under the Insolvency Act 1986
demonstrating that the asset that is the subject-matter of the complained of transaction is property held by the company under a properly constituted trust for another party or parties.
The above is not an exhaustive list and may not apply or be relevant for challenging or defending a specific antecedent transaction.
It is important to note that antecedent transaction claims are highly fact specific.
Why choose Hill Dickinson?
Hill Dickinson are well placed to assist you in responding promptly to any antecedent transaction claims that you may be facing. Our team has established expertise and experience in relation to such claims and of working alongside any insurers who may be providing Directors & Officers Liability Insurance cover in respect of such claims to directors (D&O Insurance).
We provide commercial and pragmatic advice so that you understand the claims being put to you and how best to respond to them in a litigation context.