In the lead up to any liquidation process, it is important that the borrower makes sure that he behaves truthfully, honorably and fairly in his or her business with all other individuals who might be impacted by the process. All actions relating to lenders or any others (not being creditors) which will detrimentally affect the welfare of creditors are of particular concern, regardless whether creditors happen to be party to the financial transactions are not. Insolvency processes include Bankruptcy, Individual Voluntary Arrangements, Company Voluntary Arrangements, Liquidations and the like.
There are two important kinds of dodgy transactions:
Antecedent Transaction and Transaction at an Undervalue.
An Antecedent Transaction takes place in instances where, ahead of the insolvency process commencing, something is carried out which ends up in one creditor being dealt with more favourably in comparison to the other creditors or when a non-creditor benefits from the actions of the debtor or of the company undergoing the insolvency process resulting in the suffering of one or more of the lenders.
In such cases the official receiver or liquidator of the estate can have the right of recovery. The laws surrounding an Antecedent Transaction vary to some extent depending on the type of insolvency process. In the case of a bankruptcy, for example, if one or more bills have already been settled or considerably reduced in preference to others, the official receiver might be able to reclaim from the preferred creditor(s) the monies paid preferentially in this way.
Transaction at Undervalue
A Transaction at Undervalue occurs when goods or services are sold or transferred to another party at a lot less than their true market worth. In an insolvency process, if any merchandise is purposely disposed of at undervalue to avoid them being seized by the trustee in bankruptcy and realized for the benefit of lenders, the trustee could possibly have the authority to claim such goods back from their new owner(s). Just as before there are different rules with regards to a Transaction at Undervalue depending upon 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 the transaction concerned an associate of the bankrupt: the trustee does not have to verify the insolvency of the bankrupt – there is just a presumption that that was the actual situation. Associates include the bankrupt’s spouse, or a relative or a relative’s spouse of either the bankrupt or of the bankrupt’s spouse.