Insolvency Made Clear: A Guide for Debtors
Plain English, practical guidance for anyone facing demands over a debt they are struggling to pay. Plain English, practical guidance for anyone facing demands over a debt they are struggling to pay.
Effect Of Bankruptcy The judge held that this repayment to the stepdaughter was a preference. The stepdaughter, who was a litigant in person, relied on her personal circumstances and said that the only way she could repay the preference would be to sell her house where she lived with her two children. The court declined to order her to repay the preference. It placed weight on its finding that the debt arose from a commercial relationship and represented a fair amount for the work done, the stepdaughter had acted in good faith, and she would face wholly disproportionate consequences should an order be made. The next most common forms of transaction review in descending order of importance are: 3. Avoiding dispositions made after the presentation of the bankruptcy petition: s284 of the Act. Due to this section, all ‘dispositions’ of property made by the bankrupt after the presentation of the bankruptcy petition are void unless ratified by the court. The disposition is void even if it is otherwise a harmless transaction. However, the Trustee may decide not to take any steps to reclaim property if it would not be cost-effective. ‘Disposition’ refers to all the ways a bankrupt can transfer property, including a sale, a gift, a loan, etc. There is protection in s284(4) of the Act for a third party who received property in good faith, for value and without notice of the bankruptcy petition. The practical point for the bankrupt is that someone aware of the petition may refuse to trade with them or even accept part payment of a debt, out of concern that any transaction will be void under this section. If the bankrupt wishes to continue to trade, for example, then they will need to seek a ‘validation order’ from the court permitting the disposition. This section has a far reaching legal effect. In theory, a debtor’s purchase of a sandwich from a shop is a void disposition, albeit one where no claim is possible against the shop. In practice, s284 only matters for particularly large transactions (including a series of small transactions), transactions with a counterparty who is aware of the bankruptcy petition (for example, a bank), and as a means of short-cutting the process for proving a particular transaction was at an undervalue. It can be difficult to prove a disposition was at an undervalue, but it is usually simple to prove that it was made after the presentation of the bankruptcy petition. 23
Insolvency Law Made Clear – A Guide For Debtors Box 7: VALIDATION ORDERS In virtue of s284 of the Act, after a bankruptcy petition has been presented all dispositions of property are void unless they were made with the consent of the court, either before or after the disposition. This does not allow any claim against a third party who received property for its fair price (‘for value’) and without notice that the petition had been presented. However, if a third party does have notice then it is not safe for them to trade with the debtor because the Trustee can claim against them. The section therefore creates a problem for the debtor if they need to sell property or grant a charge over property in order to raise money to pay their debts. The solution is to apply to the court for permission to make the sale, known as a ‘validation order’. The debtor should give notice of the application to the petitioning creditor. A petitioning creditor is likely to agree to this application, if they think that the transaction is legitimate. The rules for the application are found in paragraph 12.8 of the PDIP. The court will make the order if it is satisfied that either the debtor is solvent and able to pay their debts, or that the transaction will be beneficial to and not prejudice the unsecured creditors of the debtor as a whole. The selling of an asset for value will not usually prejudice the unsecured creditors. For example, imagine the debtor owns a car worth £10,000. Before the sale, the debtor held an asset, the car. After the sale, the debtor holds £10,000. The unsecured creditors are no worse off: if anything, their position has been improved since the debtor is now able to pay the creditors more easily. An example application for a validation order for a company is at Annex 1. 4. Transactions defrauding creditors: s423 of the Act. This applies even when the individual has not gone bankrupt, but where they entered into a transaction at an undervalue and the purpose of the transaction was to defraud the creditors, i.e. to put assets outside of their reach. Where there are multiple purposes, the court will apply a ‘substantial purpose’ test, i.e. that one important result which the debtor intended to achieve by the transaction was that creditors would be put in a worse position. In general, Trustees will prefer to use the standard ‘transaction at an undervalue’ approach where it would not be necessary to demonstrate that the bankrupt had a particular intention. 24
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Effect Of Bankruptcy<br />
The judge held that this repayment to the stepdaughter was a preference. The<br />
stepdaughter, who was a litigant in person, relied on her personal circumstances<br />
and said that the only way she could repay the preference would be to sell her<br />
house where she lived with her two children. The court declined to order her to<br />
repay the preference. It placed weight on its finding that the debt arose from a<br />
commercial relationship and represented a fair amount <strong>for</strong> the work done, the<br />
stepdaughter had acted in good faith, and she would face wholly disproportionate<br />
consequences should an order be made.<br />
The next most common <strong>for</strong>ms of transaction review in descending order of importance<br />
are:<br />
3. Avoiding dispositions made after the presentation of the bankruptcy<br />
petition: s284 of the Act. Due to this section, all ‘dispositions’ of property<br />
made by the bankrupt after the presentation of the bankruptcy petition are<br />
void unless ratified by the court. The disposition is void even if it is otherwise<br />
a harmless transaction. However, the Trustee may decide not to take<br />
any steps to reclaim property if it would not be cost-effective. ‘Disposition’<br />
refers to all the ways a bankrupt can transfer property, including a sale, a<br />
gift, a loan, etc. There is protection in s284(4) of the Act <strong>for</strong> a third party<br />
who received property in good faith, <strong>for</strong> value and without notice of the<br />
bankruptcy petition. The practical point <strong>for</strong> the bankrupt is that someone<br />
aware of the petition may refuse to trade with them or even accept part<br />
payment of a debt, out of concern that any transaction will be void under<br />
this section. If the bankrupt wishes to continue to trade, <strong>for</strong> example, then<br />
they will need to seek a ‘validation order’ from the court permitting the<br />
disposition.<br />
This section has a far reaching legal effect. In theory, a debtor’s purchase<br />
of a sandwich from a shop is a void disposition, albeit one where no claim<br />
is possible against the shop. In practice, s284 only matters <strong>for</strong> particularly<br />
large transactions (including a series of small transactions), transactions<br />
with a counterparty who is aware of the bankruptcy petition (<strong>for</strong> example,<br />
a bank), and as a means of short-cutting the process <strong>for</strong> proving a particular<br />
transaction was at an undervalue. It can be difficult to prove a disposition<br />
was at an undervalue, but it is usually simple to prove that it was made after<br />
the presentation of the bankruptcy petition.<br />
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