Antecedent Recoveries

Antecedent Recoveries                              

June 2014

Introduction

1. What are antecedent recoveries?

The word “antecedent” is defined as “going before” and “recovery” as to “get back”. In a very basic form, the provisions of the legislation relating to antecedent recoveries allow the liquidator or trustee to get something back for the estate which was disposed of before the order was made and at a time when it was inappropriate, unfair or wrong to do so.

Insolvency legislation provides that, subject to the rights of certain creditors such as secured or preferential creditors or those entitled to levy distress, the administration of an insolvency will result in the equal treatment of all creditors as far as the distribution of assets is concerned. 

If something has been done in the run-up to insolvency which results in one creditor being treated more favourably than the others or where a person other than a creditor benefits from the actions of the company or bankrupt and the creditors suffer as a result, the official receiver as liquidator or trustee of the estate may have a right of recovery. For example, where one or more debts have been paid or substantially reduced in preference to others, it may be possible to recover the monies paid to the creditor preferred in this way. 

For the official receiver, it is likely that the types of transaction covered by this part will become apparent at the initial interview. Once identified, the examiner may conduct an inspection of the accounting and/or banking records and will wish to obtain confirmation of the events that took place from creditors, suppliers or other persons capable of giving relevant information.

 

2. Does the Insolvency Service have an antecedent recoveries contractor?

On the 8th September 2013 the Service entered into an arrangement and a Service Contract (SC) now exists with Clarke Willmott, for that firm to take on all qualifying antecedent recoveries on behalf of official receivers. Clarke Willmott will accept referral instructions in respect of all antecedent recoveries and there is currently no minimum amount.

 

3. When and how is an antecedent recovery matter referred to Clarke Willmott?

The official receiver should endeavour to refer qualifying antecedent recoveries to Clarke Willmott at the earliest possible opportunity, but not before the relevant information has been obtained. The method of referral is by completion of an ARIA (Antecedent Recovery Instruction to Agent) form, a Word template produced in ISCIS. Once the form has been completed it should be submitted by the examiner to Clarke Willmott via the Debt View website. Information on the service provided by Clarke Willmott and full guidance on using the Debt View website is available on the Clarke Willmott intranet page     

 

4. In the event of legal action how will Clarke Willmott be paid their fees and costs?

Clarke Willmott will undertake recoveries under a Conditional Fee Arrangement (CFA) whereby they will, if need be, undertake legal action at their own risk. Clarke Willmott will pay for the fees and deal with any costs (including adverse costs) associated with bringing a legal action. Assuming the action is successful, Clarke Willmott will deduct disbursements from the monies recovered and also deduct the fees due to them under the arrangement, before transferring the balance to the official receiver.

Under the arrangement, the official receiver will have no liability for costs in the event of an action being unsuccessful.

 

5. Paragraph deleted May 2015 

6. Paragraph deleted May 2015  

7. Paragraph deleted June 2014  

8. Paragraph deleted June 2014 

9. Paragraph deleted June 2014 

 

10. What types of antecedent recovery are there?

Antecedent recoveries fall into the following main categories:

  • avoidance of property dispositions (companies only)
  • restrictions on disposition of property (bankruptcies only)
  • transactions at an undervalue
  • preferences
  • civil recoveries following misfeasance (wrongdoing) by directors
  • extortionate credit transactions
  • avoidance of floating charges (companies only)
  • transactions defrauding creditors
  • avoidance of general assignment of book debts (bankruptcies only)
  • recovery of excessive pension contributions

 

11. Avoidance of property dispositions etc. (company case) - Insolvency Act (IA) - section 127

The general rule is that any transaction entered into by the company after the commencement of the winding up is void unless approved or validated by the court. The court will generally only exercise the discretion to validate a transaction that would otherwise be void if the interests of the unsecured creditors are not affected adversely. Where a disposition was made in good faith, in the ordinary course of business when the parties to the transaction were unaware of the petition, the court will usually validate it unless the court has reason to believe that there was an attempt to prefer the recipient of the transaction.

