Voidable Transactions in Liquidation: Unpacking Preferential Payments

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Voidable Transactions in Liquidation Unpacking
Preferential Payments 0 Comments / Liquidation /
By Viv1
Navigating Individual Insolvency Insights from
October to December 2023 24/05/2024
The insolvency process can be a complicated and
stressful time for businesses, individuals and
creditors. As such, it is important that you
have a clear understanding of the whole process
and some of the different factors that it
entails. One of these factors is voidable
transactions. If you are interested in ?nding out
more about what a voidable transaction in
Liquidation is and how it can apply to the
insolvency process then all will be discussed in
more detail below.
What is a Voidable Transaction in
Liquidation? Lets start with the obvious
question What actually is a voidable
transaction? A voidable transaction is
a transaction that a company enters into either
once it becomes insolvent or before it becomes
insolvent, which is more than likely going to be
challenged or overturned by liquidators and
administrators who are involved in the
liquidation process. The reason why voidable
transactions and the legislation which surrounds
them are important is that it is intended to
prevent directors of an insolvent company from
essentially stripping the organisation of its
assets and then using those assets for its own
bene?t at the expense of creditors who are owed
money. The legal duties which are imposed on the
director of a company shift once that company
?nds itself in a di?cult ?nancial situation.
Rather than the regular duties of running the
business for the bene?t of the shareholders,
directors need to act with their creditors best
interests in mind. This means that they need to
act in a way where they will minimise their
losses and preserve company assets so that they
can be sold for the creditors bene?t. If there
are any transactions which occur during this
period which dont align with this ideology then
they can be challenged and will likely be
void. If it is found by an o?cial receiver,
administrator or liquidator that you have entered
into a voidable transaction then they have the
power to force whoever the third party was that
bene?ted from the transaction to repay money to
the company. If that asset cannot be recovered
then it may be that the director is held
personally liable for the shortfall. There might
also be proceedings brought against the director
for a breach of duty. Examples of Voidable
Transactions There are a few different examples
of voidable transactions. These include but are
not limited to the following Transactions at
an undervalue Preferential transactions
Fraudulent transactions Wrongful
trading Transactions at an Undervalue This
occurs when an asset is transferred to a third
party (who usually has some a?liation with the
director like a friend or family member) with no
money changing hands or less money changing hands
than is correct. This takes money that is owed
to creditors away from them, which goes against
the interests of the business. If you plan on
selling some of your business assets whilst your
business is in a di?cult position then you
should make sure that you have the asset valued
independently by a quali?ed surveyor to ensure
the transaction is not void. Preferential
Transactions If your business is struggling and
insolvency is a real risk then you need to make
sure that you are maximising the returns of your
creditors and that you are also treating all of
them equally. If you pay one creditor before you
pay any others then this is whats known as a
preferential transaction. This happens a lot when
people have suppliers they have worked with for
a long period of time and therefore have
developed a good working relationship with. It
can also be the case if family and friends have
invested in a business that hasnt worked out.
These transactions can often be void as they are
not fair given they involve prioritising one
creditor over another. Fraudulent
Transactions These are transactions that are
entered into in order to intentionally reduce the
return for your creditors by putting your
business assets beyond their reach. A fraudulent
transaction can often overlap with
the aforementioned preferential transactions and
transactions at an undervalue. The key difference
with a fraudulent transaction is that there is
no recklessness involved, they have been done
very speci?cally in order to defraud creditors
or prejudice the interests of somebody who is
looking to make a claim. Wrongful
Trading Wrongful trading is also a common
problem which occurs when a business keeps
trading despite the fact it knows that there is
no way it can realistically recover and avoid
insolvency. If the director of a business is
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found to be responsible for wrongful trading then
it is likely they will be made personally liable
for the debts of the company due to the fact
they have only stood to worsen the creditors
position.
What Could Happen if a Director is Found to Have
Made a Voidable Transaction?
If the director of a business is found to have
entered into a voidable transaction in the
build-up to the businesss insolvency procedure
then the consequences can be quite serious. It
will be up to the administrator or liquidator
whether they would like to commence proceedings,
and if they do it will be with the intention
of recovering any assets that might be the
subject of a voidable transaction. If o?cials are
unable to recover these assets then it could well
be the case that the director who has engaged in
the voidable transaction will be made personally
liable for the debts. Directors may also be ?ned
and can even be banned from acting as the
director of a business for up to 15 years. Do
You Need Help with Voidable Transactions? If your
business looks as though it is going to go into
liquidation and you would like to avoid making
any voidable transactions then it is worth
reaching out to experts such as Simple
Liquidation. We will be able to advise you on
the best way to act to ensure that you do not
make any voidable transactions. If you have any
questions or require any further information then
do not hesitate to get in touch.
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