June 2004
Introduction
i What are antecedent recoveries?
The word "antecedent" is defined as "going before" and "recovery" as to "get back". In a very basic form, the provisions of the legislation relating to antecedent recoveries allow the trustee/liquidator to get something back for the estate which was disposed of before the order was made and at a time when it was inappropriate, unfair or wrong to do so.
The insolvency legislation provides that, subject to the rights of certain creditors such as secured or preferential creditors or those entitled to levy distress, the administration of an insolvency will result in the equal treatment of all creditors as far as the distribution of assets is concerned.
If something has been done in the run-up to insolvency which results in one creditor being treated more favourably than the others or where a person other than a creditor benefits from the actions of the bankrupt or company and the creditors suffer as a result, the official receiver as trustee or liquidator of the estate may have a right of recovery. For example, where one or more debts have been paid or substantially reduced in preference to others, it may be possible to recover the monies paid to the creditor preferred in this way.
For the official receiver, it is likely that the types of transaction covered by this part will become apparent at the initial interview. Once identified, the examiner may conduct an inspection of the accounting and/or banking records and will wish to obtain confirmation of the events that took place from creditors, suppliers or other persons capable of giving relevant information.
ii What can the trustee/liquidator do?
Under the antecedent recovery provisions, the trustee/liquidator may be able to recover assets or monies or to take other action to recover the position e.g. by applying to have a charge set aside. This type of recovery is made under the civil law although the events that gave rise to the right to recover may also lead to a criminal prosecution or be considered in disqualification proceedings.
In the majority of cases, the recovery will be made by an application to the court, unless those persons who benefited from the transactions are willing to return the property without the need to resort to court action. As many of these types of action will have been taken with insolvency very much in mind, court action will be necessary to achieve a recovery more often than not.
iii Appointment of IP as trustee/liquidator
NB The official receiver should seek the appointment of an IP as trustee/liquidator to take the recovery application forward once the case has been identified as a potential antecedent transaction whenever it is possible to do so. Where necessary, a Secretary of State appointment should be sought.
It is important when seeking an insolvency practitioner to take the appointment, if there are no other funds in the estate account or assets to enable the IP’s fees to be paid, that he/she is made fully aware that this type of recovery is the only likely asset to be recovered.
(See Case Help Manual part: Appointment of Trustees and Liquidators by the Secretary of State for further information.)
If the official receiver cannot find an IP willing to take on the case, he/she may take proceedings as a last resort. Where the official receiver makes application to have an antecedent transaction set aside, he/she needs to ensure that, prior to making the application, there are adequate funds available in the estate to finance the action or that the creditors/major creditors are prepared to give an indemnity to cover the costs.
Before resorting to proceedings, the official receiver should attempt to settle the claim amicably.
iv What types of antecedent recovery are there?
The forms of antecedent recovery available fall into seven main categories:
v Avoidance of dispositions in companies (section 127)
In the case of companies, the general rule is that any transaction entered into by the company after the commencement of the winding up is void unless approved or validated by the court.
The court will generally only exercise the discretion to validate a transaction that would otherwise be void if the interests of the unsecured creditors are not affected adversely. Where a disposition was made in good faith, in the ordinary course of business when the parties to the transaction were unaware of the petition, the court will usually validate it unless the court has reason to believe that there was an attempt to prefer the recipient of the transfer.
In such a situation, it is not necessary to show that the company was insolvent at the time that the transaction took place and the knowledge of the parties to the transaction as to the company’s status is irrelevant, unless the court decides to take it into account when deciding whether to validate the transaction.
The commencement of the winding up is generally deemed to be the presentation of the petition and the Gazetting of the petition may be regarded as notice of the petition to all creditors. However, if the company was previously in voluntary liquidation, the date of the resolution for voluntary winding up is deemed to be the commencement of the winding up.