 

12. Restrictions on dispositions of property (bankruptcy case) - section 284

In the case of bankruptcy, dispositions of property made after the presentation of the petition up to the vesting of the estate in a trustee are void unless approved by the court, either at that time or subsequently. Anything done in good faith, for value, prior to the commencement of the bankruptcy and without notice of the petition is not a voidable transaction. This means, for example, that any payment to suppliers where goods, materials or services were delivered in the same period would not be affected provided proper value was provided. Any debts incurred after the commencement of the bankruptcy without notice of the presentation of the petition would also remain unaffected.

In bankruptcy, transactions can be approved up to the date of the vesting of the bankrupt’s property in the trustee, whether this is the result of a formal appointment of a trustee, or the date on which the official receiver files notice that he or she does not intend to hold a meeting.  

As with a company, where a petitioning creditor is paid in full but another creditor is substituted and a bankruptcy order is made, the payment to the original creditor can be recovered if it was made by the bankrupt. Otherwise, where the payment was made by a third party, the debt is not recoverable and the third party becomes an unsecured creditor in the bankruptcy. 

Further points to consider regarding voidable dispositions (both in company and bankruptcy cases) are:

a.   Status of the company or bankrupt

For the successful recovery of a voidable transaction  is not necessary to show that the company or bankrupt was insolvent at the time the transaction took place and knowledge of the parties to the transaction as to the company’s or bankrupt’s status is irrelevant, unless the court decides to take it into account when deciding whether to validate the transaction.

b.  Commencement of the winding up   

The commencement of the winding up is generally deemed to be the presentation of the petition and gazetting of the petition may be regarded as notice of the petition to all creditors. However, if the company was previously in voluntary liquidation, the date of the resolution for voluntary winding up is deemed to be the commencement of the winding up.

c.  Payments into or out of an overdrawn account

Where the account is overdrawn, any monies paid into the account during the relevant period will result in the company’s or individual’s indebtedness to the bank being cleared in part or in full.  It is clear that such a transaction would count as a disposition, which would be void under the relevant provisions of the Act, and may be recovered from the bank.

When a bank authorises a payment from an overdrawn account, this is effectively a (further) loan from the bank to the company or individual.  The honouring of the payment by the bank cannot, therefore, be a disposition of the insolvent’s property.  When the bank as agent for the company or individual consequently passes this “loan” money on to the person receiving the payment, it becomes a disposition of property as, by then, the “loan” money has become property of the company or individual.  The monies are recoverable by the liquidator or trustee from the person to whom the money was paid.

d.  Petitioner paid in full then another creditor petitions   

Where the original petitioner in a case is paid in full by the company or individual only for another creditor to take over as petitioner, the payment to the original petitioner is recoverable as a disposition if a winding up order or bankruptcy order is made. However, if the payment was not made by the company or individual, it is not recoverable and the person who made the payment is an unsecured creditor.

e.   Disposition pursuant to an order of court

Where a disposition made during the relevant period is made in compliance with a (general) court order, it will still be void  unless ratified by the (insolvency) court.  Where the party who benefitted from the order has incurred costs in enforcing the order and that order has resulted in a benefit to the estate (such as tracing assets), the court may allow those costs to be recovered from the estate. 

 

13. Transactions at an undervalue - sections 238 and 339

Where a company or bankrupt has entered into a transaction with any person at an undervalue, the transaction can be challenged by a liquidator or trustee and in the case of a company, an administrator. It is generally necessary to show that the company or individual was insolvent at the time that the transaction occurred. 

The court may make an order as it sees fit to restore the position to what it would have been if the transaction had never taken place. The court may make any order which it deems appropriate in these circumstances and the applicant cannot demand a particular form of redress by asking the court for a particular order.

