Do Voidable Transactions Survive Liquidation? 

In the complex landscape of corporate finance and insolvency law, voidable transactions hold a significant yet often misunderstood role. Businesses in the UK, particularly larger enterprises, need to understand their implications. This article aims to shed light on how voidable transactions can affect the financial stability and continuity of UK businesses.

Types of Voidable Transactions 

Let us explore four different types of voidable transactions below:

1. Preferences: Preferential transactions that favour one creditor over others.  If a company, shortly before going into liquidation, repays a debt to a preferred creditor, this transaction may be voided;
2. Transactions at Undervalue: Deals where the insolvent company receives significantly less value than it provides.  An example is selling a company’s assets at prices far below their market value;
3. Extortionate Credit Transactions: Agreements that impose terms significantly harsher than those typically expected.  These might include excessively high interest rates or unfair conditions; and
4. Invalid Floating Charges: These include security interests that are invalidated if granted during the insolvency twilight period and not backed by the new value provided to the company.

Timeframes for Voidable Transactions

The law sets out specific periods during which certain transactions can be reviewed.

In relation to unfair preference payments, transactions made within six months before the onset of insolvency can be challenged (two years if the creditor has a connection to the company).  

However, transactions at undervalue can be scrutinised if they occurred within two years before insolvency. 

In contrast, floating charges created within 12 months of insolvency are subject to review (two years if the charge is granted to a connected party).

Company Registers

When you incorporate a company in England and Wales, you must maintain a number of company registers at its registered office or at the Companies House. This template includes these company registers.

Download Now

The Role of Liquidators

When a company enters liquidation, a liquidator is appointed to manage the winding-up process.  

One of the liquidator’s crucial responsibilities is identifying and recovering assets for distribution to creditors.  This includes examining past transactions to uncover any that might be voidable.

Understanding voidable transactions is crucial for businesses, as these can significantly impact financial stability and strategic planning.  Here are some key considerations:

1. Risk Management

Companies should implement robust risk management practices to ensure compliance with insolvency laws.

This includes conducting frequent financial audits to detect potentially voidable transactions and establishing stringent internal controls to prevent preferential or undervalued transactions.  Additionally, your business should seek legal advice when contemplating significant transactions, especially during periods of financial difficulty.

2. Financial Implications

Voidable transactions can have substantial financial repercussions for UK businesses.  

If a liquidator successfully challenges a transaction, the company might need to repay significant sums or return assets, which can strain its financial resources.  Moreover, the legal costs of defending or reversing such transactions can be considerable.

Therefore, maintaining prudent financial practices and avoiding questionable transactions is essential to mitigate these risks.

3. Reputational Risks

Engaging in transactions that might be deemed voidable can also harm a company’s reputation.

Stakeholders, including creditors, investors, and customers, may lose trust in a business that engages in dubious financial practices.  This loss of confidence can have long-term consequences, affecting the company’s ability to secure financing, attract investment, and maintain customer loyalty.

4. Training and Awareness

Holding regular training sessions for company directors, officers, and key employees on insolvency laws and the implications of voidable transactions can help identify and avoid risky practices.

It is crucial to maintain compliance to ensure that all relevant personnel are aware of the legal requirements and potential consequences of their actions.

5. Legal and Financial Advice

Engaging legal and financial advisors, especially during times of economic uncertainty or when considering significant transactions, can help businesses navigate the complexities of insolvency laws.

Consult advisors to provide valuable insights and guidance. Advisors ensure that transactions are structured to minimise the risk of being challenged as voidable.

Key Takeaways

Voidable transactions play a pivotal role in the liquidation process, safeguarding the principles of fairness and equity among creditors.  

In essence, while voidable transactions do not liquidate a company, their presence and subsequent legal actions can significantly influence the liquidation process.  They serve as a mechanism to correct potentially inequitable distributions of assets and ensure that the winding-up of a company adheres to legal and ethical standards.

Understanding and proactively managing the implications of voidable transactions not only helps comply with the legal framework but also contributes to a UK business’s overall resilience and sustainability.

If you need legal assistance identifying voidable transactions, LegalVision’s 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 on 0808 196 8584 or visit our membership page.