What Kind Of Transactions Can Defraud Creditors?
Transaction defrauding creditors are those transactions can be caught by virtue of Section 423 of the Insolvency Act 1986 and which can relate to transactions entered into at an undervalue; resulting from:
- gifts to the other person
- transactions with another party on terms that provide for him to receive no benefit
- a transaction with the other party in consideration of marriage
- a transaction with the other party for less money or money’s worth that is significantly less than the value provided.
What Are The Key Tests For Transactions Defrauding Creditors?
The key legal requirements to prove a transaction defrauding creditors are as follows:
- A “transaction” includes “a gift, agreement or arrangement” and, therefore, can include an agreement or understanding between parties, whether formal or informal, oral or in writing.
- When assessing the purpose of a transaction in question the matter to be considered is the purpose of the party issuing the transaction.
- A prohibited purpose is not acceptable when intended to put assets beyond the reach of creditors or prejudice their interests.
- Insolvency is not an essential requirement in such claims but it might be relevant.
What Compensation Or Other Court Order Could Be Made?
The Court has wide powers if it finds transactions defrauding creditors and can:
- restore the position to what it would have been if the transaction had not been entered into
- protect the interests of victims of the transaction
- it can be appropriate to require payment of a sum to compensate for the transaction at an undervalue
The Court however cannot:
- put a victim in a better position
- punish parties that conducted the challenged transactions