Dispositions include payments into or out of an overdrawn bank account, where the paying in of a trade debt means that a liability the overdraft - has been reduced and an asset - the trade debt - that could have been realised in the insolvency disposed of.
NB
vi Avoidance of dispositions in bankruptcy (section 284)
In the case of bankruptcy, dispositions of property made after the presentation of the petition up to the vesting of the estate in a trustee are void unless approved by the court, either at that time or subsequently.
Anything done in good faith, for value, prior to the commencement of the bankruptcy and without notice of the petition is not a voidable transaction. This means, for example, that any payment to suppliers where goods, materials or services were delivered in the same period would not be affected provided proper value was provided. Any debts incurred after the commencement of the bankruptcy without notice of the presentation of the petition would also remain unaffected.
In bankruptcy, transactions can be approved up to the date of the vesting of the bankrupt’s property in the trustee, whether this is the result of a formal appointment of a trustee or the date on which the official receiver files notice that he/she does not intend to hold a meeting.
As with a company, where a petitioning creditor is paid in full but another creditor is substituted and a bankruptcy order is made, the payment to the original creditor can be recovered if it was made by the bankrupt. Otherwise, where the payment was made by a third party, the debt is not recoverable and the third party becomes an unsecured creditor in the bankruptcy.
vii Transactions at an undervalue (sections 238 and 339)
Where a bankrupt or company has entered into a transaction with any person at an undervalue, the transaction can be challenged by a trustee or liquidator and, in the case of a company, an administrator, and it is generally necessary to show that the individual or company was insolvent at the time that the transaction occurred.
The trustee or liquidator must obtain sanction (approval) of the court or creditors'/liquidation committee before bringing legal proceedings under section 238 or 339. (Where the OR is trustee/liquidator, Technical Section undertake the functions of the creditors'/liquidation committee on behalf of the Secretary of State. The Examiner/B1 will minute details of the transaction to Technical Section requesting sanction) The court may make an order as it sees fit to restore the position to what it would have been if the transaction had never taken place. The court may make any order which it deems appropriate in these circumstances but the applicant cannot demand a particular form of redress by asking the court for a particular order.
Examples of transactions at undervalue are those for which the individual or company received no consideration or gifts and those transactions where the individual or company received inadequate consideration.
Where the individual or company has received no benefit from the transaction, the possibility of indirect benefit or consideration less than the market value must be considered. Where the consideration may have been inadequate, it is necessary to decide what the consideration received amounted to, what ought to have been received and whether there is a significant difference between the two amounts.
In the same way as with avoidance of dispositions, the official receiver should seek the appointment of an IP where possible to attempt recovery. Otherwise, he/she will need to ensure that there are adequate funds available in the estate or obtain an indemnity from the creditors/major creditors to cover the costs prior to taking proceedings (unless the matter can be dealt with amicably).
viii Bankruptcy transactions at undervalue (section 339)
As far as a bankrupt is concerned, the transaction at undervalue must have occurred during the 5 years prior to the presentation of the bankruptcy petition. Where the transaction took place in the period of 2 to 5 years prior to the petition being presented, the bankrupt must either have been insolvent at the time or become insolvent as a result of the transaction. The burden of proof falls on the trustee to show that the bankrupt was insolvent at that time.
NB: Where the transaction involved an associate of the bankrupt, there is a presumption that the bankrupt was insolvent at the time the transaction took place so that the trustee does not need to prove that the individual was insolvent. An associate can be the individual’s spouse, or a relative or relative’s spouse of either the individual or the individual’s spouse.
Any transaction that was entered into in the 2 years prior to the presentation of the bankruptcy petition can be set aside, as can any transaction entered into in consideration of marriage and there is no need to show that the individual was insolvent. Only transactions entered into for valuable consideration and in good faith will stand. The trustee must obtain sanction (approval) of the court or creditors' committee before making an application under section 339. (Where the OR is trustee, Technical Section undertake the functions of the creditors' committee on behalf of the Secretary of State. The Examiner/B1 will minute details of the transaction to Technical Section requesting sanction.)