The liquidator or trustee must obtain sanction (approval) of the court or liquidation/creditors' committee before bringing legal proceedings under section 238 or 339. Where the official receiver is liquidator or trustee, Technical Section undertake the functions of the liquidation/creditors' committee on behalf of the Secretary of State. If instructed, Clarke Willmott will make the application for sanction (see paragraph 6) and forward it by e-mail to the official receiver at the local office (or LTADT). The examiner or case officer will e-mail the application to Technical Section, ensuring that it is clearly marked ‘Clarke Willmott agreement – application for sanction’.

 

14. What actions could be examples of a transaction at an undervalue?

Examples of transactions at undervalue are:

  • where the company or individual received no consideration (payment or similar) for the transfer
  • gifts (including formal gifts such as for a birthday or Christmas)
  • purchase by the company or individual of goods/services at an inflated price   
  • guaranteeing the debts of a third party      
  • those transactions where the company or individual received inadequate consideration.

Where the company or individual has received no benefit from the transaction, the possibility of indirect benefit or consideration less than the market value must be considered. Where the consideration may have been inadequate, it is necessary to decide what the consideration received amounted to, what ought to have been received and whether there is a significant difference between the two amounts.  

 

15. Transactions at an undervalue (company cases) -  section 238

In the case of a company, the transaction at an undervalue must have occurred in the 2 years prior to the onset of insolvency for it to be recoverable. As far as liquidation is concerned, the onset of insolvency is the date of the presentation of the winding-up petition and in the case of an administration order, the date of the presentation of the petition for an administration order. 

Where there is any transfer at undervalue to a person connected to the company, there is a presumption that the company was insolvent at the time of the transaction unless it can be proved otherwise. A connected person is a director or shadow director. The court will not make an order in respect of a transaction at an undervalue if it is satisfied that the company in question entered into the transaction in good faith and for the purpose of carrying on its business and that at the time there were reasonable grounds for believing that the transaction would benefit the company.

The liquidator must obtain sanction (approval) of the court or liquidation committee before making an application under section 238 (see paragraphs 6 and 13).  

 

16. Transactions at an undervalue (bankruptcy cases) - section 339

As far as a bankrupt is concerned, the transaction at undervalue must have occurred during the 5 years prior to the presentation of the bankruptcy petition. Where the transaction took place in the period of 2 to 5 years prior to the petition being presented, the bankrupt must either have been insolvent at the time or become insolvent as a result of the transaction. The burden of proof falls on the trustee to show that the bankrupt was insolvent at that time. 

Where the transaction involved an associate of the bankrupt, there is a presumption that the bankrupt was insolvent at the time the transaction took place so the trustee does not need to prove that the individual was insolvent. An associate can be the individual’s spouse or civil partner, or a relative or relative’s spouse or civil partner, of either the individual or the individual’s spouse or civil partner. 

Any transaction that was entered into in the 2 years prior to the presentation of the bankruptcy petition can be set aside, as can any transaction entered into in consideration of marriage or the formation of a civil partnership and there is no need to show that the individual was insolvent. Only transactions entered into for valuable consideration and in good faith will stand. A settlement or transfer of property made as a result of a court order in matrimonial proceedings is unlikely to be deemed a transaction at an undervalue unless the trustee in bankruptcy is able to demonstrate collusion, fraud, mistake, misrepresentation or some broadly similar circumstances when the court considered the division of the property of the marriage.

The trustee must obtain sanction (approval) of the court or creditors' committee before bringing legal proceedings under section 339 (see paragraphs 6 and 13).

 

17. Preferences -  sections 239 and 340

There are two elements to a preference: 

  • a company or individual does something that puts a creditor,  surety or guarantor of any debts in a better position than it otherwise would have been on the winding up of the company or bankruptcy of the individual and   
  • there was an intention to put the creditor, surety or guarantor in a better position – even if this was not the dominant intention.

