Antecedent Transactions: s238, s239 and s423 Where HMRC Is the Creditor

An HMRC investigation followed by an insolvency produces a distinctive pattern: assets move in the window between the taxpayer realising a liability is coming and the assessment landing. Sections 238, 239 and 423 of the Insolvency Act 1986 are how office-holders and HMRC reach those assets, and s423, which needs no insolvency and has no lookback window, is the most dangerous of the three.

Introduction: Why HMRC Cases Generate Antecedent Transaction Claims

An HMRC investigation followed by an insolvency produces a distinctive and recurring pattern. The company or individual becomes aware of a substantial and unexpected tax liability months or years before it crystallises into an assessment. Assets move during that window: the family home is transferred to a spouse, a dividend is declared, a director’s loan account is cleared, a property is sold to a connected company, or a floating charge is granted to secure existing lending.

When the liquidator, trustee or HMRC itself examines that window, the antecedent transaction provisions of the Insolvency Act 1986 come into play. Since 1 December 2020, HMRC’s reinstated status as a secondary preferential creditor for PAYE, employee National Insurance, VAT and CIS deductions has substantially increased the amounts at stake and the incentive to pursue these claims.

Transactions at an Undervalue: s238 and s339

Section 238 IA 1986 applies to companies in liquidation or administration; s339 is the individual equivalent in bankruptcy. A transaction is at an undervalue where the company or individual makes a gift, or enters into a transaction on terms providing for no consideration, or for consideration significantly less in value than the consideration provided.

The conditions

• The transaction must be at an undervalue as defined. This requires a comparison of money or money’s worth flowing in each direction.
• It must have been entered into at a “relevant time” under s240: within two years ending with the onset of insolvency for a company, or five years before the presentation of the bankruptcy petition for an individual.
• The company must have been unable to pay its debts within s123 at the time, or have become unable to do so in consequence of the transaction. Where the counterparty is a connected person, that insolvency is presumed and the burden shifts to the respondent to disprove it.

Re MC Bacon Ltd [1990] BCC 78: the depletion requirement

Millett J held that the grant of a debenture to secure an existing indebtedness, for no new consideration, is not a transaction at an undervalue. The reason is that the company’s assets are not depleted by the grant of security: the company parts with nothing of value that would otherwise be available to creditors. The claim in that case therefore had to be brought, if at all, as a preference. The analysis remains fundamental.

The statutory defence: s238(5)

The court must not make an order if satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business, and that at the time there were reasonable grounds for believing the transaction would benefit the company. This is a conjunctive test and all three limbs must be met. Contemporaneous evidence of the commercial rationale is what wins it.

Preferences: s239 and s340

A preference occurs where a company does anything, or suffers anything to be done, which has the effect of putting a creditor, surety or guarantor into a position which, in the event of the company going into insolvent liquidation, will be better than the position they would have been in had that thing not been done.

The desire to prefer

The decisive element, and the reason most preference claims fail, is s239(5): the court may make an order only if the company was influenced by a desire to produce that preferential effect. Re MC Bacon Ltd established that this is a subjective test. It is not enough that the company intended to do the act, or that it foresaw the preferential consequence. There must have been a positive wish to improve the creditor’s position.

Relevant time and the connected person presumption

• Six months ending with the onset of insolvency for an unconnected creditor.
• Two years where the creditor is a connected person, which includes directors, shadow directors, their associates and associated companies.
• Where the preference is given to a connected person (otherwise than by reason only of being an employee), the desire to prefer is presumed, and the respondent must rebut it.
• The insolvency requirement in s240(2) applies as it does for undervalue transactions.

The combination of a two-year window and a reversed burden of proof is why repayment of a director’s loan account, or payment of a director-guaranteed bank facility, in the run-up to an insolvency is one of the most dangerous transactions a director can authorise.

Transactions Defrauding Creditors: s423

Section 423 is the most powerful of the three and the least well understood. It is not an insolvency provision at all in the technical sense, and its requirements are strikingly different.

The purpose test

Section 423(3) requires the court to be satisfied that the transaction was entered into for the purpose of putting assets beyond the reach of a person who is making, or may at some time make, a claim against the debtor, or of otherwise prejudicing the interests of such a person in relation to the claim they are making or may make.

