Month: February 2021

What is a transaction defrauding creditors?

This is effectively a transaction at an undervalue made by an individual (or by a company; see above at sections 12 of this Chapter) (s.423(1)), but where it must additionally be proved that the intention or purpose of the transaction was to put assets beyond the reach of creditors of the individual or otherwise prejudice their interests (s.423(3)). In this respect, ‘creditors’ includes future creditors who were unknown at the time of the transaction.

Who may bring a claim?

Since claims under s.423 may, but do not necessarily, relate to insolvency, an
application to the court to set aside the transaction can be made by (s.424):

• a supervisor of a voluntary arrangement;
• a trustee in bankruptcy or the OR; or
• a victim of the transaction in question.

What is the ‘relevant time’?

There is no ‘relevant time’ or period within which the transaction must have taken place. However, generally speaking, the more recent the transaction, the more likely it is that the applicant will be able to show the necessary intent.

Sanction

The court may make such order as it thinks fit to restore the position to what it would have been, but for the transaction in question (s.423(2)). A nonexhaustive list of orders is set out in s.425.

Note: Since it is a pre-requisite of a claim under s.423 that the transaction was at an undervalue, where the challenge is made by a trustee in bankruptcy, it may be easier to establish the claim under s.339 if the claim satisfies the criteria for challenging an undervalue transaction under the above sections (i.e. ‘relevant time’ and insolvency). This is because under s.339 it need not be proved that the purpose of the transaction was to put the assets beyond the reach of creditors or otherwise prejudice them.

Purpose

The purpose is to prevent a creditor obtaining an improper advantage over other creditors of the individual at a time when that individual is insolvent.

Who may bring a claim?

A trustee in bankruptcy (s.340(1)).

What is a preference? – s.340(3)

An individual gives a preference to a person if:

• that person is a creditor (or a surety or guarantor of his debts or liabilities); and
• the individual does anything or suffers (i.e. allows) anything to be done which has the effect of putting that person into a position such that if the individual were to go bankrupt, that person would be in a better position than he/she otherwise would have been in if that thing had not been done.

How and when can a preference be avoided?

A preference is voidable if it was given within the ‘relevant time’ (s.340(1)) i.e. in the six months preceding the date of presentation of the petition leading to the bankruptcy (s.341(1)(c)). The period is extended to two years for preferences to associates (s.341(1)(b) and see s.435).

It must be proved that the individual was insolvent at the time of the preference or became insolvent (meaning either on a cash-flow or liabilities exceeding assets basis) as a result of it (s.341(2)).

It must be shown that the individual was influenced by the desire to prefer the creditor (s.340(4)). This is a subjective test. However, if the preference is given to an associate of the bankrupt individual, there is a rebuttable presumption that the bankrupt individual was influenced by the desire to prefer the creditor (s.340(5)). This shifts the burden of proof from the trustee in bankruptcy to the preferred person to rebut the statutory presumption (see s. 435 for ‘associate’).

Sanction

The court has a discretion to make an order to restore the position as if the individual had not made the preference (s.340(2)). Section 342(1) provides a non-exhaustive list of the types of restoration order that the court might make.