Asset Protection and Insolvency - Traps for The Unwary

15 Nov 2013

To avoid unpleasant surprises in the future, anyone estate planning for asset protection should be aware of the potential consequences if a donor or settlor is later made bankrupt or - if a company - goes into liquidation or administration.

The Insolvency Act 1986 contains a sophisticated "tool kit" for undoing such transactions, including those entered into years earlier. We look here at two of the ways this can be done.

Transactions at an undervalue

When an individual or company gives away cash or property, or settles them in trust, that act may constitute a transaction at undervalue. If the donor or settlor is an individual who is later adjudged bankrupt on a petition issued within five years of the gift or settlement, his trustee in bankruptcy can try to claw back the assets.

If the transaction occurred between five and two years before the petition was issued, it can only be challenged if the donor or settlor was insolvent at the time or became insolvent as a result. However, if the recipient is a close family member, insolvency is presumed and the burden of rebuttal falls on the parties to the transaction. It is therefore advisable to fully document the donor or settlor's solvency as a precaution against any future challenge.

The Act is even harsher if the transaction occurs less than two years before the issue of the petition; in that case the solvency of the donor or settlor is irrelevant and the trustee can claw back the assets from the donee or trustees of the settlement.

A similar provision applies when the donor or settlor is a company. A liquidator or administrator, however, can only challenge transactions which go back two years (calculated from the commencement of the administration or winding up), not five. The company must have been insolvent or have become insolvent as a result of the transaction; as with an individual, there is a rebuttable presumption of insolvency if the recipient of the gift or settlement is closely connected to the company.

Transactions defrauding creditors

If an individual or company transfers assets to put them beyond the reach of someone who is making or might make a claim in the future, their solvency at the time is irrelevant and a trustee in bankruptcy, liquidator or administer can claw back the gift or settlement whenever it was made. A victim of the transaction, such as a defrauded creditor, can also mount his own challenge.

In such cases there is therefore no five or two year cut off point after which the transaction is "safe." While proving a party's motive years after the event is never straightforward, anyone who gifts or settles assets needs to be able to demonstrate that a wish to put assets beyond the reach of creditors was not a substantial purpose of the transaction.

As a transaction can have more than one purpose, it is no defence to show there was also a wish to provide for dependents. These are just two instances of how a subsequent insolvency can adversely impact on the most careful and expensive estate planning. Claims can be made cross border and the insolvency practitioner's reach is worldwide.

Additional information