Transactions at an Undervalue and Preference Payments-Case Law UpdateAugust 19, 2016
In the recent case of the Official Receiver for Northern Ireland –v- Patrick Doyle  NI Master 7 Master Kelly the Court was asked to determine whether the transfer of lands from the Bankrupt to the Respondent for natural love and affection was void on the basis that the transfer constituted a Transaction at an Undervalue (“TUV”) and/or a Preference Payment (“Preference”) pursuant to the provisions of Articles 312 and 313 respectively of the Insolvency (Northern Ireland) Order 1989 (“the Order”).
The background to the case is as follows. The Respondent is the Bankrupt’s father and thus deemed to be an Associate pursuant to Article 4 of the Order. In and around May and July 2009 the Respondent advanced the Bankrupt the sum of £50,000.00 to enable him to buy a car and to discharge some business debts. The Bankrupt was the sole owner of family lands (“the Lands”) which he had inherited from his deceased uncle. In August 2010 the Bankrupt transferred his full legal ownership in the Lands to the Respondent. The consideration recorded on the Land Registry Transfer Form (“Transfer form”) was “for natural love and affection”. At the time the Lands were transferred their value was circa £54,000. The Transfer form was not registered at the Land Registry until 8 August 2011, one year after it had been executed. The Bankrupt lodged a Debtor’s petition on 31 August 2012 and was adjudicated Bankrupt on 13 September 2012.
The Official Receiver applied to the High Court to challenge the transfer of the Lands on the basis that the transfer represented a TUV and/or a Preference. The Respondent argued that there had been no TUV on the basis that the transfer had been made in “repayment” of the £50,000.00 previously loaned by him to his son and this represented proper consideration. The Respondent also claimed that the date which should be considered as the starting point for challenging the Transfer form was the date it was signed, and not the date it was registered at the Land Registry.
The Court accepted that the £50,000.00 had been loaned to the Bankrupt by the Respondent and not gifted. The Court also accepted that the transfer of the Lands had been in repayment of the loan. However, the Court however did not accept the argument that the transfer was for value. Master Kelly determined that “the loan itself could not have been consideration as it was past consideration, which is no consideration”.
Article 312(3) of the Order sets out the criteria that must be met in order to challenge a transaction as a TUV:-
A gift to a person or who otherwise enters into a transaction with that person on terms that provide for him to receive no consideration; or
He enters into a transaction with that person in consideration of marriage or the formation of a civil partnership; or
He enters into a transaction with that person for a consideration the value of which, in money or monies worth, is significantly less than the value, in money or monies worth, of the consideration provided by the individual.
Article 314 of the Order sets out the period in which a transaction can be reviewed and challenged as a TUV or a Preference. In relation to a TUV, a transaction which took place within the 5 years immediately preceding the date of the presentation of the Bankruptcy Petition can be reviewed. If a transaction took place less than 2 years before the date upon which the Bankruptcy Petition is presented it is void. If it took place between 2 and 5 years prior to the presentation of the Bankruptcy petition then the transaction cannot be set aside unless the individual was insolvent at the time or became insolvent as a result of the transaction. Pursuant to Article 314(3) an individual will be deemed to be insolvent if they are unable to pay his debts as they fall due or if the value of their assets is less than the amount of their liabilities, taking into account contingent and prospective liabilities. Of particular relevance to this case is the further qualification that if a transfer has been made to a party who is deemed an Associate of a Bankrupt then insolvency will be presumed, unless the contrary is shown.
The Court concluded that the evidence that had been provided to it was that the Respondent was both a Creditor and an Associate of the Bankrupt and that the transfer of the Lands had taken place when the Bankrupt was not solvent. It also appeared that to the Court from the evidence of both the Bankrupt and the Respondent” that there was a “background of established and continuing insolvency”.
The Court further concluded that the transaction satisfied the criteria of Article 313 as a Preference. The Court reaffirmed the position that a transaction could be deemed both a TUV and a Preference. The Court agreed with the Official Receiver’s argument that by the Bankrupt transferring the land at the time when he did, he had undoubtedly put his father in a better position than he would have been in the event of his bankruptcy and had the transaction not taken place. As the transfer was also an undervalue, the dispute in relation to whether the relevant date on the Transfer form was the date of execution or the date of registration was irrelevant.
Interestingly in this case the Bankrupt was subject to Ancillary Relief proceedings in which the transfer of the Lands was also being challenged. The Bankruptcy Court took into consideration the fact that the Bankrupt had “admitted” in the course of cross examination … “that he was aware that in transferring the lands to his father when he did, that the lands wouldn’t then go either to his Creditors or his wife in the matrimonial proceedings”.
This case provides further judicial guidance in relation to the various criteria which must be met by an Insolvency Practitioner when reviewing a transaction to determine whether it could successfully be challenged and set aside as a TUV and/or a Preference.
It may also be of great interest to office holders and legal practitioners when dealing with an insolvent estate of an individual that is simultaneously involved in ancillary relief proceedings which unfortunately is not unusual. Reconciling the interests of a Trustee in Bankruptcy and an applicant in ancillary relief proceedings is often complex and contentious, with the insolvency provisions often taking priority.
Practitioners should also bear this case in mind if they are advising clients in relation to proposed transfers and the potential sources of challenge not only in the context of matrimonial proceedings if these are on-going or imminent, but also from a Trustee in Bankruptcy.
Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.