A settlement or transfer of property made as a result of a court order on divorce can still be deemed as an undervalue transaction, although where the divorce court confirms the transaction it may become valid.
ix Company transactions at undervalue (section 238)
In the case of a company, the transaction at undervalue must have occurred in the 2 years prior to the onset of insolvency for it to be voidable. As far as liquidation is concerned, the onset of insolvency is the presentation of the petition and in the case of an administration order, the date of the presentation of the petition for an administration order.
In the case of a company, where there is any transfer at undervalue to a person connected to the company, there is a presumption that the company was insolvent at the time of the transaction unless it can be proved otherwise. A connected person is a director or shadow director, and this has been extended to include a company’s bankers in the past where the bank was so closely tied to the company’s affairs that it was deemed to be a shadow director. The liquidator must obtain sanction (approval) of the court or liquidation committee before making an application under section 238. (Where the OR is liquidator, Technical Section undertake the functions of the liquidation committee on behalf of the Secretary of State. The Examiner/B1 will minute details of the transaction to Technical Section requesting sanction.)
In the case of a company, the court will not make an order in respect of a transaction at an undervalue if it is satisfied that the company in question entered into the transaction in good faith and for the purpose of carrying on its business and that at the time there were reasonable grounds for believing that the transaction would benefit the company.
x Preferences (sections 239 and 340)
There are two elements to a preference:
For example, in a company, a common preference is the payment of all or a substantial part of the bank debt, the debt being personally guaranteed by the directors.
If the preference has been made because the creditor has threatened to commence legal action, it may be that the intention was to get rid of the threat rather than prefer. Genuine pressure may be a defence if the action was taken to prevent insolvency but the fact that the action was the result of a court order does not mean that it cannot be deemed a preference.
The trustee, liquidator or administrator may make an application to the court that the transfer be reviewed as a preference and that the court make an appropriate order. The trustee or liquidator must obtain sanction (approval) of the court or creditors'/liquidation committee before making applications under section 239 or 340. (Where the OR is trustee/liquidator, Technical Section undertake the functions of the creditors'/liquidation committee on behalf of the Secretary of State. The Examiner/B1 will minute details of the transaction to Technical Section requesting sanction.)
It is up to the trustee, liquidator or administrator to show the court that the preference had taken place in anticipation of insolvency and was influenced by a desire to put the creditor in a better position. Where the preference was given to an associate, except for an employee, the associate must prove that there was no desire to put him in a better position.
For a preference to be capable of consideration by the court, it must have taken place in the 6 months prior to the date of the presentation of the petition in both bankruptcy and compulsory winding-up proceedings. Where the preference involved an associate of an individual (see paragraph viii) or someone connected to the company (see paragraph ix), the relevant period is extended to 2 years prior to the presentation of the petition.
At the time the preference was made, the individual or company must have been insolvent or become insolvent as a result of the preference, although in the case of an associate or connected person, there is a presumption of insolvency.
The court may order that the position be restored to what it would have been if the preference had never been given, although a third party who purchased something in good faith and for value will be protected unless the third party had notice of the impending insolvency or if he was an associate or connected person.
xi Extortionate credit transactions (section 343)
If a trustee, liquidator or administrator considers that a credit transaction or agreement is extortionate, he may apply to the court to have the transaction set aside. The court can set the transaction aside either in whole or in part, can vary the terms of the transaction and may require the creditor to repay any sums paid to him or surrender any security given to him under the terms of the agreement.
These provisions relate to transactions which have occurred in the 3 years prior to the making of the insolvency order and it is up to the other party to the transaction to prove that it was not extortionate.
In deciding whether a transaction is extortionate, the court must consider whether the transaction required grossly exorbitant payments to be made or contravened the ordinary principles of fair dealing having consideration to the risk taken on by the lender and the general rates of interest at the time of the transaction.
