Purpose
The IA 1986 gives both a liquidator and an administrator the ability to challenge certain transactions that have taken place within specified statutory periods prior to the insolvency of a company (or bankruptcy of an individual). These are known as ‘voidable’ or ‘antecedent’ transactions. The aim of a challenge is to restore the company to the same position it would have been in had the transaction not taken place and thereby, increase the funds available in the insolvent estate for the benefit of creditors.
Effect of an order
These provisions are often described as ‘clawback’ provisions which can result in an order reversing transactions or more usually, providing for financial restitution to be paid, in order to increase the assets of the insolvent company for the benefit of creditors. It is the beneficiary of the transaction with the insolvent company that is the target of the proceedings, rather than the directors of the company responsible for entering into the transaction. This rule is subject to ss.241(2) and 241(2A) which protect bona fide purchasers for value without notice who were not a party to the original transaction.
In addition, it should be noted that responsibility for entering into a voidable transaction is a relevant factor to which a court shall have regard when considering whether to make a disqualification order against a director for unfitness, and may also render the director liable for misfeasance.
Litigation expenses
Any legal challenge will involve litigation expenses (including the fees of the liquidator or administrator and potential liability for adverse costs if the action is unsuccessful). A major factor to be taken into account by a liquidator or administrator will be the cost of any legal challenge, given the inevitable risk that if the challenge fails, the assets will have been diminished (by the legal expenses and any adverse costs incurred) rather than increased.
The Insolvency Rules 2016 provide for the recovery by the liquidator of costs and expenses out of the company’s assets in a statutory order of priority and they allow recovery of costs and expenses relating to the conduct of any legal proceedings which he has power to bring or defend. A liquidator can therefore recover the costs of the litigation out of the assets in the insolvent estate even if he loses his challenge.