Defending Claims by a Trustee in Bankruptcy or Official Receiver

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Introduction

When an individual is made bankrupt, the trustee in bankruptcy has an obligation to investigate their affairs in the period leading up to the making of the bankruptcy order.

• Certain types of “antecedent” transactions entered into by a bankrupt before they were made bankrupt may be challenged by the trustee in bankruptcy
• the result of this can be that assets disposed of at a time might have to be returned to the bankrupt’s estate if those transactions are deemed inappropriate, unfair or wrong.

In most cases, the trustee in bankruptcy challenges a transaction by making an application to court. If the challenge succeeds, the court has a wide discretion to make order undoing the effect of the transaction for example, by ordering the return of assets to the bankrupt’s estate or ordering that the recipient of the asset pays a sum to the bankrupt’s estate.

The transactions, which may be challenged, are:

a) Transactions which took place after the bankruptcy petition was presented

Any transfers or disposals of property made after the presentation of a bankruptcy petition are usually void unless they are approved by the court. This is dealt with by s.284(1) of the Insolvency Act 1986.

b) Transactions at an undervalue

Transactions at an undervalue occur where a bankrupt transfers an asset to another party as a gift or otherwise for no consideration or for significantly less than the asset’s true value or enters into a transaction in consideration of marriage or the formation of a civil partnership. This is dealt with by s.339 of the Insolvency Act 1986.

Examples of a transaction at an undervalue include:

• the transfer of property for no consideration;
• the transfer of shares for no consideration;
• gifts;
• providing goods or services for no consideration; and
• buying goods or services that are worthless, or the value of which is significantly less than the price paid.

c) Preferences

A preference occurs where a bankrupt does something that puts a creditor, surety or guarantor in a better position than it otherwise would have been on the making of a bankruptcy order. There must have been an intention to put the creditor, surety or guarantor in a better position than the bankrupt’s other creditors. This is dealt with by s.340 of the Insolvency Act 1986.

Paying back loans from family members rather than third party creditors and granting a charge over a property to secure the debt are examples of preferences.

d) Excessive pension contributions

A bankrupt’s rights under any pension arrangement are normally excluded from his estate or, in the case of unapproved pension schemes, capable of being excluded. This is dealt with by s.342A of the Insolvency Act 1986.

• A trustee in bankruptcy is however permitted to make an application to the court to recover excessive pension contributions made by the individual before his bankruptcy.
• In addition, the trustee in bankruptcy may apply to the court to recover excessive pension contributions where an individual who is adjudged bankrupt has rights under an approved pension arrangement or excluded their rights under an approved pension arrangement.

e) Transactions defrauding creditors

A transaction can be set aside it is entered into at an undervalue and the purpose of the transaction was to put assets beyond the reach of a person who is making or may make a claim against the individual, or to otherwise prejudice a person’s interests in relation to such a claim. This is dealt with by s.423 of the Insolvency Act 1986.

Transferring assets to a spouse (such as the matrimonial home) to avoid a creditor from taking recovery action against the assets is an example of a transaction defrauding creditors.

f) Excessive credit transactions

A trustee may challenge any transaction providing credit to a bankrupt, which either; which require the bankrupt to make exorbitant repayments or otherwise contravene the ordinary principles of fair dealing. This is dealt with by s.343 of the Insolvency Act 1986.

• Any transaction providing credit in the 3 years prior to the date of the bankruptcy. The date of the bankruptcy being the date of the bankruptcy order not the date of the bankruptcy petition.
• Whilst most provisions of credit from high street lenders are unlikely to be considered excessive credit transactions, credit from non-traditional lenders involving particularly high interest rates may be challenged.

What can be recovered by the trustee in bankruptcy?

The court has the power to make a variety of orders to enable a recovery for the bankruptcy estate.

Such orders can:

• require any property transferred as part of the transaction, or in connection with the giving of the preference, to be returned to the bankrupt’s estate. This is dealt with by s.342(1)(a) of the Insolvency Act 1986.
• release or discharge (in whole or in part) any security given by the individual. s.342(1)(c) of the Insolvency Act 1986.
• require any person to pay, in respect of benefits received by him from the individual, such sums to the trustee in bankruptcy. See s.342(1)(d) of the Insolvency Act 1986.

Call our team today

We are here to help you deal with any type of bankruptcy claim by a trustee in bankruptcy. If you call is urgent, call Stephen Downie direct and he will be able to help.

We needed expert bankruptcy advice and we definitely found it in the bankruptcy team at FWJ. Sue and Bradley provided us with clear and understandable advice in a situation which was really stressful for us. They were able to resolve matters on very favourable terms for us and we can’t thank them enough.

A client for whom we achieved a successful outcome