31.4.1EA Explanation of "antecedent"

The main purpose of liquidation and bankruptcy is to effect an orderly and equitable realisation of assets for the general benefit of creditors and contributories. subject to certain exceptions (e.g. secured and preferential creditors and those entitled to levy distress in certain circumstances), creditors are treated equally in the distribution of available assets. Details relating to executions and distress and the effect on the official receiver are contained in chapter 9. If some act occurs in the run-up to the insolvency which leads to one creditor being treated more favourably than another, the transaction may well be one which gives rise to recovery rights by an administrator, liquidator or trustee. Similarly, if a person other than a creditor has benefited from the company or bankrupt to the detriment of creditors the Act may provide a remedy.

The term "antecedent" is used to describe this sort of transaction as it occurred "before" a particular event (e.g. the presentation of petition or the date of bankruptcy order) usually within a specified time prescribed by the Act. The Act provides an administrator, liquidator and trustee with opportunities to recover assets/monies and/or to avoid certain events (e.g. granting of charges) for the benefit of all creditors.

The Enterprise Act 2003 amends Schedules 4 and 5 of the IA86 so the liquidator or trustee must obtain sanction of the court or liquidation or creditors' committee before bringing legal proceedings for transactions at an undervalue, preferences or transactions defrauding creditors. This applies to all such proceedings commenced on or after 15 September 2003 (see paragraphs 31.4.7A,31.4.7B, chapter 1 paragraphs 1.28 -1.29 and also chapter 65 for more information on applying for sanction).

Antecedent recoveries are made under civil law although the facts giving rise to such recoveries may also lead to prosecutions for criminal offences and may be considered in disqualification proceedings (see paragraph 222.43).

In the period leading up to the formal insolvency, persons connected with a company or the individual subject to bankruptcy will have been aware of the difficulties and impending failure in advance of creditors. It is possible that steps may have been taken to reduce some liabilities rather than others, to give some advantage over the general body of creditors or to undertake some other transaction which would put assets beyond the reach of creditors. It is necessary to consider whether any actions have been taken to subvert the equitable principles of insolvency taking into consideration when the company or individual first became insolvent and whether the actions adversely affected creditors generally.

Notes:[Schedule 4 Part 1, para 3A] [s238, 239,and 423] [Schedule 5, Part 1, para 2A] [s339,340,423]

For the purposes of formal winding-up, a company is deemed to be unable to pay its debts either because of an unsatisfied statutory demand or an unsatisfied execution. A company is also deemed to be unable to pay its debts if it is proved to the satisfaction of the court that the company’s assets are less in value that its liabilities. If there are unpaid invoices, it may be inferred that a company is unable to pay its debts (Re: Taylor’s Industrial Flooring Ltd [1990] BCC 44).

For the purpose of bankruptcy, an individual is deemed to be unable to pay his debts if either he fails to pay a statutory demand which is served on him within three weeks or if an execution for judgment debt is returned unsatisfied.

Notes:[s123(1)] [s123(2)] [s268(1)]

Obviously, the recoveries referred to in this chapter will not be scheduled as assets in the statement of affairs or in the preliminary examination. Transactions may have occurred which have removed the property from the company or the bankrupt’s estate which it may be possible to overturn to produce a recovery for creditors. During the course of a preliminary examination it may be possible to detect that such a transaction has occurred. Thereafter, it will be necessary to conduct a detailed examination of the accounting records and banking records together with suitable independent corroboration of the events that have occurred from creditors and suppliers and other persons capable of providing this information.  

Generally speaking where the Act gives a remedy against "any person", this phrase is apt to cover any person wherever resident. However, a court will not permit service of proceedings outside the jurisdiction under rule 12.12 of the Insolvency Rules 1986 unless it is satisfied that there is a real issue between the plaintiff and the defendant, which the defendant can reasonably ask the court to try (see Powdrill v Hambros Bank (Jersey) Ltd [1992] BCLC 710).

The provisions of the Insolvency Partnerships Order 1994 apply to the provisions of the Act relating to antecedent transactions to insolvent partnerships with certain modifications.

