Transfer of Assets Pre-Insolvency - Obtaining Permission from the Court - 10 FAQs

Here you can download our Transfer Of Assets Pre-Insolvency - Obtaining Permission From The Court 10 Frequently Asked Questions answered booklet. An example of the useful information you can find in the booklet is featured below.

1. What Are The Practical Effects Of A Winding-Up Petition Being Presented?

We refer to our separate booklet which address 10 Frequently Asked Questions as regards Defending Winding-up Petitions.

In essence, a Winding-Up Petition is a request (usually by a creditor) for the Court to make a winding-up order against a company and place it into liquidation. However, until the order is made the company is free to continue operating and trading as normal.

However, although the company may be operating in an identical way as to previously, and may on the face of it be exactly the same, the existence of a winding-up petition can disrupt trade and impacts on any transactions the company is a party to. The situation is worse where the Winding-Up Petition is advertised, in which case the company’s bankers may freeze its account for fear of monies being dispersed and creditors may refuse to grant lines of credit in respect of goods and services provided.

Even where the Winding-Up Petition is not advertised, word-of-mouth communication of its existence may be enough to provide the above outcomes. It is not uncommon, despite any agreement not to advertise a Winding-Up Petition, for a petitioning creditor (or any other party) to announce the existence of the Winding-Up Petition with the intention of destroying the company and its business.

2. What Are The Legal Effects Of A Winding-Up Petition?

In addition to the above practical concerns, legislation also provides that a disposition of company assets after the date of the presentation of the Winding-Up Petition is automatically void under Section 127(1) of the Insolvency Act 1986.

Under Section 128 of the Insolvency Act 1986 any enforcement of a claim against a company’s assets (for example where a creditor obtains judgment against the company and then instructs a bailiff to remove company assets in execution of the judgement) cannot occur and is void if the enforcement is not concluded by the time of presentation of the Winding-Up Petition.

The avoidance of property dispositions under section 127 of the Insolvency Act 1986 is set out as follows:

(1)     In a winding-up by the court, any disposition of the company’s property, and any transfer of assets, or alteration in the status of the company’s members, made after the commencement of the winding-up, is, unless the court otherwise orders, void..

(2)     This section has no effect in respect of anything done by an administrator of the company while a WUP is suspended under Paragraph 40 of Schedule B1.

The “commencement of the winding-up” in a conventional winding-up scenario is defined by Section 129(2) of the Insolvency Act 1986 as the date when the Winding-Up Petition was presented.

This prohibition of disposal of company assets after this date is automatic and, should the company (usually acting under the authority of its directors) act in breach of this provision, then repayment (and the connected legal costs to seek repayment) is automatically required or may be sought from the recipient of such dispositions.

3. What Are The Consequences Of A Void Transaction?

If a transaction is void, then it is void as of the date it is transferred and it does not matter whether the value of the goods exchanged have, on one side, deteriorated.

For example, if goods are supplied to a company and a large sum is paid, and thereafter the goods remain in the company in liquidation, then ideally these goods should be returned, and the sum paid returned by the supplier. It may be that by this time the goods supplied have substantially reduced in value, and this may cause hardship to the supplier (and potentially a claim against the director for a breach of his fiduciary duties owed to that creditor in arranging such a transaction).

Generally, however, where a company continues to trade profitably then there is no disposition of company property as the level of insolvency should be reducing as a result. For example, with suppliers of goods and services, payment to them is perfectly acceptable if it is at the market rates and those goods and services lead to on-going transactions which returned profits (or at least identical sums) as a result of the provision of those goods and service.

Payments to associated parties, such as directors or their friends/relatives, will however be void and recoverable. The key point is that the transaction in its entirety must fall within the period between Winding-Up Petition and order (if made).

4. How Can I Free Assets To Pay Creditors Then?

A problem that often occurs is that a company is asset rich but cash flow poor. This may be because of unusual events, economic downturns or by reason of one-off investments the company has entered into.

If you have such cash flow problems, we can assist with business funding and we can arrange for someone to contact you to assist you in improving the cash flow of your company.

However, it is often the case that a business in such a situation seeks to sell one of its assets to pay off the petitioning creditor. However, where a Winding-Up Petition has been presented, this is not possible under Section 127 of the Insolvency Act 1986 (our comments above refer).

As stated above (Section 127(1) of the Insolvency Act 1986), such a transaction entered into between the presentation of a Winding-Up Petition and the making of a winding-up order is void, “unless the court otherwise orders”.

There is a specific Court Practice Direction which sets down the procedure for a company to apply for a Court order that validates the transfer of any assets for these purposes.



5. How Do I Apply For An Order To Validate Transactions?

6. What Do I Need To Show To Obtain A Validation Order?

7. What Cannot Be Validated?

8. Am I Required To Seek Validation Of Payments Out Of Aa Overdrawn Account?

9. Can Anyone Else Apply For A Validation Order?

10. Are Directors Personnaly Liable For These Void Transdactions?

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.