Some points to note when considering ‘preferences’ are:

a.   Personal guarantees   

In a company, a common preference is the payment of all or a substantial part of the bank debt, the debt being personally guaranteed by the directors.

b.   Threat of legal action 

If the preference has been made because the creditor has threatened to commence legal action, it may be that the intention was to get rid of the threat rather than prefer. Genuine pressure may be a defence if the action was taken to prevent insolvency but the fact that the action was the result of a court order does not mean that it cannot be deemed a preference.

c.   Giving up an asset to a creditor

A transaction does not have to involve a cash payment to be considered a preference.  For example, the giving up of an asset to a creditor can be considered to be a preference and the asset or, where this is not possible, the value of the asset transferred should be recovered.

d.   Application to court for review 

The liquidator, administrator or trustee may make an application to the court that the transfer be reviewed as a preference and that the court make an appropriate order. The liquidator or trustee must obtain sanction (approval) of the court or liquidation/creditors' committee before making applications under section 239 or 340.

Where the official receiver is liquidator or trustee, Technical Section undertake the functions of the liquidation/creditors' committee on behalf of the Secretary of State. If instructed, Clarke Willmott will draft the application for sanction (see paragraph 6) and forward it by e-mail to the official receiver at the local office (or LTADT). The examiner or case officer will e-mail the application to Technical Section, ensuring it is clearly marked ‘Clarke Willmott agreement – application for sanction’.

e.   Desire to put the creditor in a better position

It is up to the liquidator, administrator or trustee to show the court that the preference had taken place in anticipation of insolvency and was influenced by a desire to put the creditor in a better position.

Just because the creditor was put in a better position by the transaction does not mean that there has been a preference.  It is still necessary to show the desire to prefer.

Where the preference was given to an associate, except for an employee, the associate must prove that there was no desire to put him in a better position.

f.   Relevant timescales 

For a preference to be capable of consideration by the court, it must have taken place in the 6 months prior to the date of the presentation of the petition in both a compulsory winding up and bankruptcy proceedings. Where the preference involved someone connected to the company (see paragraph 15) or an associate of an individual (see paragraph 16), the relevant period is extended to 2 years prior to the presentation of the petition. At the time the preference was made, the company or individual must have been insolvent or become insolvent as a result of the preference.

g.   Court powers and third party involvement 

The court may order that the position be restored to what it would have been if the preference had never been given, although a third party who purchased something in good faith and for value will be protected unless the third party had notice of the impending insolvency or if he was an associate or connected person.

 

18. Civil recoveries following misfeasance (wrongdoing) by directors -  section 212

Where, during the course of a winding up it appears that a person who is or was an officer of the company has misapplied, retained or become accountable for any money or other property of the company, or been guilty of any misfeasance (wrongdoing) or breach of any fiduciary (holding something in trust) or other duty in relation to the company, the IA section 212 will apply.

The court may, on application by the official receiver or other liquidator, or of any creditor or contributory, examine the conduct of such a person and compel him or her to:

  • repay, restore or account for the money or property or any part of it with interest at such rate as the court thinks fit, or
  • contribute such sum to the company’s assets by way of compensation in respect of the misfeasance or breach of fiduciary duty as the court thinks fit.

An action for misfeasance is in the name of the company against the office holder(s) and is brought by (or on behalf of) the liquidator. The action must demonstrate a breach of duty and a loss.

 

19. Extortionate credit transactions -  sections 244 and 343

If a liquidator, administrator or trustee considers that a credit transaction or agreement is extortionate, he or she may apply to the court to have the transaction set aside. The court can set the transaction aside either in whole or in part, or can vary the terms of the transaction and may require the creditor to repay any sums paid, or to surrender any security given under the terms of the agreement. 

These provisions relate to transactions which have occurred in the 3 years prior to the making of the insolvency order and it is up to the other party to the transaction to prove that it was not extortionate. 

In deciding whether a transaction is extortionate, the court must consider whether the transaction required grossly exorbitant payments to be made or contravened the ordinary principles of fair dealing, having consideration of the risk taken on by the lender and the general rates of interest at the time of the transaction. However, what appears at face value to be an extortionate credit transaction may not be seen in the same way by the courts, so applications relating to extortionate credit transactions are not common.   

