Antecedent Transaction and Transaction at an Undervalue

Published: 30th June 2011
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In the lead up to an liquidation process, it is crucial that the debtor makes sure that he / she acts honestly, honorably and fairly in his or her business with all other people who will be impacted by the process. Any ventures involving financial institutions or any third parties (not being lenders) that might adversely affect the interests of lenders are unquestionably of concern, regardless whether creditors happen to be party to the transactions or not. Insolvency processes include Bankruptcy, Individual Voluntary Arrangements, Company Voluntary Arrangements, Liquidations and the like. There are two important types of dodgy transactions:
Antecedent Transaction and Transaction at an Undervalue.

Antecedent Transaction

An Antecedent Transaction takes place where, ahead of the insolvency process commencing, something is carried out which results in one creditor being treated more favourably as compared to the other lenders or where a non-creditor benefits from the actions of the borrower or of the organization going through the insolvency process resulting in the suffering of one or more of the lenders.

In such scenarios the official receiver or liquidator of the estate can have the right of recovery. The rules relating to an Antecedent Transaction vary to some degree based on the form of insolvency process. In the case of a bankruptcy, for instance, if one or more debts have already been paid or significantly lessened in preference to other people's, the official receiver might possibly get back 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 lower than their true market worth. In an insolvency process, if any goods are purposely disposed of at undervalue in order to avoid them being seized by the trustee in bankruptcy and realized for the benefit of creditors, the trustee can have the authority to claim such goods back from their new owner(s). Again there are different rules relating to a Transaction at Undervalue according to the type of insolvency process and on other factors. In bankruptcy, for example, the Transaction at Undervalue must have occurred during the five years period before 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 a transaction involved an associate of the bankrupt: the trustee does not have to prove the insolvency of the bankrupt - there is just a presumption that that was the situation. Associates include the bankruptís spouse, or a relative or a relativeís spouse of either the bankrupt or of the bankruptís spouse.

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