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Bankruptcy and Transactions at an Undervalue/Preference Payments

Bankruptcy is a confusing and complex area which can have adverse legal consequences. When they elect to make themselves bankrupt, many individuals fall into pitfalls that they did not foresee.  

Many people perceive bankruptcy as a ‘get out of jail free’ card when they are unable to pay debts. It may well be that if you have zero assets and a zero account balance, it could be useful.

However, there are individuals with assets and money who realise they have reached a state of personal insolvency that try to be clever and shift assets before declaring themselves bankrupt. For example, you have your car on finance, a mortgage, student loans, pet insurance etc. and are being chased by your creditors for the payments you are falling behind on and don’t have the cash to repay.

Here’s a hypothetical scenario involving M and D, where M is the mother and D is the daughter. M decides to declare herself bankrupt, but before doing so, has the idea to transfer her house to D at a cut price. M doesn’t want to transfer her £100,000.00 home for £1.00 to D as that would look suspicious to the Trustee in Bankruptcy who will inevitably be appointed when she declares herself bankrupt. So instead she transfers the house for £80,000.00 to her daughter. This is known as a ‘Transaction at an Undervalue’. Transaction at Undervalue claims are focused on the ‘mischief of asset depletion (and fragmentation) of the insolvent estate’, whether corporate or personal, in a time period before the onset of a formal insolvency procedure, known as “the relevant time”.

In a personal transaction, the Trustee in Bankruptcy can pursue a claim up to five years before the Bankruptcy petition was presented.

D innocently believes she is getting onto the property ladder and her mother is helping her to do so. However, upon her mother declaring bankruptcy, she will be pursued for significant amounts of debt by the Trustee in Bankruptcy. The daughter’s view would likely be that as it is her mother’s home she can sell it to her for whatever she wants, right? Wrong.

Declaring yourself bankrupt, having disposed of your assets to family members at cut prices to get around a Trustee in Bankruptcy taking your assets to settle your debts, is dangerous. Put simply, the law is not oblivious to individuals using the above trick (i.e. disposing of assets at cut prices to avoid a Trustee in Bankruptcy taking their assets), which is why the concept of a Transaction at an Undervalue was created, and a ‘relevant time’ (i.e. up to five years in this case) put in place.

As M and D are family members, this also makes D a “connected person”. When there is a connected person there is an ‘automatic presumption’ that M was insolvent at the time she transferred the asset unless M can show otherwise. This is a very difficult thing to disprove, putting both M and D in a tricky position.

The Trustee in Bankruptcy now wants the money that D should have paid for the property. They may even want more. In the event D does not have the cash to pay for the ‘Undervalue’, the property will probably need to be sold, a disaster if you have tenants.

Just when you think the problem cannot get much worse, it sometimes does if the cash used to buy the property at cut price is provided by the parent, i.e. M.  If so then the significance of the undervalue becomes a whole lot more depending on how much M gave. If it were the entire amount of the property, then the entire amount will be considered an undervalue since the property was effectively bought by M.

In the event you do have issues concerning Bankruptcy and Insolvency please do not hesitate to contact a member of the Litigation team on 0116 212 1000.

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