Asset Adjustment

Adjustment of Bankrupt’s Estate

There are provisions in the Bankruptcy Act allowing the Official Assignee or trustee to get rid of onerous property and to reclaim assets that have been wrongfully transferred by the bankrupt.

The former provision facilitates the disclaiming of assets which carry liabilities which may drain the bankrupt’s assets. There is a single provision in relation to the disclaimer of assets which has a broad scope.

The latter provisions allow the clawback of assets which the bankrupt may have attempted to put beyond the scope of his creditors. There are several distinct ground which differ in their scope and requirements.


Fraudulent Conveyance I

It is an ancient  principle of law, that where a debtor transfers an asset to a third-party for the purpose of avoiding his creditors, the transfer may be set aside.  Until 2009, the Irish legislation was the Fraudulent Conveyance Act 1634 which was the equivalent of an older English Act in identical terms. This legislation applies to acts and events before the Land law reforms on 1st, December 2009.  A modernised and modified provision applies to transfers after that date.

The transfer applies to any class of assets.  There need not be a written document. The legislation provides that where a person transfers lands, goods or chattels with the intent to delay, hinder or defraud his creditors or others to whom he may be liable, the transfer is deemed absolutely void. The 2009 Act provides that any transfer of property made with the intention of defrauding a creditor or other person is voidable by any person thereby prejudiced.

Unlike the other bankruptcy provisions mentioned below, it is not necessary that the transferor be insolvent at the time of the transfer.  It is not necessary that the transfer be for undervalue.  A fully solvent person could transfer assets to another for full value which could be rendered void by the prohibition. If the transferor is, in fact, insolvent and the transfer is for less and full value, the transaction is more likely to be interpreted as being within the terms of the statute and thereby rendered void.


Fraudulent Conveyance II

Although the legislation is commonly referred to as the “fraudulent conveyances” legislation, fraud in this sense does not refer to intentional wrongdoing. It does not require that the debtor is aware that he is obstructing or hindering creditors.  Most so-called fraudulent conveyances are gifts or transfers for undervalue. The onus is on the person who seeks to challenge the transaction, to prove the requisite intention.  The intention may be inferred from the circumstances and need not be conscious.

Once there is an intention to put assets beyond the reach of his creditors or adversely affect them in this regard, the provision may apply. If this is the necessary result of his so doing, the courts are likely to infer the requisite intent.

The transferee may not be set aside against a transferee who has taken in good faith for value without notice of the intention to delay or defeat creditors. This requirement may be more readily satisfied where the acquisition is in the open market.  Where the transfer is made to a relative, a connected person or associate, it will be less easy to show the absence of notice on the transferee’s intent.


Factors Pointing to Fraudulent Conveyance

The mere fact that a person is insolvent does not mean that the transfer of his assets constitutes a fraudulent conveyance. The sale of an asset at open value will often be consistent with the intention of realising monies in order to pay creditors. However, certain circumstances, including those next mentioned, give rise to the inference of an intention to avoid creditors.

Where one or more of the following factors are present, the requisite intention will be more readily inferred.

  • the involvement of related parties;
  •  the lack of proper or questionable consideration or exchange
  • a transfer of substantially all of the transferor’s assets;
  • litigation or proceedings for debt are pending or there is a judgment
  • the secrecy of the transaction;
  • the transfer is to connected persons;
  • an arrangement of trust with the transferee, which is for the benefit of the transferor;
  • the transferor remains in possession of the asset / property;
  • a power to revoke the transfer;

Unlawful Preference

An unlawful (sometimes described as a fraudulent) preference is the preferential payment of one creditor over another, the purpose or effect of which is to give one creditor an unfair advantage over others. The provision in the Bankruptcy Act applies to every transfer of assets, payment made or obligations incurred, court proceedings taken or allowed by a person who is unable to pay his debts as they become due from his own money. It applies to payments etc., to a creditor or guarantor with a view to giving such creditor or guarantor, a preference over another creditor.

The provision extends to all types of arrangements, transfers and the grant of additional securities, with the intention of preferring one creditor. It applies to payments made within six months of commencement of formal insolvency proceedings.   The principle is that the transfer upsets the proportionate entitlement to creditors in the ultimate winding up.

