Antecedent Transaction and Transaction at an Undervalue
In the lead up to an insolvency process, it is important that the debtor ensures that he behaves honestly, honorably and fairly in his or her dealings with all other parties who may be affected by the process.
Any activities involving creditors or any third parties (not being creditors) which may negatively affect the interests of creditors are of particular concern, whether creditors are party to the transactions or not. Insolvency processes include Bankruptcy, Individual Voluntary Arrangements, Company Voluntary Arrangements and Liquidations and so on. There are two main types of dodgy transactions:
Antecedent Transaction and Transaction at an Undervalue.
Antecedent Transaction
An Antecedent Transaction arises where, prior to the insolvency process commencing, something is done which results in one creditor being treated more favourably than the other creditors or where a non-creditor benefits from the actions of the debtor or of the company undergoing the insolvency process resulting in the suffering of one or more of the creditors.
In such circumstances the official receiver or liquidator of the estate may have the right of recovery. The rules relating to an Antecedent Transaction vary somewhat depending on the type of insolvency process. In the case of a bankruptcy, for example, if one or more debts have been paid or substantially reduced in preference to others, the official receiver may be able to recover from the preferred creditor(s) the monies paid preferentially in this way.
Transaction at Undervalue
A Transaction at Undervalue arises where goods or services are sold or transferred to another party at less than their true market value. In an insolvency process, if any goods are purposely disposed of at undervalue to avoid them being seized by the trustee in bankruptcy and realized for the benefit of creditors, the trustee may have the authority to claim such goods back from their new owner(s). Again there are different rules relating to a Transaction at Undervalue depending on the type of insolvency process and on other factors. In bankruptcy, for example, the Transaction at Undervalue must have occurred during the five years prior to the presentation of the bankruptcy petition and where the transaction took place in the period of two to five years prior to the petition, the bankrupt must have been insolvent at that time or become insolvent as a result of the transaction and it falls to the trustee to prove that that was the case. An exception to this burden of proof arises where the transaction involved an associate of the bankrupt: the trustee does not have to prove the insolvency of the bankrupt – there is simply a presumption that that was the case. Associates include the bankrupt’s spouse, or a relative or a relative’s spouse of either the bankrupt or of the bankrupt’s spouse.