Three features of that test matter in practice:

• The purpose is that of the debtor, not of the recipient. The recipient’s innocence does not defeat the claim, though it is relevant to the relief granted and to the protection of third parties.
• The purpose need not be the sole or even the dominant purpose. The Court of Appeal confirmed this in BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, upholding the finding that a lawfully declared dividend had been paid with the purpose of putting assets beyond the reach of a future claimant. That case also establishes that an otherwise entirely lawful corporate act, a dividend properly declared out of distributable profits, can be a transaction at an undervalue within s423.
• The claimant need not have an existing claim. A person who “may at some time make” a claim is within the section. This is exactly the position of HMRC where a taxpayer transfers assets while an enquiry is open, or even while the taxpayer merely anticipates that one may follow.

Limitation

The limitation position under s423 is not straightforward and depends on the relief sought. Where the claim is for the recovery of a sum of money, a six-year period is generally applicable; where the relief sought is not a money claim, the twelve-year specialty period under s8 Limitation Act 1980 has been applied. The cause of action does not necessarily accrue at the date of the transaction: in the case of a victim who was not prejudiced until later, time may run from the point at which the prejudice arose. This is a technical area in which specific advice should always be taken.

The Orders the Court Can Make

Section 241 (and s425 for s423 claims) gives the court a broad power to make such order as it thinks fit for restoring the position to what it would have been. That includes:

• revesting property in the company or the trustee;
• requiring the proceeds of sale of transferred property to be paid over;
• releasing or discharging security;
• requiring a person to pay sums in respect of benefits received;
• providing for a surety or guarantor whose obligations were released to be under new or revived obligations.

Third party protection. Section 241(2) protects a person who acquired an interest in good faith and for value, and who was not a party to the transaction. But the presumptions in s241(2A) work against connected persons and against anyone with notice of the relevant circumstances, so a purchaser from a connected party should not assume protection.

The Related Director Liability Claims

Antecedent transaction claims rarely travel alone. Where assets have moved in the shadow of an HMRC liability, the office-holder will usually consider:

• Misfeasance under s212 IA 1986, a procedural route for enforcing breaches of duty, including the duty to have regard to creditors’ interests once insolvency is probable, as explained by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25.
• Wrongful trading under s214, where the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation.
• Fraudulent trading under s213, and the corresponding criminal offence.
• Unlawful dividends under s847 Companies Act 2006, where distributions were made without sufficient distributable profits, a very common finding once HMRC reconstructs the accounts.
• Overdrawn directors’ loan accounts, which give rise to both a debt claim and a s455 CTA 2010 charge.
• Director disqualification under the Company Directors Disqualification Act 1986, for which non-payment of Crown debts is a recognised ground.

Funding and assignment

Office-holders can assign antecedent transaction claims to third parties under s246ZD IA 1986. This materially changes the risk calculus: a liquidator with no funds is not, as respondents sometimes assume, a liquidator who will not sue. Claims are routinely sold to litigation funders who will pursue them vigorously.

Practitioner Application

Advising a director or taxpayer before the transaction

• Map the windows. Six months, two years and five years, measured back from the likely onset of insolvency or petition, are the periods that matter for ss238–240 and s339. Section 423 has no window at all.
• Document the commercial purpose contemporaneously. Board minutes recording the reason for a payment, the pressure applied by a creditor, or the valuation supporting a transfer, are worth more than anything produced afterwards.
• Obtain and keep valuations for any transfer of property, particularly to a connected person. An undervalue claim founders on evidence of value.
• Never move assets while an HMRC enquiry is open or anticipated without advice. This is the fact pattern s423 was designed for, and it carries the additional risk of a deliberate behaviour finding in the tax dispute.
• Take advice on the creditor duty once insolvency becomes probable. After Sequana in the Supreme Court, the duty to consider creditors’ interests engages well before formal insolvency.

Defending a claim

• Test the relevant time and the s123 insolvency first. Where the respondent is unconnected, the office-holder must prove insolvency at the date of the transaction, and management accounts prepared with hindsight are vulnerable.
• On a preference, attack the desire. MC Bacon requires a positive wish to prefer. Commercial pressure, a genuine belief the company would survive, or a payment made in the ordinary course all point away from it.
• On an undervalue, attack the valuation and rely on s238(5). Good faith, the purpose of carrying on business, and reasonable grounds for believing the transaction would benefit the company.
• On s423, attack the purpose. The debtor’s subjective purpose is the issue. Evidence of an independent commercial reason, particularly one that predates any awareness of the potential claim, is the answer.
• Consider limitation. It is frequently overlooked by office-holders, particularly in long-running estates.

Frequently Asked Questions