VOIDABLE TRANSACTIONS (OR CLAW BACKS BY LIQUIDATORS)
September 16, 2019
Vigorously pursuing slow paying debtors does improve prospects of receiving payment. It follows that a creditor that puts the most pressure on a debtor will most likely receive payment before other creditors.
When dealing with a company that is insolvent, and receiving payment for overdue accounts from a debtor that subsequently goes into liquidation, a creditor should be aware of the voidable transaction regime.
In an insolvent liquidation, unsecured creditors are treated equally and the company’s assets are shared on a pro rata basis.
Some business owners will have received a letter of demand from a liquidator setting out that a company it provided goods or services to has failed and they want you to repay funds received. It has become more common for suppliers and others to be challenged by liquidators to repay funds that they have previously been paid.
Liquidators are able to set aside, or apply to the Court to have set aside a voidable transaction. Section 292 of the Companies Act 1993 provides that a transaction is voidable by the Liquidator if:
- It was made by the company at a time when it was unable to pay its due debts;
- It enables a creditor of the company to receive more towards the satisfaction of a debt than what the creditor would receive in the company’s liquidation;
- It was made within the two years prior to the company’s liquidation or the application to liquidate the company.
The definition of “transaction” is broadly defined and includes the payment of money, the transfer of assets, and also the incurring of an obligation. There is a presumption that the company was unable to pay its due debts if the payment was made within the six month period (the restricted period) to the company’s liquidation (or prior to the filing of the application to liquidate the company).
A Liquidator who intends to set aside a transaction as being voidable is required to serve a notice on the creditor. The creditor has twenty working days from being served to oppose in writing to the Liquidator the decision to set aside the transaction. If the creditor fails to object within that period, the transaction automatically is set aside. This is the statutory time period which the Court has no power to extend retrospectively. If the Liquidator receives a valid notice of opposition, he or she can then elect whether to issue an application in the High Court seeking the Court to set aside the transaction as being voidable.
There is no longer a “defence” that the transaction was undertaken in the “ordinary course of business”. All insolvent transactions (as defined) that have been made by the company during the specified period are open to challenge by the liquidator.
A creditor may oppose a notice to set aside a transaction. Where a continuing business relationship can be established (such as where there has been a running account), it is necessary to treat all individual transactions between the company and a creditor as a single transaction thus limiting, and in some cases, defeating the liquidators’ rights of recovery.
A transaction will not be set aside if the creditor received payment in good faith, in circumstances when a reasonable person in the creditors position would not have suspected and the creditor did not suspect that the company was or would become insolvent. This includes factors such as an ongoing contract or business relationship at the time of payment, whether it is common practice in the industry for delays in payments, evidence and knowledge of credit concern, and the nature of payments and trading history.
The consistent use of proper terms of trade, normal timely debt collection procedures, and asset protection mechanisms may protect a creditor from successful insolvent transaction challenges by a liquidator.