4.4 Claw-Back of Assets and Order of Priority

Claw-back of assets for creditors

Office-holders in administration or liquidation can restore value that left the company before the process began. Learn the mental element, the look-back, and the connected-person shortcut together.

A transaction at an undervalue (s.238, England and Wales) is a gift or a transaction for consideration the value of which, in money or money's worth, is significantly less than the value provided by the company. The company must have been unable to pay its debts at the time or become unable as a result. The relevant time is the 2 years before the onset of insolvency. If the counterparty was connected with the company, inability to pay is presumed unless the contrary is shown. The court must make a restoration order unless the company entered the transaction in good faith for the purpose of carrying on its business and there were reasonable grounds for believing it would benefit the company.

A preference (s.239) is given if the company does anything, or suffers anything to be done, that puts a creditor, surety or guarantor into a better position on insolvent liquidation than that person would otherwise have been in. Putting a connected lender on a previously unsecured debt into a newly created charge, or paying a director's loan account in full while trade suppliers wait, is the usual pattern. The court will not make an order unless the company was influenced by a desire to produce that better position. Desire is presumed, unless the contrary is shown, where the preference was given to a connected person (other than by reason only of being an employee). The look-back is 6 months, or 2 years if the recipient was connected. Insolvency at the time or as a result is required. Payment pursuant to a court order is not, without more, a defence.

Section 245 attacks a floating charge created in the relevant time. The charge is invalid except to the extent of new consideration — money paid, or goods or services supplied, to the company at the same time as or after the creation of the charge, plus agreed interest. Past consideration (securing an already outstanding loan) does not support the charge. The relevant time is 12 months, or 2 years if the charge-holder is connected. For an unconnected charge-holder the company must also have been insolvent at creation or become insolvent in consequence; that insolvency condition does not apply when the charge-holder is connected.

Connected persons for these sections include directors, shadow directors, and associates (spouses, civil partners, close relatives, and companies the director controls). Always run the connected-person analysis before you pick the look-back and the burden of proof.

Order of priority

Realisations are not shared equally. After the costs of realising a fixed charge, the charge-holder is paid from that charged asset. Remaining realisations (including floating-charge assets) then follow the statutory waterfall used by HMRC and insolvency practitioners for processes starting after 1 December 2020:

1. Fixed-charge holders (from their charged property, after realisation costs).
2. Insolvency expenses and the office-holder's remuneration.
3. Ordinary preferential creditors — principally certain employee wage and holiday claims (subject to statutory caps supplied in the question if a calculation is required).
4. Secondary preferential creditors — HMRC for VAT and for PAYE income tax, employee NICs, CIS deductions and student-loan deductions that the business was holding for others. Corporation Tax, employer NICs, interest and penalties are not in this class.
5. The prescribed part (IA 1986 s.176A) — a statutory slice of net floating-charge realisations set aside for unsecured creditors. The percentage formula and the cap are statutory; use the figures in the question if you are asked to calculate the pot.
6. Floating-charge holders.
7. Remaining unsecured creditors, ranking equally (pari passu).
8. Any surplus to members (or back to the bankrupt in a personal surplus case).

Worked priority sketch. A company in CVL has a factory subject to a fixed charge, stock subject to a qualifying floating charge, unpaid employees, unpaid VAT, an unpaid Corporation Tax bill, and ordinary trade suppliers. The factory proceeds go first to the fixed-charge bank. Employee preferential claims come out of the remaining pot before HMRC's secondary-preferential VAT claim. Corporation Tax waits with the unsecured suppliers. A prescribed part is carved from the floating-charge realisations for those unsecured creditors before the floating-charge bank is paid. If you pay the floating-charge bank in full before setting aside the prescribed part, the distribution is wrong.

Personal insolvency uses the same idea: secured property is realised for the secured creditor, then bankruptcy expenses, then preferential and secondary preferential claims, then unsecured creditors. Members do not appear; any surplus returns to the bankrupt after debts and expenses.