What are the risks of accepting payment from a company that is likely to enter into a formal insolvency process and what can be done to mitigate those risks?

The following Restructuring & Insolvency practice note provides comprehensive and up to date legal information covering:

  • What are the risks of accepting payment from a company that is likely to enter into a formal insolvency process and what can be done to mitigate those risks?
  • Unlawful payments—general position
  • Risks of accepting payment from a company on the verge of insolvency
  • Steps to take to mitigate the risks

What are the risks of accepting payment from a company that is likely to enter into a formal insolvency process and what can be done to mitigate those risks?

Unlawful payments—general position

When a company enters into liquidation or administration, certain transactions entered into by the company prior to the opening of the insolvency proceedings can be reviewed by the liquidator/administrator and, if the circumstances are right, set aside by the court. This can pose a risk to creditors, who may find themselves in the unenviable situation where they later have to refund a company cash despite being legitimately owed that cash, and fall to be an unsecured creditor for that amount in a subsequent liquidation or administration, hoping to secure a dividend together with other unsecured creditors.

In these circumstances, the claims that an administrator or liquidator may be able to bring will include:

  1. transactions at an undervalue

  2. preferences

  3. transactions to defraud creditors

  4. property dispositions after the commencement of the winding up

The risk of these transactions being set aside subsequently is greater if the company is insolvent or is verging on becoming insolvent.

This Practice Note will look at potential transaction at an undervalue and preference claims only. For further reading on unlawful payments in corporate insolvency, see Practice Notes: Antecedent transaction claims by an office holder in liquidation or administration, Transactions defrauding creditors—claims under section

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