August 28, 2013

When individuals are faced with the prospect of Bankruptcy, they are understandably concerned about losing their business, their assets and perhaps most importantly, their family home.

We often get asked the following question “What is the best way to protect all of these assets-should I transfer them to a family member for £1 before I am made bankrupt?”

The short answer to this question is no: at least not until you consider the implications of such a transfer.

Article 312 of the Insolvency (Northern Ireland) Order 1989 (1989 Order) sets out the requirements for a Trustee in Bankruptcy (“TIB”) to challenge a transaction at an undervalue. Subject to satisfying the “undervalue criteria” and the “relevant time” criteria set out below, the legislation makes provision for a TIB to make an application to Court to restore the position to what it would have been had the transaction not been entered into.

Definition of an Undervalue

The 1989 Order provides that a transaction will be deemed to be an undervalue when the debtor has:

  •  given a gift to a person or otherwise entered into a transaction on terms that provide for the debtor to receive no consideration or
  •  entered into a transaction with that person in consideration of marriage or the formation of a civil partnership or
  • entered into a transaction with a person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual.

The Relevant time and The Onus of proof

Pursuant to Article 314 of the 1989 Order, the transaction, in addition to being one at an undervalue, must also have been entered into within the “relevant time” prior to the date of the presentation of the bankruptcy petition.

The following time limits apply when determining the “relevant time”:-

a) If a transaction is entered into less than two years prior to the presentation of the petition, then any such transaction will be void;
b) If a transaction is entered into between two and five years prior to the presentation of the petition, then it can be set aside if at the time of the transaction the transferor was insolvent or became insolvent as a result of the transfer; and
c) If a transaction is entered into more than five years prior to the presentation of the petition, then the transfer cannot be attacked under Article 312 (although it should be noted that such a transaction may still be set aside on the grounds that it was a Transaction Defrauding creditors pursuant to Articles 367-369 of the 1989 Order).

The time limits set out at A and B above will likely be of most interest for debtors considering such a transfer of assets or property. In relation to the time limit at point B, the burden of proof will be on the Trustee to prove that the Bankrupt was insolvent at the time of, or became insolvent as a result of the transaction.

In the case where the transfer has been made to an “Associate” (the definition of which is contained at Article 4 of the 1989 Order, and which includes spouses, civil partners, as well as a relative of the debtor or his spouse or civil partner), then the debtor’s insolvency will be presumed unless the contrary can be shown. The onus of proof therefore shifts and it will be on the benefiting party to prove the Bankrupt’s solvency. This can and often will be a difficult hurdle to overcome.

Whilst many individuals may still proceed to transfer assets to their spouses or children as a gift or for a nominal value, and in the knowledge that they may soon be subject to bankruptcy proceedings (or even at times with no present knowledge that they may be adjudicated bankrupt in future), it is extremely important to be aware of the time limits that apply for a TIB to attack any such transaction and the risks of making such a transfer.

If a TIB does make an application to Court under Article 312, the party who benefited from the transaction will be joined as a party to the proceedings. As with all court proceedings, there comes the risk and exposure to costs as well as the possible stress involved.

If you are an individual considering making an undervalue transfer to a family member (or any person that may fall within the definition of an Associate pursuant to Article 4 of the 1989 Order) in anticipation of bankruptcy, both you and they should obtain independent legal advice in relation to the benefits and risks of such a transaction.

Even if you are not presently having any financial difficulties and are simply intending on making a gift or transfer now to someone who may fall within the definition of an, it is important to remember that such a transfer could be attacked as an undervalue transaction in the event of your insolvency in the future, and in light of this we would always recommend that you and the benefiting party obtain your own independent legal advice.

As noted above, a TIB can in certain circumstances attack a transfer that was entered into up to five years preceding the date of the presentation of the bankruptcy petition, and whilst everything may appear to be rosy now, unfortunately no-one can predict what financial difficulties you may find yourself in in a few years time.

This article relates solely to the transaction at an undervalue provisions applicable to an insolvent individual and not the provisions contained within the 1989 Order for company transactions. Caitriona Flanagan is Assistant Solicitor at Cleaver Fulton Rankin. Caitriona works in the insolvency department, advising local and national insolvency practitioners and accountants, as well as individual debtors.

Should you require any further information about the contents of this article please do not hesitate to contact Caitriona Flanagan at

T. 028 9024 3141