4. Common Issues with Current Voidable Transactions Provisions
The issues discussed below have been identified for the most part from Mr Brown's paper and from responses to that paper by various stakeholders. Because the voidable transactions provisions in the Insolvency Act 1967 and the Companies Act 1993 are worded and interpreted quite differently from each other, some of the issues which relate to personal and corporate voidable transactions are also quite different. Nevertheless, it is possible to identify some common issues.
4.1 Inconsistency
Both the Companies Act and the Insolvency Act, as well as other statutes such as the Property Law Act and the Matrimonial Property Act, contain voidable transaction provisions that have differing time periods and requirements of proof. An example of this is that some of the Companies Act provisions have a presumption of insolvency. As well as differing requirements of proof, procedures vary depending on which section is used. For example, section 294 of the Companies Act establishes a procedure whereby liquidators can set aside transactions by lodging a notice with the court. This procedure does not apply to all the voidable transaction provisions under the Companies Act, and this variation in procedure can produce different results depending on which voidable transaction law is used.29
These inconsistencies are for the most part historical and should not be retained unless there is a sound policy justification for the difference.
4.2 Uncertainty
There is real uncertainty surrounding the actual meaning of certain key tests in the existing avoidance provisions. The best example is the "ordinary course of business" test in section 292 of the Companies Act. If a transaction is in the "ordinary course of business" then it is not considered to be a voidable preference. There have been a significant number of cases concerning the meaning of the test in the six years since its enactment, including a decision of the Privy Council.30
It is clear that in each case the definition of "ordinary course of business" will depend on the particular circumstances of that case.31 Judicial precedent has given some guidance on how the circumstances of each case will be interpreted. However, the subjective nature of the test means that there still remains significant uncertainty regarding whether a particular transaction is within the "ordinary course of business" in the context of section 292.32
4.3 Cost
Both creditors and liquidators/assignees agree that the cost of pursuing or defending a voidable transaction is high. This cost is attributed in large part to the inconsistencies and uncertainty addressed above.
While these costs are commonly seen as a negative factor, it may also have a self-regulating effect on the amount which liquidators/Assignees consider worth pursuing. This is because a liquidator is unlikely to pursue a transaction where the amount that will be recovered is less than the cost of pursuing it, even if there is a high chance of success.
However, a system that imposes significant or excessive costs is likely to prevent worthwhile actions being taken where there are insufficient funds remaining for the liquidator to proceed with the action. The costs of pursuing a transaction will also reduce the net recovery for creditors.
4.4 Insider Preferences
The Companies Act currently provides two sections aimed specifically at transactions with directors and other insiders: sections 298 and 299. Section 298, for example, is aimed at transactions where the recipient is a director or other person closely related to the debtor company and inadequate or excessive consideration has changed hands. That section allows transactions to be challenged within three years of insolvency, and there is no defence to a claim under section 298. Similar provisions exist in personal insolvency law also. For example, under the Matrimonial Property Act,33 transactions between husband and wife are scrutinised more closely than transactions with non-related parties. Where that occurs, a creditor who is required to return a voidable transaction will not receive a pro rata dividend. It is difficult to justify the voidable transaction regime where there is not an equal distribution of available assets to all unsecured creditors.
4.5 Priority Debts34
As discussed above, the general understanding of the purpose of voidable transactions provisions is to put all creditors in an equal position in insolvency. Creditors who are asked to disgorge payments would tend to be more accepting of the rationale behind the law if a liquidator or Assignee could assure them that the payment they are returning will be shared equally with all creditors on a pro rata basis. Unfortunately, the existence of preferential creditors often results in there being little or no remaining assets for distribution to unsecured creditors. If that occurs, the recipient of a voidable transaction is asked to return a payment which is ostensibly for the benefit of all creditors but in fact goes to one or a small number of preferential creditors.
4.6 Knowledge
The existence and effect of voidable transaction provisions is not well known. It is likely that most small businesses are unaware of the voidable transaction regime and its rationale. Indeed, even some large businesses have no knowledge of this area of the law. Generally, the first awareness of the voidable transaction regime arises when a business is asked to return a voidable payment to a liquidator. While deterrence is not one of the objectives of voidable transactions law, it might be hoped that the existence of the provisions has some impact on people's behaviour. However, some people who do not know about the provision will behave differently than if they did know.
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