Antecedent transactions: A twist on Transactions Defrauding Creditors?

Under the Insolvency Act 1986, where an individual or a company gives something away for less than its full value, the transaction can be upset, provided the deal occurred within certain timeframes of formal insolvency.  The aim of the law is to restore the position to what it would have been in an attempt to be fair to the creditors.

But there is a hitherto less common way of an IP upsetting similar transactions, going back even further, which were always thought to be constrained to instances of downright fraud.  Under Section 423 of the Insolvency Act 1986 a ‘transaction defrauding  creditors’, where assets are purposely put beyond the reach of creditors, can be upset however far back it occurred.  It could have happened 20+ years previously.  And it could have happened at a time when the person or company was highly solvent!  The problem historically for IPs was that s423 carried a higher burden of proof, a criminal burden as opposed to a civil burden of proof, and that the IP had to prove that the intent had been to put the assets out of the creditors reach.

The courts now appear to be interpretating how s423 works in a slightly wider way, making it easier for IPs to upset such transactions, meaning that more such deals could be upset.  If you or your company entered into something years ago that you thought was perectly safe, it may not now be so.

This is a result of the recent Sands v Clitheroe case.

In this case, Mr Clitheroe, a lawyer, gave his interest in his home to his wife 15 years before he went into bankruptcy.  At the time of the transfer he was solvent: the creditors who were owed money in the bankruptcy were owed nothing at the time of the gift (so we have to ask ourselves how the gift could have defrauded creditors who did not even exist at the time?).  He had a stable job, as a partner in a firm of lawyers, he was not contemplating going into any risky area of business.
The court decided that it was the intent of Mr Clitheroe that was key in the case.  He had given his interest in his home to his wife in order to follow his firm’s policy that all partners should do this to protect their family should the firm be subject to, say, a large negligence claim.  There were no other reasons, such as tax reasons, for the transfer.  The court held that he had indeed knowingly put assets beyond the reach of his creditors, and ordered that Mrs Clitheroe transfer half of the equity in the home to the trustee in bankruptcy.

Hardly sounds fair to the wife does it?

The case demonstrates a few things:

  • If you are going to give something away, transfer out something for less than its true value, or transfer in something for more than its true value, you need to document all the reasons for the transaction.  The more reasons you have, the more likely you are to be able to defeat a trustee’s action to upset a deal under s423.  And keep those documents long after the normal limitations period.
  • Consider taking formal advice from someone experienced in insolvency on any major gifts or transactions that could latterly be looked at in a different light, however solvent you may be.
  • If you are contemplating transferring assets between yourself and your business or intra a group, do them at full value.  This will defeat any attempted Transaction Defrauding Creditors action.  Make sure the value at which the transfer is done is backed up by a formal valuation by the appropriate professional.  Ensure the basis of that valuation is reasonable given the then prevailing circumstances.  Document it fully with the expectation that someone 20 years down the line may look on it in a completely different light.   If, with hindsight, you seem to have insufficient documentation of a transction, prepare it now while it is all fresh in your mind.
  • Do not rely on your advisors to produce all the documents necessary to support the decisions made: many advisors have not yet taken on board the importance of the Sands v Clitheroe case and few will keep their records for 20+ years.  Make sure you keep the documents, put them in your loft and give copies to those loved ones who could potentially be effected by such an action!
  • Forethought is essential in any group planning exercise: shutting the door after the horse has bolted is unlikely to work.
  • If you are a professional who has  given advice to clients who may be effected by this, review the adequacy of, and retain, your records: you do not want to be attacked for having given erroneous advice: after all this case is a clarification of the pre-existing law, not new law.

I suspect that, going forward, we will see more actions taken by Insolvency Practitioners aimed at upsetting transactions they see as defrauding creditors, particularly in a group strategic planning situation.  In the meantime, individuals, companies and the professionals advising them need to be more attentive to such potential exposure.

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