Antecedent transactions: why preferential payments are a bad idea

Antecedent transactions: why preferential payments are a bad idea

June 28, 2018 by Sandra

No one wants to see their business fail. It can be a very upsetting time for any businessperson. Just as you’re coming to terms with its failure and accepting the company’s fate - but still quite vulnerable - you’re hit with the complex and confusing legal side of the insolvency process. With its complicated rules and laws and its alien terms and impenetrable legalese. Navigating this new world can be extremely difficult for newcomers, which is why we would always advise that you do so with the help of an experienced and trusted insolvency practitioner.

Attempting to dissolve a business yourself is possible, but then so to is making a mistake you may live to regret. The sheer number of obligations, regulations and requirements on a business owner during the insolvency process can be quite overwhelming. It can easily lead to a person forgetting something, or misinterpreting the requirements. It certainly doesn’t help when the industry is packed full of jargon…

Antecedent transactions

'Antecedent transactions', for instance. You - and pretty much everyone that isn’t a qualified IP - will be forgiven for not knowing what this means. Despite the oddly unusual first word, it’s not a hugely complex concept. It really just means any transaction made in the lead-up to a company becoming insolvent that could be construed as unfair or suspicious. ‘Antecedent’ basically means ‘precursor’.

There are quite a few examples of could be considered ‘antecedent’ when winding up a company, including:

  • Intentional undervaluing of an asset
  • Fraudulent trading
  • Wrongful trading
  • Floating charge avoidance
  • Restrictions on the disposition of property
  • Misfeasance
  • Other undefined malpractice or underhandedness

Many of those on that list look quite cynical, don’t they? And while there are, of course, unscrupulous types out there that will employ these methods, most business owners that breaks rules in this regard do so entirely by accident. One of the most common ways? Preferential payments.

What are preferential payments?

There is a legal requirement for anyone wrapping up a business that all creditors must be considered in any move the business takes. There’s a duty of care due to them. Financial losses must be kept as minimal as possible for everyone. All creditors must be treated fairly and equally, with no unfair preference shown to anyone. Prioritising a loan repayment or other form of payback can be categorised as a preferential payment.

These types of payments are often made to:

  • Friends
  • Family
  • Employees
  • Long-standing suppliers
  • Creditors that you know and will come across day to day
  • Someone the person plans to work with again in the future

Payments made to any of the above are frowned upon and will come with penalties later down the line (to the point where the director or business owner could become personally liable to repay debts). These kinds of payments are unfair and often self-serving.

That’s not to say that prioritising payments and tactically selecting creditors to pay back is necessarily unwise or morally dubious. Sometimes it makes sense. Take, for example, a creditor who - once paid back - can assist the business in getting back on its feet. If choosing to prefer to make that particular payment saves the business, all creditors with get their money in the future. That’s just smart.

The Law

This isn’t just guidance, nice advice or even just best practice. It’s the law. The Insolvency Act of 1986 deals quite comprehensively with the idea of preferential payments, with sections 239 and 340 specifically detailing what can be considered as preferential. The general point being that if it can be proven that someone put a creditor in a ‘better position’ that they would have be in otherwise by making a specific payment to them, that’s a transgression. Whether that move was accidental or intentional.

Payments made in this way can be - and often are - reversed. The insolvency process can already be quite a stressful one, it doesn’t need to be made any more complicated by antecedent transactions and further recoveries. So why take the chance that you’re flouting a rule? Why not work with an expert insolvency practitioner to alleviate those fears and ensure you’re in safe hands? Contact us today.

Filed Under: Insolvency, liquidation

We don’t need personal or company details to answer initial questions on your situation:

Call 03300 563 600

Recent Posts