A trustee in bankruptcy has a wide range of powers to investigate a debtor's dealings in the period prior to the bankruptcy, and to reverse dispositions of property made prior to the bankruptcy order.
A common scenario is for a debtor, faced by the prospect of insolvency, to either transfer property or to grant security to a third party. If such a disposition is made during the period between presentation of the bankruptcy petition and the making of the bankruptcy order, then is automatically void unless validated by the court. Alternatively, the principal means for a trustee to challenge antecedent transactions are summarised below.
Transaction at undervalue
A transaction can be challenged by a trustee in bankruptcy if it results in the debtor receiving no consideration, or significantly less consideration, then the value of the asset that was transferred.
A trustee can challenge a transaction at undervalue made in the five year period prior to the bankruptcy. If the transaction took place more than two years before the bankruptcy, it is also necessary for the trustee to prove that that the debtor was either insolvent at the time of the transaction or became insolvent as a result of it, although there is a rebuttable presumption of insolvency if the transaction was made to an associate.
When a transaction at undervalue is established by a trustee in bankruptcy, the Court may make such order as it sees fit to restore the position to what it would have been if the transaction had not occurred.
A trustee in bankruptcy can also challenge a prior transaction as a "preference" if the debtor does anything, or suffers anything to be done, which puts a creditor, surety or guarantor, in a better position in the event of the debtor's bankruptcy, then they would have been had the act not be done. It is necessary to show that the debtor was motivated by a desire the individual, although where the preference is given to an associate of the debtor, there is a rebuttable presumption that it was motivated by a desire to prefer.
A trustee can pursue a preference claim given to an associate in the two year period prior to the bankruptcy. Where the preference was made to a non-associate, a six month time period applies. It is necessary for the trustee to prove that that the debtor was insolvent at the time of the preference, or became insolvent as a result of it.
If a preference claim is successful, , the Court may make such order as it sees fit to restore the position to what it would had the preference not been given.
Transaction Defrauding Creditors
The Court has the power to overturn a transaction made by a debtor at undervalue, which was made with the intention or putting assets beyond the reach of creditors.
The Court's power is wide ranging because there is no time limit in respect of when the transaction was made, no need to prove insolvency, and it can be made either by the trustee in bankruptcy or an individual creditor. However, such claims face the high evidential burden of proving the intention of the debtor when the transaction was made.
We advise bankrupts, creditors and trustees in bankruptcy on all matters relating to the investigation and challenge of antecedent transactions. If you would like to discuss any of these issues with us, please contact any member of our team.
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