My Business is Facing Insolvency. What is a Voidable Transaction?

If your business is insolvent or facing insolvency, the law can review your business’s transactions in the previous two years. In some cases, the law can “void” a transaction, which means the other party to the transaction may be liable to the company. This article will explain what a voidable transaction is and what you should know as a company director about voidable transactions.

What is Insolvency?

When a company is insolvent, the law typically appoints a liquidator or administrator to manage the company’s affairs upon a successful court application. Liquidators oversee companies in liquidation. Whereas administrators oversee companies in administration. When a court determines that a business cannot be rescued, liquidation is the appropriate procedure. On the other hand, the administration is more appropriate for businesses capable of rescuing through a sale. 

In either case, the liquidator or administrator can review all the transactions a company has been a party to for up to the previous 24 months from insolvency. The purpose of this power is to enlarge the insolvent company’s assets so that its creditors’ interests can be maximised. 

What is a Voidable Transaction?

There are three elements involved in proving a claim for a voidable transaction. A voidable transaction:

1. involved a connected person or an associate of a company director;
2. took place within the relevant period; and
3. the company was insolvent at the time of the transaction or became insolvent due to the transaction.

Who is a Connected Person or Associate in a Voidable Transaction?

A connected person refers to a shadow director. Whereas an associate is anyone whose relation to the insolvent company’s director includes:

• a spouse; 
• a relative of the director or spouse of the director, which is widely defined; 
• a business partner; 
• an employer or employee; 
• certain trustees to trusts; and
• a separate company to which the director is connected. 

What Was the Effect of the Transaction?

Essentially, the liquidator or administrator must prove:

• the transaction contributed to the company’s insolvency; or 
• the company was insolvent at the time of the transaction. 

If the evidence suggests this is the case, the claim is more likely to succeed. 

What is the Relevant Period for a Voidable Transaction?

The relevant period is calculated backwards from the date of insolvency. For administration, this is the point that the application to initiate administration is lodged with the court. 

For liquidation, it is the date winding up commenced. This is either when:

• the shareholders pass a resolution for voluntary liquidation; or 
• when an applicant presents an application to the court for an involuntary liquidation. 

A voidable transaction applies to a variety of different transactions. Nevertheless, depending on the nature of the transaction, different periods apply. 

In practice, a liquidator or administrator will look at all transactions within the past two years (except for fraud, which has no limit). Suppose they find a transaction that is either an undervalue, preferential treatment to a creditor, or avoidance of floating charge. In that case, they will investigate whether the other party is connected. If the transaction happened before the relevant period, the liquidator or administrator cannot take any action. However, if the transaction happened after the relevant period, they can bring a claim. 

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What is the Effect of a Voidable Transaction?

If a liquidator or administrator brings a successful claim for a voidable transaction, the court can order the other party to contribute to the insolvent company’s assets. 

For instance, if your company sold some valuable property to a connected person at a 50% discount, the court can either order the connected person to:

• transfer the property back to the company; or 
• pay the difference between the price paid and its actual market value. 

Further Considerations

A voidable transaction is a claim against someone other than the insolvent company or its directors. If a liquidator or administrator has cause to bring a voidable transaction claim, they may also bring additional claims against the director. These claims may:

• fraud; 
• misfeasance; 
• negligence; and
• unlawful preference to a creditor. 

Key Takeaways

A voidable transaction applies to certain transactions involving a company during or before its insolvency. The liquidator or administrator appointed to manage the company’s affairs can investigate a company’s dealings. If it finds evidence of certain unlawful transactions, such as an unlawful preference to a creditor, it can order the other party to contribute to the company’s assets. 

If you need help navigating your company’s financial difficulty, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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