 

20. Avoidance of certain floating charges (company cases) -  section 245

A floating charge is a charge on property which changes from time to time, such as stock and book debts, and which allows the company that gave the charge to deal with those charged assets on a daily basis without constant reference to the charge-holder. All such charges must be registered with the Registrar of Companies within 21 days of creation or the company and its officers may be subject to a fine. 

Where a company grants a floating charge within the relevant time specified in the legislation, it will be invalid unless the company receives consideration to the value of the goods or services over which the charge was made, at or after the time the charge was given. 

In the case of a connected person, the relevant time is 2 years prior to the commencement of the winding up (presentation of the petition) otherwise the relevant time for any other person is 12 months prior to the commencement of the winding up if the company was insolvent at the time. 

 

21. Transactions defrauding creditors -  section 423

The provisions of section 423 relating to transactions defrauding creditors allow the court to set aside transactions at an undervalue designed to put assets out of the reach of creditors. The definition of a transaction at an undervalue is similar in that it also includes gifts or transactions with no consideration, transactions in consideration of marriage or the forming of a civil partnership and transactions for consideration significantly less than it should have been. Those purchasers who are bona fide, for value and without notice of the relevant circumstances are protected.

The court must be satisfied that the main purpose of the transaction was to put the assets out of the reach of creditors or to have an adverse effect on them. There is no time constraint regarding these measures and those persons capable of bringing such an action is extended from the liquidator or trustee to also include the supervisor of an individual voluntary arrangement (IVA), or someone who is or could be adversely affected by the transaction.

Where the transaction has taken place within the time limits to open it to challenge as a transaction at an undervalue (see paragraph 13), it is better to go down this route due to the lower burden of proof.  Otherwise, the official receiver, as officeholder, will need to consider a challenge of the transaction as a transaction defrauding creditors.

The liquidator or trustee must obtain sanction (approval) of the court or liquidation/creditors' committee before bringing legal proceedings under section 423. Where the official receiver is liquidator or trustee, Technical Section undertake the functions of the liquidation/creditors' committee on behalf of the Secretary of State. If instructed, Clarke Willmott will make the application for sanction (see paragraph 6) and forward it by e-mail to the official receiver at the local office (or LTADT). The examiner or case officer will e-mail the application to Technical Section, ensuring that it is clearly marked ‘Clarke Willmott agreement – application for sanction’.

 

22. Avoidance of general assignment of book debts (bankruptcy only) -  section 344

This provides that a general assignment of book debts by a trader who subsequently becomes bankrupt is void against the trustee, unless it has been registered under the Bills of Sale Act 1878.

Book debts here include future debts and future rents under a hire purchase or rental agreement but a bank balance is not included. Debts due under a specific contract or from specific debtors would not be capable of a general assignment however and could not be challenged by the trustee, nor could an assignment which formed part of a legitimate transfer of the business or one which was made for the benefit of creditors generally. 

 

23. Recovery of excessive pension contributions – sections 342A to 342F

As covered in the Case Help Manual part : Pensions, the law provides that where a bankruptcy order is made on a petition presented after 29 May 2000, a pension held by a bankrupt will, generally speaking, fall outside of the bankruptcy estate. 

To avoid the potential risk that individuals facing bankruptcy may choose to place assets out of the reach of creditors by liquidating those assets and putting the funds into a pension scheme, the Act also has provisions that allow the trustee to recover excessive pension contributions that have unfairly prejudiced the bankrupt’s creditors.

There is no definition in the Act as to what may be considered an “excessive” contribution.  Whether contributions to a pension are excessive or not would depend on whether the contributions unfairly prejudiced the bankrupt’s creditors , and this, in turn, would depend on the bankrupt’s circumstances at the time he/she made the contributions.  For example, contributions made at the expense of a bankrupt’s business capital or other household expenses may be considered to be excessive.  Similarly, consideration should be given to the bankrupt’s income and lifestyle and historical pension contributions.  Contributions made by one bankrupt who continues to make contributions during difficult times may not be considered to be excessive whereas payments started by another bankrupt in similar circumstances may be considered to be so.

