What Are Antecedent Transactions?
Antecedent transactions are any questionable transactions made by a company before it entered liquidation or administration. They’re essentially any exchange that appears to have worsened the position of company creditors.
The office-holder (the person overseeing the liquidation or administration) has the power to reverse these transactions so that creditors can get more of what they’re owed.
This can have some nasty consequences for directors. If you’re not careful, you could find yourself having to pay for any of these “reversed transactions” out of your own pocket.
In this guide, we’ll be exploring the potential risks for directors, the different types of antecedent transactions, and how you can protect yourself.
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Antecedent Transactions & the Risks for Directors
When your business enters into an insolvency procedure, the office-holder will dig through the company’s financial records. They’ll look back through the last two years’ worth of transactions.
If any questionable transactions are identified, the office-holder can order them to be reversed, putting the money back into the insolvent estate.
This is where the risk lies.
If the transaction can’t be reversed (because the company doesn’t have enough funds to pay it), chances are you’ll be made personally liable.
If you then can’t pay for this amount, you may be forced to declare bankruptcy, putting your personal assets – like your home and vehicle – at risk.
That’s not all. If evidence of misdoing is found, you could be disqualified from directorship for up to 15 years. You may also be hit with large fines and – in extreme cases – imprisoned for up to 10 years.
What Are the Different Types of Antecedent Transactions?
Any questionable transactions can be deemed an antecedent transaction and challenged in court.
But what actually are they?
We’ve compiled a list of some of the most common examples below.
Transactions at Undervalue
A transaction at undervalue is where you sell your company’s assets for significantly less than the average market rate.
An example of this is a director, knowing the company is heading for liquidation, selling a valuable asset for a nominal amount so they can buy it back later.
This results in creditors getting less than they should, so the liquidator can challenge this transaction and get a court order demanding the full value be paid into the insolvent estate.
Remember, giving an asset away for free is still treated as a transaction, so this doesn’t work as a loophole.
Preferential Payments
Preferential payments happen when a company director makes a deliberate effort to repay one creditor while ignoring the others.
A common example is directors disregarding other debts so that they can pay off one they’ve personally guaranteed.
Naturally, this leaves some creditors in the lurch, so the liquidator may challenge the transaction and reverse it.
Misfeasance
As a director, you have a fiduciary duty to promote the best interests of the company and its shareholders. If you act against this duty, you could be found liable for misfeasance.
Examples include misappropriating company funds or taking an overly high salary.
If you are found liable for misfeasance, you can be forced to personally repay a portion of the company’s debts.
Wrongful Trading
When a company becomes insolvent, a director’s legal duty fundamentally changes: instead of acting in the interest of the company, they must act in the interests of its creditors.
This is done by taking ownership of the situation and placing the company into voluntary liquidation, protecting the position of creditors.
However, some directors carry on trading in the hope they’ll manage to turn things around. This can end up making the debt worse, damaging the expected return for creditors. This is wrongful trading.
If found liable, you could be made to personally repay any additional debts created during this time.
Fraudulent Trading
Fraudulent trading is practically the same as wrongful trading. However, there is one key difference – intent. There is a clear aim to defraud creditors in these cases, so it is treated as a criminal offence.
Directors found guilty of fraudulent trading can be disqualified from directorship, made personally responsible for all company debts, or even imprisoned.
Extortionate Credit Transaction
Sometimes, companies enter credit agreements where the terms are highly unfavourable, requiring exorbitant payments to be made.
In cases like these, the liquidator or administrator can write these agreements off and get payments reversed. Alternatively, they may vary the terms of the agreement.
This type of antecedent transaction will not affect you during a liquidation. However, during administration, it can actually help your chances of a successful business turnaround.
Invalid Floating Charges
If a lender insists on getting a floating charge to secure existing funding, then it is invalid. New funding has to be provided to warrant a floating charge.
The office-holder can set aside any invalid floating charges. The assets it covers can then be included in the liquidation, or full control can be given back to the company in administration.
If the fixed charge is owned by someone you know, like a relative or an associate with interest, it will be removed automatically.
How Can I Protect Myself?
If you’re worried about your company’s finances, it’s important you speak to an insolvency practitioner as soon as possible.
Delaying or trying to avoid the truth of the situation can lead to antecedent transactions being made, exposing you legally and financially.
Instead, you need to take ownership of the situation and enter a formal insolvency solution. This could be a voluntary liquidation or a long-term payment plan.
Our team can assess your situation and guide you towards the right course of action, helping you meet your legal duties and avoid any unwanted fallout.
Get in touch to book a free, no-obligation consultation today.
