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Bankruptcy – This is Why Divesting Yourself of Assets is Unlikely to Work

When under pressure from creditors, some debtors seek to divest themselves of assets by placing them in trust for the benefit of others, often their loved ones. As a High Court ruling showed, however, judges were not born yesterday and are adept at uncovering the true motives for entering into such transactions.

The case concerned a couple whose engagement in very long-running litigation was largely unsuccessful from their point of view. They each owed judgment debts when they were declared bankrupt. Some years previously, however, they had executed a declaration of trust whereby they transferred their beneficial interests in their home to their children.

On learning of the trust’s existence, the woman’s trustee in bankruptcy applied under Section 423 of the Insolvency Act 1986 to have the declaration set aside. In granting his application, the Court found that the declaration constituted a transaction at an undervalue. Its substantial purpose was to put the couple’s home beyond the reach of creditors who were making, or might make, a claim against them, or to otherwise prejudice their interests.

In ruling that the couple positively intended that outcome, the Court found that, when they signed the declaration of trust in their children’s favour, they each knew full well that their home was vulnerable to claims from creditors. In that respect, the timing of the declaration spoke for itself.

The man openly admitted that the declaration of trust had been kept secret for five years with a view to putting it beyond challenge under Section 339 of the Act. The woman was complicit in that tactic and, throughout the relevant period, they had continued to treat the property as their own and hold themselves out as its beneficial owners.

Published in
21 November 2022
Last Updated
13 December 2022