The regime surrounding voidable transactions has recently been amended, with further changes set to follow in the next year or so. This article briefly explains what these changes are, and why they matter to various areas of business. It is written with accountants and their clients in mind - please feel free to share.
Why do these changes matter?
Voidable transactions are transactions which a liquidator (or, in the case of a bankrupted individual, the Official Assignee) is able to undo (or “void”). They are transactions which have led to an unequal distribution of an insolvent’s assets to its creditors. Where a transaction is undone, the resulting funds are put back into the insolvent estate to be shared between creditors equally and in accordance with the statutory framework.
If you are a creditor of a business which is placed into liquidation, a liquidator will now have less scope to undo pre-liquidation transactions with parties who are not related to the company and its directors, but significantly more scope to undo transactions with related parties. The changes affect the number of transactions which can be undone, and that could impact whether, and to what extent, you receive a dividend in the liquidation.
If you were a creditor of a business which goes into liquidation after you have been paid, you are more likely to be able to retain that payment if you are not related to the business, but less likely to retain that payment if you are related.
If you are a director of a distressed business, or another related party, these changes may disincentivise you from investing your own funds into the business to help it to stay afloat – even on a secured basis.
Are you a related party? You may not have been before these changes were introduced, but a new definition captures a much broader group of people as “related”, including step relations of directors and senior managers, and their more remote family members such as grandparents, cousins, nieces/nephews, aunts/uncles – and even their spouses.
More about voidable transactions
If the insolvent entity is a company, sections 292 to 299 of the Companies Act 1993 (Act) apply. Where the insolvent person is an individual, sections 194 to 203 of the Insolvency Act 2006 includes similar provisions. Broadly, the types of corporate transactions which can be unwound are:
Insolvent transactions (section 292) – transactions entered into by a company within the ‘look-back’ period which enable a person to receive more than they would have been likely to receive in the company’s liquidation;
Voidable charges (section 293) – charges granted within the look-back period in circumstances where, immediately after the charge was given, the company was cashflow insolvent;
Transactions at undervalue (section 297) – transactions occurring within the look-back period pursuant to which a company received inadequate payment for goods or services, or paid too much for goods or services; and
Transactions with directors and other related persons (sections 298 and 299) – essentially transactions at undervalue with, or charges granted to persons who are related to, the company, with wider parameters to set these transactions aside.
What has changed?
The changes to the voidable transactions regime were made in May 2020 by the COVID-19 Response (Further Management Measures) Legislation Act 2020, and apply to liquidations which commence after that date. These changes will continue to apply after the pandemic has subsided. In summary:
A new section 291A defines who is a related party for the purposes of sections 292 and 293. It is a much wider definition that that which previously applied.
The look-back periods which apply to voidable transactions have changed, and now depend on whether the counterparty is related to the company or not.
For insolvent transactions (s.292) and voidable charges (s.293):
the look-back period for transactions with unrelated parties decreases from two years to six months.
the look-back period for related party transactions will remain at two years prior to the commencement of liquidation, but that is expected to increase to four years when further legislation is passed into law.
For transactions at undervalue (s.297) the look-back period currently remains at two years for related and unrelated party transactions, but that is expected to increase to four years for related party transactions when further legislation is passed.
Section 298 is expected to be amended so that the look-back period applying to related parties increases from three to four years.
What next?
Further legislative changes are anticipated. We have been in touch with MBIE, who have confirmed that the next step will be the release of an exposure draft of a Bill for public comment. MBIE’s best guess on the timing for that release is the end of 2021.
This article is intended to be a summary for those who are not expert in insolvency matters, and so does not make reference to the more nuanced details in the legislative changes.