As with corporate insolvencies, bankruptcies can give rise to challenges of certain transactions that took place within specified statutory periods before the making of the bankruptcy order. There is a high degree of overlap in the terminology of the transactions as they apply in a bankruptcy but certain key details and time periods differ. A trustee in bankruptcy seeking to challenge any voidable transaction (save for a transaction defrauding creditors under s.423) will need to ask the following questions in each case:
- Did the transaction involve an ‘associate’?
- Did the transaction take place within the ‘relevant time’?
- Was the transferor (i.e. the person who has become bankrupt) insolvent at the time of the transaction or did he/she become insolvent as a result of it?
- Is there a presumption available which shifts the burden of proof from the trustee in bankruptcy to the other party?
s.339 – Transaction at an undervalue
Relevant time prior to onset of insolvency – 5 years
Is insolvency required at date or as a result of transaction? – No – if less than 2 years, Yes – if 2-5 years
Presumption available? (If yes, burden of proof shifts) – 2-5 years: insolvency presumed for associates
s.340 – Preference to an associate
Relevant time prior to onset of insolvency – 2 years
Is insolvency required at date or as a result of transaction? – Yes
Presumption available? (If yes, burden of proof shifts) – ‘Desire to prefer’ presumed
s.340 – Preference to a non-associate
Relevant time prior to onset of insolvency – 6 months
Is insolvency required at date or as a result of transaction? – Yes
Presumption available? (If yes, burden of proof shifts) – No
s.423 – Transactions defrauding creditors
Relevant time prior to onset of insolvency – No relevant time
Is insolvency required at date or as a result of transaction? – No
Presumption available? (If yes, burden of proof shifts) – No
The meaning of an ‘associate’ is given in s.435.
The ‘relevant time’ periods for the purposes of ss.339 and 340 are defined in s.341(1) and are calculated backwards from the date of the individual making his/her bankruptcy application or (as the case may be) the presentation of the petition for the individual’s bankruptcy.
Litigation expenses
Any challenge by the trustee in bankruptcy will involve litigation expenses. A major factor to be taken into account by the trustee in bankruptcy will be the cost of any legal challenge, given the inevitable risk that if the challenge fails, the assets will have been diminished (by the legal expenses and any adverse costs incurred) rather than increased.