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Time limits in antecedent transactions, a forgotten past?25th February 2021 Restructuring & Insolvency
English insolvency law has traditionally been a creditor led process, empowering those who have “lost out” to regain some control. The regime moved away from a being a punitive process to one which promotes business preservation a long time ago. However, there remain powers for insolvency officeholders to recover assets in cases where it can be said the transfer was detrimental to creditors, such as transactions at undervalue and preferences. In the rare case the revocation of the transaction can seem unjust, but these are important provisions necessary to maintain confidence in the insolvency regime.
In the rush to protect debtors during the COVID period the government appears to have forgotten this important element of creditor protection. By effectively preventing most winding up petitions but not providing an adjustment to the time periods relating to transactions at an undervalue and preferences, creditors’ positions are severely prejudiced. Indeed, the ability to make recovery under the antecedent transaction provisions is often the only funds available to enable distributions to creditors meaning that the omission should be urgently reviewed.
What are antecedent transactions?
The law provides that certain transactions entered into by companies prior to their entry into liquidation/administration can be challenged by the insolvency officeholder. These include:
Transactions at undervalue (s238) – A transaction at the time when the company is insolvent, or by which the company becomes insolvent, in which the company receives less than full value. This has a 2 year look back period for connected and unconnected persons. Additionally, there is an important presumption of insolvency at the time of the transaction where the beneficiary is a connected person.
Preferences (s239) – A transaction with a company’s creditor which puts that creditor in a better position than it would have been in on a company’s insolvency where there has been a desire to prefer that creditor. This has a 2 year look back period for connected parties and 6 months for others. Additionally, there is an important presumption in favour of the officeholder in the case of transactions with related parties that the company was motivated by the required desire to prefer.
Void Floating Charges (s245) – The grant of a floating charge to a person during the relevant period is invalid to the extent that no new monies are advanced (or accounted for). This has a 2 year look back period for connected parties and 1 year for others.
Void Dispositions (s127) – Usually from the date a winding up petition is presented all dispositions of property by the company subject thereto are void unless the Court’s consent is obtained. Meaning presentation of a petition has, or should have, the effect of preventing dissipation of assets. It is often the case that a winding up petition is put in when a creditor gets notice of an impending disposition of a key asset which once converted to cash may be difficult to trace. So the power to put in a petition and put a buyer on notice of the need for Court approval of the disposition is a powerful tool for creditors.
Despite the long history of these provisions it is surprisingly common for companies to enter into transactions which are captured by them. Sometimes this is because the directors are ignorant of the provisions (and their duties to creditors). Sometimes this is because the directors think they will simply take their chances that the officeholder will not discover it and/or deems it “too hard” to unwind. Whatever the reason, the unwinding of these transactions and recovery thereunder provides an important source of funds for insolvent estates and maintains creditor faith in the insolvency regime. Indeed the presumptions relating to the preference and transaction at undervalue claims, and the associated reversal of burden of proof, is often the deciding factor for an officeholder when determining whether or not to bring a claim.
Importantly, unlike the provisions relating to transactions defrauding creditors (s423) the above provisions do not require there to have been any purpose to put assets beyond the reach of creditors. So while a transaction defrauding a creditor’s claim is not subject to any time limit, and therefore always available to officeholders, the burden of proving a purpose to disadvantage creditors combined with the historical nature of the transaction (usually over 2 years since otherwise one would also bring a transaction at undervalue claim) makes it much less attractive for an officeholder to pursue.
CIGA and other measures
The Corporate Insolvency and Governance Act 2020 (“CIGA”) continued the trend of moving to a more debtor friendly insolvency regime by introducing the debtor led Restructuring Plan to English insolvency law. The Restructuring Plan is part of a planned update to English Insolvency law and requires Court oversight before the plan is approved. As such, it is perhaps not a surprise that there was no amendments to the definition of “onset of insolvency” in s240 Insolvency Act for the purposes of adjusting the look back periods for transactions at undervalue and preference claims. Indeed, there is no adjustment to that time period to take account of a company voluntary arrangement, another debtor led process with less oversight. However, the point is that in both cases there is creditor oversight and an Insolvency Practitioner is engaged to oversee the arrangements. Other measures included in CIGA appear to have been less well thought through.
The tests which have been put in place under CIGA in order for a creditor to present a winding up petition have led to a drastic reduction in the number of petitions presented and a corresponding reduction in compulsory winding up. While some creditors will be able to meet the test of presenting a petition by evidencing a reasonable belief that a company would have been unable to pay its debts without the effect of COVID, it is much harder for a creditor to meet the second test of satisfying the Court that COVID has not impacted on the company’s ability to pay. Combined with the draconian indemnity costs award in the case that the petition is dismissed, it is no surprise that creditors have held off from petitioning.
The lack of petitions caused by the provisions of CIGA, combined with government loan schemes and prevention on landlord enforcement means that record numbers of companies are presently either insolvent or at risk of insolvency. Back in October the Office for National Statistics estimated that up to 65% of businesses were at risk of insolvency. This is no surprise and is reflected in the record low numbers of corporate insolvencies during the COVID period. The lack of a threat of a winding up petition combined with a lack of creditor pressure and an inactive HMRC means that the usual threats which would otherwise push companies to jump into administration is not there either.
The result is that lots of companies which would have usually entered into a liquidation/administration from March 2020 have avoided the process. Meaning that when these companies do eventually enter into an insolvency process it is inevitable that the potential to review many transactions as preferences/transactions at undervalue will be lost to officeholders. Further, CIGA has amended the look back period in relation to s127 void dispositions so that in relation to any petitions presented in the “relevant period” (27 April 2020 – 31 March 2020 at time of writing) the usual rule that transactions are void without the Court’s consent from the date of petition is removed. The inability to obtain the benefit of s127’s restriction on dispositions from the date of the petition while the COVID period persists will have meant many creditors have had to sit by and watch as debtors convert assets to more easily dissipated cash.
So while creditors’ positions are held in abeyance (and worsening with interest/cost of funding) the beneficiaries of these otherwise voidable transactions see their positions improving. This does not seem right. While it is inevitable that COVID will produce some winners and losers, there should perhaps be some legislation to preserve/suspend the look back periods for transactions at undervalue/preferences so that funds can be clawed back up to 3/4 years under the relevant provisions and the important presumptions in favour of officeholders preserved. Giving creditors some hope that blatant dissipation of assets to directors/shareholders and family seems like it might go some way to address the imbalance in the creditor/debtor dynamic that the COVID measures have caused.
Contact / Queries
If you would like further information in relation to this blog, please contact James Williams.