Transactions that took place before bankruptcy

 Transactions before bankruptcy

The trustee, and in some cases individuals, are able to challenge certain transactions which the bankrupt entered into before bankruptcy. If a challenge is successful, the court can undo it or adjust it so that the creditors benefit from the money or property recovered.

Transactions at an under value and preferences

There are circumstances where the payment of money or the transfer of property prior to the bankruptcy may be open to challenge by the trustee.

  • Transactions at an undervalue. This could be a gift or the sale of property belonging to the bankrupt for significantly less than it was worth.
  • A preference. This is where the bankrupt makes a payment or gives security for a debt with a view to putting the recipient in a better position than other creditors.
  • There are time limits on when these transactions occurred and rules about the financial position of the bankrupt at that time. Transactions with members of the bankrupt’s family or connected people are particularly restricted.
  • There is protection for people dealing in good faith with the bankrupt.

Only the trustee can bring a claim and this must be sanctioned by a creditors committee or the Secretary of State.

Transactions defrauding creditors

There are certain transaction which entitle individuals to bring a claim if they are suffer loss as a result.

  • A transaction defrauding creditors is a gift or a transfer of property which is intended to put the money or asset beyond the reach of creditors at any time in the future.
  • For this type of claim it is not necessary for the bankrupt to have been insolvent at the time the transaction was entered into. It may, for example, apply in the case of a person who transfers their interest in a property to the name of their spouse or partner for future protection from creditors. However, it is necessary to show dishonest intent and this can be difficult to prove.
  • The time limits to bring such a claim are longer than for transactions at an under value and preferences
  • There is protection for people dealing in good faith with the bankrupt.

If the claim is proved the court has wide powers including restoring the position to what it would have been if the transaction had not taken place and/or protecting the interests of the victims of the transaction.

Other transactions

There are other situations in which payments made or things done by the bankrupt may be re-opened and adjusted for the benefit of the creditors of the bankrupt’s estate. These include:

  • Extortionate credit transactions
  • Avoidance of assignment of certain debts
  • Excessive pension contributions

These are claims which can be brought by the trustee and not individual creditors.

Taking legal advice

Legal issues often arise in connection with challenges to transactions entered into by a person before they are made bankrupt.  Our solicitors are able to provide advice on the many issues that can arise in this area and assistance with court proceedings where necessary.

For more information proceed to What happens to the bankrupt’s home?