By Alan Massenhove Partner and Head of Litigation

If you are owed money by a company in financial difficulty, and discover the company is being put into liquidation, or 'wound-up', you may decide to write off your debt as a lost cause, particularly if your debt is unsecured. Often, the creditor company will go under owing money left, right and centre. Once the costs of the liquidation and the secured debtors (usually the bank) have had their slice, there is often little in the pot to be divided up between the rest.

You should be less hasty to write off what you are owed. The liquidator will have duties to preserve the company's property and to maximise assets available for creditors where possible. The liquidator will have the power to attack previous transactions and reclaim company property. They can do so in a number of ways.

The obvious types of transactions the liquidator can seek to set aside are those where the purpose is to defraud creditors, usually by prejudicing them or putting assets beyond their reach. But the liquidator will also be able to look at other transactions with a view to setting them aside, thereby increasing the pot of money available to pay your debt.

The liquidator can examine recent transactions by the company to see if they were made at a significant undervalue. If the company made a gift, disposed of an asset for no consideration or entered into a transaction for consideration significantly less than the value of the consideration given by the company, for example, selling an IP right or plant or machinery for far less than they were worth, then the liquidator's suspicion is likely to be excited and they will look behind the transaction to discover whether it can be set aside. If so, the court can restore the position to that before the transaction was entered into. So, for example, if a company sells its freehold premises for little or no consideration, the court can order the premises to be returned to the company's ownership.

The liquidator can also ask the court to set aside preferential transactions. A preference can be given by a company to a person if that person is a company creditor or a surety or guarantor of the company's debts or liabilities and that person is put in a better position than they otherwise would be in had it not been for the company's actions. Examples of preferential transactions include paying an unsecured creditor before any others, granting security to an unsecured creditor or allowing a supplier to change their terms of business to include a retention of title clause. The court has the power to order the person who entered into the transaction with the company to return the company property or pay the proper value for the transaction to the company.

If transactions at an undervalue or preferential transactions are with a "connected person" as defined in the Insolvency Act, it is generally more likely to be scrutinised by the liquidator.

The liquidator can also disclaim onerous property. This includes company property that is un-saleable or not readily saleable and unprofitable contracts. It is usually used where a company has a lease of its business premises. Notice is served on the landlord and the landlord will then become a creditor of the company.

Sometimes, companies in financial trouble will look to borrow money to try to improve cash flow and keep the business going. Often, the directors are desperate and so agree to borrow at high rates of interest. The liquidator also has the power to set aside an extortionate credit transaction if the terms of it were such as for "grossly exhorbitant" payments to be made or it if otherwise contravened principles of fair dealing.

In a liquidation, the holders of floating charges will be paid before unsecured creditors. It is useful therefore for the liquidator to be able to set aside any invalid floating charges. If a floating charge has been granted to a "connected person" or as a preference or for prior consideration, the chances are that it can be successfully challenged.

Of course, the powers given to liquidators and to the court can be a double-edged sword for the more forward-thinking unsecured creditor. If you try and put yourself in a better position than other creditors by, for example, obtaining a fixed or floating charge over company assets, your actions are more likely to be scrutinised by a liquidator. There are ways by which you can try to ensure that there is less likelihood that such a transaction will be challenged but be warned - other creditors will look to the liquidator to challenge every transaction undertaken by the company in the months and years leading up to the company's insolvency if it improves their chances of recovering money due to them.

Spending a little bit of time investigating a company's financial affairs could prove fruitful in claiming what is owed to you. The liquidator has substantial powers to right the wrongs that happened prior to insolvency and it is often worthwhile keeping a close tab on affairs once the Winding-Up Order has been made.

Please note that this area of the law is a complex subject and you should not take or refrain from taking any step without full legal advice on the particular facts of your case. The content of this article is of a general nature and no liability is accepted in connection with it or if any reliance is placed on it. Sykes Anderson are not regulated to give financial advice. For more details on how to recover money due to you, contact Alan Massenhove on 020 3178 3770