Company Directors: Be aware of ‘Reviewable Transactions’19 Jan 2021
What do 'Reviewable Transactions' mean for me?
The business news is awash with dire predictions from experts about an expected wave of corporate insolvencies with companies of all sizes fighting to survive amid this pandemic.
Directors will be facing extremely difficult decisions about how best to allocate company resources and it would be as well that they are aware that certain transactions may be invalid or challenged in the event that the company subsequently enters into a formal insolvency process.
The Insolvency Act 1986 contains provisions enabling appointed company administrators or liquidators to scrutinise and, where applicable, to challenge certain types of transactions that took place before the start of a company administration or liquidation with a view to asking the Court to make an order to undo the effect of the transaction in order to achieve the best possible return to the company’s creditors and to ensure that the company’s available assets are shared equally among its unsecured creditors.
These types of transactions are commonly known as ‘reviewable transactions’ or ‘antecedent transactions’ and here is a very brief summary of some of the types of transactions envisaged by the legislation:
A. Transactions at an undervalue. Where a company has transferred an asset to another party for no consideration or for significantly less than its true value within the 2 year period before the company’s administration or liquidation in circumstances where the company was insolvent (or deemed insolvent) at the time of the transaction or it became insolvent as a result.
B. Preference transactions. Where, within the 6 month period before the company’s administration or liquidation (or within 2 years beforehand if the transaction involves a connected person), a company transaction puts a creditor in a better position than it would otherwise have been in circumstances where a company intends (or is presumed to intend) to prefer a creditor over others and the company is insolvent or becomes insolvent as a result.
C. Extortionate credit transactions. Where, within 3 years of the company’s administration or liquidation, the company enters into a transaction providing credit to the company which either requires the company to make grossly exorbitant payments or otherwise grossly contravenes the ordinary principles of fair dealing.
D. Floating Charges. Unless a floating charge secures fresh lending to the company, a floating charge created by a company within the 12 months before the company’s administration or liquidation (or within the 2 year period beforehand if created in favour of a connected person) may be invalid in circumstances where the company was insolvent at the time of granting the floating charge or became insolvent as a result of the transaction in which the floating charge was granted.
E. Transactions defrauding creditors. These types of transactions can be challenged not only by company administrators and liquidators but also by the Financial Services Authority or Pensions Regulator and any party prejudiced by a transaction that was entered into by the company at an undervalue for the purpose of putting assets beyond the reach of a creditor in order to frustrate the creditor’s claim against the company
A lot of useful information can be found on The Insolvency Service website.
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This blog was prepared on 13 January 2021. It is not intended to be advice and should not be relied upon as such.