The antecedent transaction provisions of the Insolvency Act 1986 are applied by virtue of Article 3(1) of the Administration of Insolvent Estates of Deceased Persons Order 1986 and paragraph 26 of part II of schedule 1 or article 5(1). However, in view of the decision in Re Palmer Deceased (A debtor) [1994] 3 WLR 420, there is now doubt that the provisions are effective, since a transaction at an undervalue or preference effected during the deceased’s lifetime will mean that the property in question will not form part of the deceased’s estate nor will the estate have as a matter of probate law any claim to the property (see paragraph 54.29A).

31.4.7 Involvement of official receivers in recoveries (amended September 2007)

The official receiver will only take an active role in dealing with recoveries when he/she is acting as liquidator or trustee. It is important to remember that whilst antecedent recoveries are made under civil law the facts giving rise to such recoveries may also lead to prosecution for criminal offences and may be considered in disqualification or BRO proceedings therefore it is envisaged that an examiner will identify the potential antecedent transaction and obtain sufficient evidence to either support further investigation or an application.

In most cases recoveries will be made by an application to the court unless persons benefiting from such transactions can be persuaded to return the property without court action.

It is the responsibility of the office initially dealing with the case (the home office) to establish in relation to each potential antecedent recovery: 

• The beneficiary of the transaction.
• The nature of the transaction e.g. preference, transaction at an undervalue etc.
• The value of the potential recovery.  

The official receiver should write to the individual or organisation involved in the antecedent transaction setting out the position and asking what arrangements they intend to make for repayment. If the reply sets out how they will repay all, or part, of the money owing then the case can be passed to the RTLU for collection.  Where part payment is offered the home office/RTLU official receiver should be willing to compromise the debt where appropriate (obtaining the necessary sanction from Technical Section).

Where the individual or organisation benefiting from the antecedent transaction does not respond to the official receiver’s correspondence, refuses to repay or disputes the antecedent transaction, the official receiver should consider the merits of pursuing the matter and discontinue collection where recovery is unlikely (e.g. where the debtor is unable to pay and/or the amount involved is too small to warrant legal action for recovery) or inappropriate (e.g. where evidence suggests there was no intent to prefer or the debtor was not insolvent as a result of the transaction). In making a decision on the ability to repay the debt the official receiver should consider all relevant information such as the beneficiary’s income and/or property ownership. 

Where the official receiver considers collection action should continue he/she should consider;

• The appointment of an insolvency practitioner liquidator or trustee (whether by meeting of creditors or a Secretary of State appointment (see chapter 17, part 5)). In cases where an insolvency practitioner liquidator or trustee appointment is sought the official receiver should consider the matters raised in paragraph 31.4.8 in relation to funding any action for recovery.

Transferring the case to the RTLU (see paragraph 31.4.7A).

31.4.7A Clarke Willmott Pilot Scheme for antecedent recoveries (amended September 2007)

Where the case is referred to the RTLU, the RTLU will attempt collection of the debt.

If the RTLU is unsuccessful in its attempts at recovery but believe that recovery is nevertheless possible, they may then refer the matter to Clarke Willmott for possible collection under the pilot scheme currently in operation. The pilot scheme permits Clarke Willmott to attempt legal action, covered by a conditional fee agreement, in order to recover certain types of debts, specifically directors’ loans, preferences and transactions at an undervalue.  

The decision to commence legal action is a decision entirely to be made by Clarke Wilmott upon reviewing each case referred to them for collection. They will decide which cases they wish to take forward under the scheme based on criteria set out in the scheme. Full details of the pilot scheme are posted on the OROS intranet site at http://intranet/OROS/OROS/SLAClarkeWilmot/SLAClarkeHome.htm.  

If the RTLU believes that there is no chance of recovery of the debt, the case should not be transferred to Clarke Willmott.  The home office will have no involvement in instructing Clarke Willmott under the pilot scheme

Where Clarke Willmott decide to commence legal action they will inform the relevant RTLU. The procedure to enable Clarke Willmott to commence legal action will then be as follows:  

i) Once Clarke Willmott has identified a suitable case, they will notify the relevant RTLU (via the central office inbox) and the contract manager via email, stating the name and particulars of the case. 

ii) Clarke Willmott will email the completed sanction application form to the RTLU via the central office inbox.  

iii) The RTLU should finalise the application form by filling in the relevant information at question 5 (current balance on the estate) from LOLA and then submit the form to Technical Section using the central email address (Technical.Section@insolvency.gsi.gov.uk). All emails containing sanction application forms should be entitled “Clarke Willmott pilot scheme – application for sanction” and Clarke Willmott should be copied in on this email using their email address as indicated on the sanction application form. 

iv) Once Technical Section has made a decision concerning sanction, they will email both the RTLU and Clarke Willmott to notify them of the decision. Clarke Willmott will then commence legal action under the conditional fee agreement if sanction has been granted. 

