This question can really be broken down into three parts. Firstly, can you transfer your house or assets – yes you probably can. Secondly, will the transfer likely avoid creditors or bankruptcy – the answer is, it depends but there are mechanisms in place which can ultimately mean the transactions could be challenged. Then finally, should you do it – with it being inherently risky the answer is more than likely no.
If you decide to transfer assets or your home and are ultimately made bankrupt, on the making of a bankruptcy order the trustee in bankruptcy has the power to review transactions made by you before the making of the order (‘antecedent transactions’) and these can be challenged in court by the trustee in bankruptcy or official receiver. This is covered by sections 339-343 of the Insolvency Act 1986.
These antecedent transactions can be challenged as it ensures the best recovery for creditors and offers protection of the pari passu principal (or “equal in right of payment”) that your assets must be shared equally among the unsecured creditors.
The Insolvency Act 1986 outlines the various types of transactions that can be challenged. They include:
- Transactions at an undervalue (for example, a transfer of property for no consideration or a gift of property). These are covered by section 339.
- Preferences (for example, paying unsecured creditors in priority to other creditors) These are covered by section 340.
- Excessive pension contributions, covered by section 342A.
- Extortionate credit transactions, covered by section 343.
- Transactions defrauding creditors (i.e., the purpose of the transaction was to put assets beyond the reach of a creditor), covered by section 423.
The trustee in bankruptcy usually challenges an antecedent transaction by applying to court. There is wide discretion on behalf of the court to undo the effect of the transaction and this can often mean ordering the return of assets or an equivalent value payment to the bankrupt’s estate. The crux of the current question is, if transfers can be made in order to avoid creditors. In this instance, there is unlikely to be any protection of assets and the court will look at all the evidence to determine this.
Transactions made within the 2 years before the date of the bankruptcy application are likely to be called into question but generally speaking, transfers made more than 5 years before the presentation of the bankruptcy petition may be harder to challenge by the official receiver or trustee in bankruptcy. However, this may depend on the purpose of the transfer itself because there is no time limit if the intention was to defraud creditors.
In terms of transferring your house, in many cases it will be the most valuable asset in your estate. If you divested any interest you had in the house, (which is often done by transferring the interest to a partner) prior to being declared bankrupt, then this transaction may be set aside as a transaction at an undervalue in circumstances where no consideration was received, or it was less than the market value.
It is important also to flag if you are found to have committed a Bankruptcy Offence under Section 350(6) you may be liable to imprisonment or a fine, or both.