The application to set aside the transaction may be made by the Official Assignee, trustee in bankruptcy or certain third parties. A purchaser who acquires an asset in good faith without notice of the so-called fraudulent preference is not affected by it.


Nature of Preference

An unlawful preference involves an intention, whether conscious or imputed, to prefer one or more creditors over others. No actual fraud in the sense of dishonesty is required.  The motive does not necessarily matter.  The motive can be entirely reasonable and justifiable, but the intention to prefer may still be found.  If the debtor, through action or inaction, actually gives the creditor preference, an unlawful preference may be inferred.

In the context of a company, directors sometimes cause a company to give security for debts which they have guaranteed personally, on the eve of insolvency. In this case, the courts will readily find an intention to prefer.  Similarly, where creditors are paid, who will assist the debtor or directors of the debtor in re-establishing in the same business again, the intention to prefer may be more readily inferred.

Payment procured by reasonable and legitimate commercial pressure, will usually not constitute an intention to prefer.  Provided the pressure is genuine and the payment is made in response, this pressure may be the predominant motive for payment, so that there may be no intention to prefer.

The burden is on the person who challenges the transaction to prove an intention to prefer. Where the transaction is declared void, it is set aside.  A transferee who acquires title to the assets in good faith may not be the subject of an order for its avoidance.


Gifts and Transfers at Undervalue I

Transfers made for no value or at undervalue are automatically set aside if they are made within three years (and in some cases five years) of bankruptcy.  This is part of the principle that an insolvent person may not dispose of his assets to the prejudice of his creditors.

Under this Bankruptcy Act provisions, which is distinct from the “Fraudulent Conveyance” legislation, it is not necessary to establish an intent to defeat or prefer creditors.  It does not matter that the transferor did not know himself to be insolvent at the relevant time.  His motive or intention does not matter.

The provision covers a transfer of assets of any kind.  The legislation applies to a so-called settlement.  A settlement is any disposition of an asset.  In the case of money, a transfer by which it is spent immediately does not constitute a settlement.  Where, however, monies are intended to be held as an asset or are intended to be invested in some form, there is likely to be a settlement.

It is not necessary that assets are transferred to third parties or trustees. A declaration of trust would constitute a settlement.


Gifts and Transfers at Undervalue II

A transaction is not rendered void where it is made in good faith for valuable consideration.  Good faith implies that the transferee is not aware of the transferor’s financial position or intention (where applicable). Marriage settlements and agreements entered in good faith on the occasion of marriage, may not be set aside.

Valuable consideration implies that substantial value has been paid.  There should be, at least, approximate equality of exchange. Valuable consideration need not necessarily mean full consideration in all circumstances.  The consideration must be real and substantial.

The transfer / transaction is avoided automatically where it is made within three years of bankruptcy. Where it was made between three and five years of bankruptcy, it is void if transferor was insolvent at the time when it was made.

The Official Assignee must prove the absence of consideration and good faith.  “Solvent” means that the person concerned may pay his debt without recourse to the transferred asset.  The burden is on the transferor to prove that he / she / it was solvent at the time.


Post Act of Bankruptcy Transactions

A transaction at undervalue undertaken within three months of bankruptcy may be set aside if the bankrupt has already committed an act of bankruptcy.  This includes, in particualr, the sale of a property at a price which is substantially below the market value or has a material effect on the sum which is available to creditors.

If the third party had no notice that the debtor had committed an act of bankruptcy and the transactions entered by a bona fide, it would not be set aside on this basis.  Furthermore, where a third party acquires the asset in good faith for the full value, he is not affected with respect to an intermediate transaction.


Disclaimers I

The Bankruptcy Act allows for the disclaiming of assets by the Official Assignee or trustee in bankruptcy, which carry liabilities which may drain the bankrupt’s assets. There is a single provision in relation to the disclaimer of assets which has a broad scope. It has been restated in amended terms in 2016.

Where any of the property other than after-acquired property of a bankrupt, consists of

  • an unprofitable contract
  • other property which is unsaleable
  • not readily saleable for any reason whatsoever (including because it is subject to security or
  • gives rises to a liability to pay money or perform any onerous act),

the Official Assignee, notwithstanding that he has endeavoured to sell or taking possession of it or exercised any active ownership, may with leave of court, disclaim the property in writing.