31.4.7B EA2002 - Changes to liquidator’s powers

The Enterprise Act 2002, section 253, amends Schedule 4 Part I of the IA86. From 15 September 2003 the liquidator must obtain the sanction of the court or liquidation committee before commencing legal proceedings for fraudulent trading, wrongful trading, transactions at undervalue, preferences or transactions defrauding creditors. When the official receiver is liquidator, the functions of the committee vest in the Secretary of State. The official receiver should make application for sanction in writing to Insolvency Practitioner Unit, Birmingham. (See chapter 1 paragraph 1.28 and chapter 65 for further information on obtaining sanction.)

Reference should also be made to paragraph 31.4.8A EA on funding a company action where the Enterprise Act 2002 provisions apply.

Notes:[Schedule 4, Part 1, paragraph 3A] [s213, 214, 238, 239 and 423]

31.4.7C EA2002 - Changes to trustee's powers

The Enterprise Act 2002, section 262, amends Schedule 5 Part I of the IA86. From 15 September 2003 the trustee must obtain sanction of the court or creditors' committee before commencing legal proceedings for transactions at an undervalue, preferences or transactions defrauding creditors. When the official receiver is trustee, the functions of the committee vest in the Secretary of State and application for sanction should be made in writing to Technical Section. (See also chapter 1 paragraph 1.29 and chapter 65 for further information on obtaining sanction.)

Notes:[Schedule 5, Part 1, paragraph 2A]  

This paragraph applies to cases where recovery action was commenced before 15 September 2003 so the provisions of the Enterprise Act 2002 do not apply.

Where the official receiver is making an application to have an antecedent transaction set aside, he needs to ensure that adequate funds are available in the estate or that creditors are prepared to give an indemnity to cover the costs or undertake to meet the costs of a potential claim. It might be necessary to confirm these matters prior to seeking the appointment of an insolvency practitioner by the Secretary of State. In the case of Re M C Bacon Ltd [1991] Ch 127 it was held that the costs of an unsuccessful action to set aside a transaction alleged to have been a preference or at an undervalue and for a contribution under section 214 were not expenses of the liquidation and were not payable as of right in priority to the claims of the holder of a floating charge as the proceedings were not brought for the purpose of "realising or getting in any assets of the company". Whilst the court had jurisdiction to order payment out of "free" assets, it had no jurisdiction to order payment out of assets subject to a charge. However, it would be prudent for any liquidator or trustee to obtain an indemnity from the major creditors to cover the costs and expenses prior to pursuing investigations and commencing proceedings. Any assets or monies recovered as a result of a successful application are not for the benefit of the company but for the creditors, and should be distributed amongst proved creditors.

If there are other uncharged assets available for distribution to unsecured creditors and the proceedings were properly brought, the court does have discretion to make an order for payment of the costs or expenses out of those assets. In Re Yagerphone Co Ltd [1935] Ch 392; 395 ALL ER Rep 803 it was held that any recovery made in respect of a preference was not to be paid to any floating charge holder but should be available for the general body of creditors. However, void dispositions of a company’s property may be recovered and retained by an administrative receiver (see paragraph 31.4.21).

Notes:[R4.218] [s112]

Where recovery action is commenced on or after 15 September 2003 for a company in liquidation the official receiver must take into account the matters in paragraph 31.4.8 as well as the contents of this paragraph.

On 15 September 2003 the Enterprise Act 2002, section 253, came into force and amended Schedule 4 of the IA86. From15 September 2003 the liquidator must obtain the sanction of the court or liquidation committee before bringing legal proceedings for antecedent recoveries after that date, including where the winding-up order was made before 15 September 2003.

If the company has a floating charge that was created on or after 15 September 2003 a share of the assets will be available for the unsecured creditors. In such cases the official receiver as liquidator should not assume that these funds can be used to discharge the legal costs of a potential recovery and the court or the liquidation committee should consider if it is appropriate to do so.

Notes:[Schedule 4, Part 1,para3A] [s213, 214, 238, 239 and 423]

[Back to Introduction] [On to Part 2 - Avoidance of Dispositions]