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03 April 2009
In difficult economic times, fear of the effects of a downturn in the economy and the prospect of business failure may lead some to consider transferring property and assets in an attempt to place them beyond the reach of claims of creditors, a trustee in bankruptcy or a liquidator. Isle of Man law provides that transactions undertaken with fraudulent or improper intentions may be set aside.
The story begins with one of the oldest pieces of Manx legislation which remains relevant in the modern context: the Fraudulent Assignments Act 1736.
The Fraudulent Assignments Act is very short, simply providing that:
"All fraudulent assignments or transfers of the debtor's goods or effects shall be void and of no effect against his or her just creditors, any custom or practice to the contrary notwithstanding."
In the United Kingdom, the broadly equivalent legislation – the Statute of Elizabeth – was repealed by the Law of Property Act 1925, although remnants of it can still be found in the Insolvency Act 1986. The development of the law in the Isle of Man has followed a different course and no direct equivalent to the Law of Property Act 1925 or the Insolvency Act 1986 exists under Isle of Man law.
The legislation and the extent of its application received in-depth judicial analysis in In Re Heginbotham(1). The case was of particular interest for a number of reasons – not least because it addressed questions regarding the extent to which a debt must be known and ascertainable at the time of the assignment. For example, must the debt (which the assignment of assets seeks to avoid) have arisen or does the Fraudulent Assignments Act extend to the actions of those that are motivated by the mere expectation of turbulent times ahead, or by the expectation that claims which are not capable of being met are likely to arise in the future? The court refered to Corlett v Radcliffe(2), a judgment of the Judicial Committee of the Privy Council on appeal from the Staff of Government Division (the Manx court of appeal), which considered both the Fraudulent Assignments Act and the Statute of Elizabeth. In that case Lord Chelmesford observed that:
"A deed is void against creditors when the debtor is in a state of insolvency, or when the effect of the deed is to leave the debtor without the means of paying his present debts."
The deemster in Heginbotham considered that this reference to 'present debts' effectively excluded debts which a person might possibly incur at some future date, stating:
"A state of insolvency implies an inability to pay existing, or present debts. A person is not in a 'state of insolvency' merely because he or she may not be able to pay contingent or future debts, which may never materialize…I would construe the term 'present debts', however, to include known and ascertained debts which are to fall due on a date in the future. A transaction or contrivance designed to deprive known and ascertainable future creditors of timely recourse to property which would otherwise be applicable for their benefit ... would not be honest in the context of the relationship of the debtor and creditor and would not therefore be bona fide."
The issue of intention was also considered, as was the question of whether it is necessary to show actual deceit. While the Fraudulent Assignments Act refers to 'fraudulent assignments' in its title, there is no reference to intent or the burden of proof which must be established within the Fraudulent Assignments Act itself. However, the court concluded that the title of the Fraudulent Assignments Act must impute an intent by the debtor to assign or transfer its goods or effects fraudulently in the context of the debtor-creditor relationship, and that while this would not be confined merely to cases of fraud involving actual deceit, an element of dishonesty was present.
Voluntary Settlements and Fraudulent Preferences
The Bankruptcy Code 1892 made provision for the avoidance or setting aside of voluntary settlements and fraudulent preferences.
Fraudulent preference is dealt with under Section 31 of the Bankruptcy Code. Any dealing with property by a debtor unable to pay its debts as they fall due which favours one creditor over another will be deemed a fraudulent preference, provided that the debtor is adjudged bankrupt on a bankruptcy petition presented within four months of the transaction occurring. However, Section 31 does not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the bankrupt. Although originally introduced in the context of personal bankruptcy, the principle was later extended to apply equally in the context of corporate insolvency by virtue of Section 250 of the Companies Act 1931.
Section 30 of the Bankruptcy Code makes provision for the avoidance of voluntary settlements. In particular, any settlement of property which is not made in favour of a purchaser or encumbrancer in good faith and for valuable consideration shall be void if the settlor becomes bankrupt within two years of the date of the settlement. A settlement will also be void if the settlor becomes bankrupt within 10 years of the date of the settlement, unless the parties claiming under the settlement can prove that the settlor was able to pay all its debts at the time of making the settlement without the aid of the property involved in the settlement, and that the interest of the settlor in such property had passed to the trustee upon the execution of that settlement. Again, the rights of parties that deal in good faith and for valuable consideration are not affected.
Section 32 of the Bankruptcy Code also makes specific provision in relation to bona fide transactions without notice and provides, among other things, that in the case of insolvency, the Bankruptcy Code does not invalidate:
Under Section 32, a transaction is considered bona fide where: (i) it takes place before the date of the order of adjudication; and (ii) the creditor with which the transaction was made has no notice at the relevant time of any act of bankruptcy previously committed by the bankrupt.
For further information on this topic please contact Christopher J Murphy at Mann & Partners by telephone (+44 1624 695800) or by fax (+44 1624 695801) or by email (email@example.com).
(1) 1999 – 01 MLR.
(2) 1860 – 14 Moo PCC 121; 15ER
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Christopher J Murphy