Disclaimer II

The classic example of an onerous property is a lease at a rent above market level or with onerous repairing obligations. Where it is disclaimed, the property revests in the landlord. A freehold property may also be disclaimed.  This may happen where there are environmental clean-up obligations applies.  Where a freehold property is disclaimed, it will vest in the Minister for Public Expenditure.

Onerous property may include many types of assets and contracts. It may cover shares and stocks in unlimited companies, unprofitable contracts and other assets which are not readily saleable, by reason of binding the possessor or party, to the performance of an onerous obligation or financial liability.

Formerly, the application to disclaim was required to be made within 12 months of the Official Assignee becoming aware of the matter or asset concerned.  The period may be extended.

Another party to the contract may take the initiative to compel the Official Assignee to elect to accept or disclaim the asset. 28 days’ notice is required.  If the Official Assignee does not disclaim after being given notice in writing, he may be deemed to have accepted it.


Effect of Disclaimer

The court considers the matter, having regard to the relative gains and losses to the parties.  The court may impose conditions on the disclaiming of the contract.  It may award damages for non-performance.  Interested parties may apply to have the assets vested in them on such terms the court determines.

Upon disclaimer, the rights and obligations of the bankrupt’s estate in relation to the property or contract terminate subject to such conditions as the court may impose. The bankrupt’s estate is released from the future obligations.  The other party to the obligation is entitled to prove as a creditor for the amount which he was lost.  He must mitigate his loss. A hypothetical valuation of future or possible losses will be allowed.

The rights and obligations of third parties should not be affected, except insofar as strictly necessary for the purpose of the disclaimer.  Where this occurs, the third party may prove as an unsecured creditor, for the amount concerned.  Third parties may include a sublessee or mortgagee of the lease concerned. They may apply to have the assets vested in them on the basis that they assume the original terms and conditions.


References and Sources

Irish Books

Burke & Comyn Personal Insolvency Law               2014

Bracken Practioner’s Personal Insolvency Handbook 2013

Law Society (Wright)       Insolvency Law                  2009

Sanfey & Holohan            Bankruptcy Law & Practice2nd Ed             2010

Farry, Holohan  Consolidated Bankruptcy & Personal Insolvency Legislation2013

Forde, Kennedy & Simms              Company Insolvency                      2015

Forde & Simms Bankruptcy Law 2nd Ed 2009

UK Books

Insolvency Law and Practice (Report of the review committee chaired by Sir Kenneth Cork CBE, 1982, Cmnd 8558) (the Cork report)

V Finch, Corporate Insolvency Law: Perspectives and Principles 3rd Ed 2017

RM Goode, Principles of Corporate Insolvency Law (4th Ed, 2011)

A Keay and P Walton, Insolvency law: corporate and personal (4rd Ed, 2017)

Marsh Bankruptcy Insolvency and the Law 2016

WW McBryde, Bankruptcy 2nd Ed, 1995

Butterworths Insolvency Law Handbook 14th Ed 2012

Core Statutes on Insolvency Law and Corporate Rescue (annual editions)

Legislation

Bankruptcy Act 1988

Bankruptcy (Amendment) Act 2015

Personal Insolvency Act 2012

Personal Insolvency (Amendment) Act 2015

Bankruptcy Act 1988 (Commencement) Order 1988, S.I. No. 348 of 1988

Bankruptcy Act, 1988 (Alteration of Monetary Limits) Order 2001, S.I. No. 595 of 2001

Bankruptcy Act 1988 (Official Assignee Accounts and Related Matters) Regulations 2013, S.I. No. 464 of 2013

Bankruptcy (Amendment) Act 2015 (Commencement) Order2016, S.I. No. 34 of 2016

Rules of the Superior Courts (Bankruptcy) 2013, S.I. No. 461 of 2013

Rules of the Superior Courts (Bankruptcy) 2016, S.I. No. 232 of 2016

Rules of the Superior Courts (Bankruptcy) 2012, S.I. No. 120 of 2012

Bankruptcy (Amendment) Act 2015 (Commencement) (No. 2) Order 2016, S.I. No. 253 of 2016