Deals involving family members' firms may not be set aside in bankruptcy cases: courts
The High Court in Northern Ireland has recently considered the law relating to the setting aside of transactions carried out by a bankrupt in the years leading up to the order of bankruptcy.
The insolvency laws allow a trustee of a bankrupt's estate to apply to the High Court to set aside certain transactions where the transaction is deemed to be at an undervalue or there is deemed to be a preference to any person who is one of the bankrupt's creditors. The case in question considered the law of preference as the bankrupt had transferred a property to a company (which was a creditor of the bankrupt) less than two years before a bankruptcy petition was presented against him. The trustee in bankruptcy required the transaction set aside on the basis that the company was an associate of the bankrupt.
The setting-aside laws are there to prevent bankrupt individuals from attempting to retain assets by transferring them to friends and family members and then getting them back when their bankruptcy is discharged. For this reason there can be a preference if the recipient is an associate of the bankrupt defined as a relative such as brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant. In addition it includes a company if the bankrupt has control of the company or if the bankrupt together with persons who are his associates have control of the company.
To be a preference the transaction must be given within two years of the presentation of the bankruptcy petition when there is a preference involving an associate and within six months where the preference does not involve an associate.
The bankrupt wasn't and had never been at any stage a director or shareholder of the company. The company was owned by his parents who were the directors of the company together with his sister. The courts had to consider whether the company was an associate of the bankrupt as, if it wasn't, then the transaction could not be set aside as even though the company was a creditor the transaction had taken place outside the six-month time limit.
The trustee in bankruptcy argued that the bankrupt's family who are associates of the bankrupt controlled the company making the company an associate. The company accepted that associates of the bankrupt controlled the company but argued that the company was not an associate of the bankrupt because the bankrupt on his own did not control the company and nor did the bankrupt and his associates together control the company. The judge agreed with the company. On a literal construction of the relevant law the bankrupt would need to have held some shares in the company, even one, to control the company together with his associates. The judge added that seeking to exercise influence over family members is not the same as having 'control' as required by the legislation.
It is not difficult to see how this ruling could seem unfair. The judge however commented that if the legislator had wanted to extend the net to include transactions involving companies controlled by relatives of the bankrupt alone he would have defined a company as an associate if it was controlled by the bankrupt or his associates.
- Michael Duffy is a solicitor in the commercial department at Worthingtons Solicitors, Belfast with experience in a broad range of property transactions including sales and purchases, commercial leases, secured lending and residential conveyancing. Michael also acts for clients with property interests in England and Wales. He can be contacted on 028 9043 4015 or firstname.lastname@example.org