However, what appears at face value to be an extortionate credit transaction may not be seen in the same way by the courts, where an interest rate of 48% has been deemed not to be extortionate in the past, and applications relating to extortionate credit transactions are thus not common.
xii Avoidance of floating charges company only (section 245)
A floating charge is a charge on property which changes from time to time, such as stock and book debts, and which allows the company that gave the charge to deal with those charged assets on a daily basis without constant reference to the charge-holder.
All such charges must be registered with the Registrar of Companies within 21 days of creation or the company and its officers may be subject to a fine.
Where a company grants a floating charge within the relevant time specified in the legislation, it will be invalid unless the company receives consideration to the value of the goods or services over which the charge was made at or after the time the charge was given.
In the case of a connected person, the relevant time is 2 years prior to the commencement of the winding up (presentation of the petition) otherwise the relevant time for any other person is 12 months prior to the commencement of the winding up if the company was insolvent at the time.
xiii Transactions defrauding creditors (section 423)
This provision overlaps to a great extent with those relating to transactions at an undervalue and allows the court to set aside transactions at an undervalue designed to put assets out of the reach of creditors. The trustee or liquidator must obtain sanction (approval) of the court or creditors'/liquidation committee before bringing legal proceedings under section 423. (Where the OR is trustee/liquidator, Technical Section undertake the functions of the creditors'/liquidation committee on behalf of the Secretary of State. The Examiner/B1 will minute details of the transaction to Technical Section requesting sanction.)
The court must be satisfied that the main purpose of the transaction was to put the assets out of the reach of creditors or to have an adverse effect on them.
There is no time constraint regarding these measures and those persons capable of bringing such an action is extended from the trustee/liquidator to also include the supervisor of an IVA or someone who is or could be adversely affected by the transaction.
The definition of transaction at undervalue is similar in that it includes gifts or transactions with no consideration, transactions in consideration of marriage and transactions for consideration significantly less than it should have been.
Those purchasers who are bona fide, for value and without notice are protected.
xiv Avoidance of general assignment of book debts bankruptcy only (section 344)
This provides that a general assignment of book debts by a trader who subsequently becomes bankrupt is void against the trustee unless it has been registered under the Bills of Sale Act 1878.
Book debts here include future debts and future rents under an HP agreement. Debts due under a specific contract or from specific debtors would not be capable of a general assignment, however and could not be challenged by the trustee nor could an assignment which formed part of a legitimate transfer of the business or one which was made for the benefit of creditors generally.
Where can I find out more?
Insolvency Act 1986:
Section 86 Commencement of winding up (Voluntary winding up)
Section 123 Definition of inability to pay debts
Section 127 Avoidance of property dispositions etc
Section 129 Commencement of winding up by the court
Section 238 Transactions at an undervalue
Section 239 - Preferences
Section 240 Relevant time under ss 238,239
Section 241 Orders under ss 238, 239
Section 244 Extortionate credit transactions
Section 245 Avoidance of certain floating charges
Section 284 Restrictions on dispositions of property
Section 307 After-acquired property
Section 339 –Transactions at an under-value
Section 340 Preferences
Section 341 Relevant time under ss 339, 340
Section 342 Orders under ss 339, 340
Section 343 Extortionate credit transactions
Section 344 Avoidance of general assignment of book debts
Section 423 Transactions defrauding creditors
Section 424 Those who may apply for an order under s423
Section 425 Provisions which may be made by order under s423
Section 435 Meaning of associate
Insolvency (No 2) Act 1994
Technical Manual:
Chapter 17.34 to 17.47 Liquidator/Trustee Secretary of State Appointments
Chapter 31.4 Antecedent Recoveries
Case Help Manual:
Appointment of Trustees and Liquidators by the Secretary of State
Click HERE to view the Flowchart for Antecedent Recoveries
Procedure
LOIS screen references are given in brackets e.g. DO73