In our work with international companies supplying goods to the UK, we see the same issues arising regularly. In Part 3, we examined the types of insolvency process a customer may be subject to. In this fourth of five articles based on the five elements of the Wu Xing, we take the theme of Fire and explain the significant powers that arise for the insolvency practitioner on the entry into insolvency: to investigate propriety and recover assets to the central pool to pay creditors.

Fire: the great powers of the insolvency practitioner regarding transactions defrauding creditors

An insolvency practitioner (an “IP”) (whether liquidator or administrator) may apply to the Court to set aside certain transactions that took place before a company entered insolvency. In this way, assets or funds can be recovered into the central pool from which creditors are paid. These “antecedent” or “reviewable” transactions are if:

1) an asset or property of the company has been sold at an undervalue.

2) the company gives a preference to a creditor that puts him in a better position than other creditors before the company enters insolvency.

3) the company had entered into an extortionate credit transaction (one with grossly exorbitant terms).

4) the company entered into an invalid floating charge, that is a charge to secure loans already made or the costs of goods and services already provided.

5) the company has entered into a transaction is with the clear purpose to defraud the creditors, that is to remove assets of the company from the reach of the IP and the creditors.

Different time periods apply to the different types of reviewable transactions – for example a sale at an undervalue must have been within two years of the company entering insolvency.

In addition, the IP will review the conduct of the directors of the insolvency company and consider whether they are liable for wrongful or fraudulent trading. If a director knew, or should have known, that there was no reasonable prospect that the company would avoid an insolvency procedure but nonetheless allowed it to continue trading, then that director may be required to make a contribution to the company’s assets.

Be warned, if you have been lucky enough to be paid by a customer who then enters insolvency, the payment to you may be considered a preference or, if the customer has already entered insolvency, may be subject to statutory “claw back”. You may be required to pay into a pool to be shared by all creditors even if you did not know that the customer was in difficulties or there has been a winding up order made. The Court will in some circumstances “validate” a payment made but these grounds are very narrow. The best protection is to know your customer and be aware of its affairs.