Turning back time?

26th Feb 2018

Despite it being commonly reported that the UK is now out of the “great recession”, we are still facing uncertain times. This is demonstrated by the recent demise of construction giant Carillion, and the Insolvency Service’s recent report that in 2017 “total insolvencies rose for the second consecutive year, returning to the levels seen in 2013 and 2014”. In addition, we are of course never far away from discussion and speculation as to the possible effects of Brexit on the UK economy.

Employee Fraud

When an individual is faced with the prospect of bankruptcy, or a company with the risk of being wound up, it may be tempting to start transferring money and assets to others such as the Bank to reduce a liability under a Personal Guarantee or to family members. But is this really as simple as it may seem?

In short, no. The court has a wide discretion to review transactions and a wide range of remedies to choose from if it is satisfied that the transaction falls foul of the provisions of the Insolvency Act 1986. The three main types of reviewable transaction are transactions at an undervalue, preferences and transactions defrauding creditors.

Transactions at an undervalue

  • The company or the bankrupt enter into a transaction which is a gift, or the payment it receives in return, in money or money’s worth, is significantly less than the value of what is transferred.
  • To be challenged, the transaction must have been entered into at the “relevant time”. In the case of a company, the relevant time is the period of 2 years ending with the “onset of insolvency”. In the case of an individual, the relevant time is the period of 5 years ending with the presentation of the bankruptcy petition or making of a bankruptcy application.
  • In the case of a company, the meaning of the “onset of insolvency” is very much dependant on the exact circumstances of the case. You should therefore take legal advice as soon as possible if you think that you may have entered into a transaction at an under value or are considering challenging a transaction on that basis.

Preferences

  • The company or the bankrupt does something (or allows something to be done) which puts one creditor, surety or guarantor in a better position than they otherwise would have been in the event of the individual’s bankruptcy or the company’s insolvent liquidation.
  • The company or individual was influenced by a desire to prefer that person.
  • The preference was given at the “relevant time”.
  • The company or individual was insolvent at the time of the transaction or as a result of it.
  • If a person is connected to the company or an associate of the individual a desire to prefer will be presumed.
  • A person is “connected” to a company if they are a:
    • Director
    • Shadow director
    • An associate of such a director, shadow director or the company.
  • A company is an “associate” of another person if:
    • That person has control of it, either alone or together with other associates of his.
    • A company is an “associate” of another company if:
    • The same person has control of both companies
    • A person has control of one and persons who are his associates have control of the other.
    • Both companies are controlled largely by the same groups of persons.
  • A person is an “associate” of an individual if that person is:
    • The individual’s husband, wife or civil partner
    • A relative of the individual
    • A relative of the individual’s husband, wife or civil partner
    • The husband, wife or civil partner of a relative of the individual
    • The husband, wife or civil partner of a relative of the individual’s husband, wife or civil partner
  • The “relevant time” is the time when the decision to enter into the transaction was taken, and not when the transaction was effected.
  • If the preference is given to a person connected to the company or an associate of the debtor (other than an employee) the “relevant time” is the period up to 2 years before the onset of insolvency or presentation of the bankruptcy petition, otherwise the “relevant time” is 6 months beforehand.

Transactions defrauding creditors

  • The requirements to bring this challenge are similar to those for transactions at an undervalue, with the additional requirement that the purpose of the transaction was to put the assets beyond the reach of a person who is making or may make a claim against the company or individual, or to otherwise prejudice a person’s interest in relation to such a claim.
  • Unlike transactions at an undervalue, there is no need for the company or individual to be insolvent and there is no time limit for avoidance, save for the usual limitation provisions (6 years for claims for monies, 12 years for actions on a specialty).
  • The head of challenge may therefore be useful where the transaction was entered into outside the “relevant period” for the purposes of a transaction at an undervalue.

An example of a transaction defrauding creditors could be a company, knowing that it is in financial difficulties, paying large dividends to creditors in a deliberate attempt to put the funds beyond the reach of an unsecured creditor, such as an unpaid supplier. In the context of an individual, such a transaction may be a husband, who is being pursued by an unsecured creditor, such as the Revenue, transferring the whole of his interest in the family home to his wife for no payment by her in return.

This is only a very brief overview of the main provisions, and there is a vast amount of case law as to their interpretation. If you are an office holder in relation to an individual or corporate insolvency and suspect that assets may have been deliberately put out of your reach, we can give you detailed advice in relation to challenging antecedent transactions.

If you are an individual or company faced with insolvency and you are concerned as to any transactions that you have already entered into, or are considering future transactions, we can help to assess whether those transactions are likely to be open to challenge and, if so, how any challenge may be defended. It may be that you have come into possession of assets which you think may previously have formed part of a transaction that fell foul of the rules. If this is the case, we can advise you as to any protection that may be available to you.

The Dispute Resolution team at Rogers & Norton has a wealth of experience in both individual and corporate insolvency. If you would like to discuss this further please contact Peter Hastings at ph@rogers-norton.co.uk or Elizabeth Gibson at eg@rogers-norton.co.uk.