Antecedent transactions are specific types of transactions that were made prior to a company’s insolvency. Such transactions may be reversible by a liquidator or administrator if the company was insolvent at the time they were made, or caused the company to become insolvent at a later date.
When a company enters an administration or liquidation process the conduct of the directors leading up to the insolvency will be investigated in order to highlight any wrongful or unlawful actions. One such action that may come under scrutiny is preferential payments.
What are Preferential Payments?
Preferential payments are when a creditor is placed in a more beneficial position at the detriment of the remaining creditors.
Once insolvency is threatened, it is the obligation of the Directors to maximise returns for all creditors equally, to do otherwise would be viewed as acting unlawfully.
Directors must set aside their own interest and those of the company, under the ‘pari passu’ principle to ensure that creditors within each class are treated equally where repayments and losses are concerned. For example, repaying a loan from someone connected to the company, such as a director’s relative, or making sure that a creditor is paid simply to encourage an ongoing business relationship post-insolvency would be seen as preferential.
When considering whether a payment is preferential, considerations are made in respect to the length of time between the transaction and the onset of insolvency.
Considerations include:
- Was the transaction to a ‘connected party’ such as a relative of a director or a business partner? The timescale for these transactions are two years before the onset of insolvency.
- Transactions to non-connected parties? These have a timescale of 6 months before the onset.
The date of insolvency could be when the petition for an administration order is presented, the filing date of Notice of Intent to Appoint, or the date on which winding-up begins. If a company has struggled on for a period of time without actually becoming insolvent, a payment that was indeed preferential, could be overlooked simply because of the timescale.
The Consequences?
If the Directors are found to have made preferential payment they could face personal liability for some or all of the company’s debts. The insolvency practitioner will apply to the court for the transaction(s) to be set aside, and action may be taken against you. If the preferential payment was made while the company was insolvent, may have even been the cause of insolvency, the Director(s) could face disqualification for a period of up to 15 years.
This articles only refers to corporate insolvency, to find out more about preferences in corporate insolvency and to ensure you are acting lawfully as a company director contact our expert team for advise on whether your actions might be investigated and to discuss the options available.