HM Revenue and Customs set a limit (for tax relief purposes) on the amount that can be contributed to a pension – this being 15% of remuneration.  This figure should give the official receiver a reference point when considering whether payments to a pension by a bankrupt are excessive.

 

Where can I find out more?

Insolvency Act 1986 

Section 86 - Commencement of winding up (voluntary winding up)

Section 123 - Definition of inability to pay debts 

Section 127 - Avoidance of property dispositions etc. 

Section 129 - Commencement of winding up by the court

Section 212 – Summary remedy against delinquent directors, liquidators, etc 

Section 238 - Transactions at an undervalue (England and Wales) 

Section 239 – Preferences (England and Wales) 

Section 240 – ‘Relevant time’ under sections 238,239 

Section 241 - Orders under sections 238, 239 

Section 244 - Extortionate credit transactions 

Section 245 - Avoidance of certain floating charges 

Section 284 - Restrictions on dispositions of property 

Section 307 - After-acquired property 

Section 339 - Transactions at an undervalue 

Section 340 - Preferences 

Section 341 - ‘Relevant’ time under sections 339, 340 

Section 342 - Orders under sections 339, 340

Sections 342A-F – Excessive pension contributions 

Section 343 - Extortionate credit transactions 

Section 344 - Avoidance of general assignment of book debts 

Section 423 - Transactions defrauding creditors 

Section 424 - Those who may apply for an order under section 423 

Section 425 - Provisions which may be made by order under section 423 

Section 435 - Meaning of ‘associate’

Companies Act 2006

Part 25, chapter 1 – Registration of charges

Technical Manual 

Chapter 17.34  - 17.47 Liquidator/Trustee Secretary of State Appointments

Chapter 17 – Appointment of Liquidators and Trustees 

Chapter 31.4A – Preferences and transactions at an undervalue

Chapter 31.4B – Other antecedent recoveries

Case Help Manual 

Insolvency Practitioners (IPs)

Meetings

Official Receiver Business Services (ORBS)  SLA Agreement 

Procedures for referral of antecedent recovery cases to Moon Beever – Click HERE to view

Forms to be used:

Referral form preference claims

Referral form transactions at undervalue claims

Referral form misfeasance/other claims

 

Antecedent Recoveries Flowchart  

 

Procedure

1   The examiner decides that contact is to be made with creditors, suppliers and any other persons capable of providing or confirming information indicating that an ‘antecedent recovery action’ may be necessary.

  If the enquiries outlined at 1 above are not done by the examiner they will be done, as instructed, by the case officer.

  Ensure that any replies are forwarded immediately to the examiner.

  Where there is evidence that an antecedent recovery action is warranted the examiner will instruct Clarke Willmott to undertake the recovery action.

  Clarke Willmott will accept instructions in respect of all antecedent recoveries and there is currently no minimum amount. The method of referral is by completion of an ARIA (Antecedent Recovery instruction to Agent) form, a Word template produced in ISCIS. Once the form has been completed it should be submitted by the Examiner to Clarke Willmott via the Debt View website. Information on the service provided by Clarke Willmott and full guidance on using the Debt View website is available on the Clarke Willmott intranet page     

  If sanction is required Clarke Willmott will complete the application and e-mail it to the Official Receiver at the local office (or LTADT).

7   The examiner or case officer will forward the application for sanction to Technical Section at Technical.Section@insolvency.gsi.gov.uk seeking approval, marked clearly ‘Clarke Willmott agreement – application for sanction’.  

  Technical Section will e-mail their decision back to the official receiver at the local office (or LTADT) and will copy in Clarke Willmott. If sanction is granted Clarke Willmott will pursue the recovery on behalf of the official receiver as liquidator or trustee.