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 finding 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?
Let’s 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 benefit 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 finds itself in a difficult financial situation. Rather than the regular duties of running the business for the benefit of the shareholders, directors need to act with their creditor’s 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 creditor’s benefit. If there are any transactions which occur during this period which don’t align with this ideology then they can be challenged and will likely be void.
If it is found by an official 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 benefited 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 affiliation 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 difficult position then you should make sure that you have the asset valued independently by a qualified surveyor to ensure the transaction is not void.
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 what’s 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 hasn’t worked out. These transactions can often be void as they are not fair given they involve prioritising one creditor over another.
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 specifically in order to defraud creditors or prejudice the interests of somebody who is looking to make a claim.
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 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 creditor’s 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 business’s 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 officials 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 fined 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.