Voidable transactions FAQs
What is a voidable transaction?
If your company has been served with a creditor’s winding-up petition, any transactions made by the company since the date of the presentation of the winding-up petition are potentially voidable transactions.
Section 127(1) of the Insolvency Act 1986 provides:
In a winding up by the court, any disposition of the company’s property, and any transfer of shares, 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.
There are several reasons why any dispositions made by a company post the presentation of a winding-up petition are potentially voidable transactions and these include:
- To protect the company’s unsecured creditors by avoiding a situation where one creditor is paid in preference to another after the winding up petition has been issued
- To preserve and protect any assets of the company for the benefit of creditors following the winding up petition
Voidable transactions have serious consequences.
The company directors can be found personally liable to the company for the disposition or misapplication of its assets in circumstances where the company is ultimately wound up and placed into compulsory liquidation. If this happens, the Official Receiver or appointed liquidator can seek to try and recover any property that was the subject of the voidable disposition or transaction. In addition, it is also open for the Official Receiver or liquidator to issue proceedings against the company’s directors for breach of duty as a result of causing the company to enter the voidable transaction.
How can you avoid being liable for voidable dispositions?
To avoid being potentially liable for a voidable transaction or misapplication of company assets following a winding-up petition, the company directors can apply for a validation order whereby the court may validate the transaction which would otherwise be rendered void.
Any ‘void disposition’ that is recovered by a liquidator following the winding up of a company remains subject to any interests in favour of third parties who obtained those interests in good faith and for value. By way of example, any floating charges that are attached to such property will not fall away.
However, the recipient of property which is a potentially void disposition can apply to court for a retrospective validation order. If granted, this avoids the recipient having to return such property to the liquidator.