Division 3 of Part V of the Insolvency Act (Chapter 253) is the personal-insolvency equivalent of the voidable transaction provisions of the Companies Act.
Section 75 — transfers that are acts of insolvency
A conveyance, assignment, gift, delivery or transfer of any property, or other dealing with property, that would constitute an act of insolvency, is void against the trustee.
A transfer of all the debtor’s property for the benefit of all his creditors, and dealings under it, are valid and unaffected by the adjudication — unless the trustee of that transfer had notice, before or at the time, that proceedings had been taken or were about to be taken to obtain an adjudication.
Where an execution has been levied by seizure and sale and the proceeds lawfully paid over to the execution creditor, the payment is valid and the recipient is unaffected — unless at the time of payment he had notice that a petition had been presented.
Notice is the recurring theme throughout this Division.
Section 76 — voluntary settlements
A settlement of property — and “settlement” includes a transfer of property — is void as against the trustee if the settlor becomes insolvent (d) within two years after the settlement, or (e) within three years, unless the parties claiming under the settlement can prove that at the time of making it the settlor was able to pay all his debts without the aid of the property comprised in it.
Excepted are settlements (a) made before and in consideration of marriage; (b) in favour of a purchaser or encumbrancer in good faith and for valuable consideration; and (c) on or for the wife or children of the settlor of property that accrued to the settlor after marriage in right of his wife.
Within two years: void, full stop. No enquiry into solvency, motive or good faith.
Between two and three years: void unless those claiming under the settlement prove the settlor could then pay all his debts without the settled property. The onus is on the beneficiaries, and the test excludes the very property they are defending.
Section 76(3) closes a related gap: a covenant or contract in consideration of marriage for the future settlement on a wife or children of money or property in which the settlor had no estate or interest at the date of the marriage, and that was not property of or in right of his wife, is void against the trustee if he becomes insolvent before the property is actually transferred.
Compare the corporate provision: section 344 of the Companies Act, which allows recovery of the difference in value on transactions with directors and related parties within five years.
Section 77 — fraudulent preferences
Where a debtor unable to pay, from his own money, his debts as they become due has — (a) made a transfer, gift or delivery of property; (b) given a charge; (c) made a payment; (d) incurred an obligation; or (e) taken or suffered any judicial proceedings — in favour of a creditor, or a person in trust for a creditor, with a view to giving that creditor a preference over the others, and (f) a petition is presented within the next six months and (g) an adjudication is made on it,
the transaction is deemed to be fraudulent and is void as against the trustee.
Pressure by a creditor does not exempt a transaction from the operation of subsection (1). A debtor cannot answer a preference claim by saying the creditor demanded payment.
Note that paragraph (e) catches taking or suffering judicial proceedings — the arranged judgment and execution, the same conduct caught by section 340(1)(d) and (f) of the Companies Act.
Subsection (2) preserves the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration.
Section 78 — preferences without sufficient consideration
Where a debtor unable to pay his debts as they become due has (a) made a transfer, gift or delivery of property or (b) given a charge, in favour of a creditor or a person in trust for a creditor, otherwise than for a reasonable and sufficient consideration given at the time, and a petition is presented within six months after and an adjudication is made, the transaction is deemed a fraudulent preference, void as against the trustee, and not available to the creditor.
The property, or its full value, is recoverable from (a) the creditor; (b) any person holding it in trust for the creditor; or (c) any person to whom it has been transferred, delivered or mortgaged, if at that time he had notice of the fraudulent preference.
Section 78 differs from section 77 in what must be proved. Section 77 requires a view to preferring; section 78 requires only the absence of reasonable and sufficient consideration given at the time. Securing an existing unsecured debt is the classic case — no new value passes, so paragraph (b) bites.
Section 79 — transactions defeating or delaying creditors
A transfer, gift or delivery of property, or a charge, made by a debtor unable to pay his debts from his own moneys as they become due, the effect of which is (a) to defeat or delay the creditors, or (b) to diminish the property to be divided among them, is deemed fraudulent and void —
(c) if a petition is presented within six months — as against the petitioning creditor; and
(d) if adjudication is made on the petition — as against the trustee,
unless it is proved that the transfer, gift, delivery or charge was in fact made in good faith.
(2) Pressure by a creditor does not protect a transaction, and a transaction acquires no validity by reason only that it was made under an agreement made before the adjudication.
Section 79 looks only at effect, not intention: does the transaction defeat or delay creditors, or diminish the divisible estate? Once that is shown, the burden shifts — the transaction stands only if good faith is proved.
All three sections share a six-month look-back. That is shorter than the corporate periods: one year for section 340 preferences and section 343 uncommercial transactions, and five years for section 344 related-party dealings.
Section 80 — the savings for honest dealings
(a) a payment made in good faith and for value received to an insolvent before the date of the order of adjudication, by a person without notice of an available act of insolvency;
(b) any payment or delivery of money or goods belonging to an insolvent, made to him before that date by a depositary without such notice;
(c) any contract or dealing with an insolvent made in good faith and for valuable consideration before that date by a person without such notice.
Subject to the rules on execution proceeds and on avoidance of settlements and preferences —
(c) a disposition, or contract for a disposition, of property made by the insolvent in good faith and for valuable consideration before the order of adjudication with a person without notice of an available act of insolvency; and
(d) any execution or attachment executed in good faith by seizure and sale before that date, where the execution creditor had no such notice at the time of the seizure and sale,
are valid.
Section 80 protects those who dealt honestly with a debtor before the adjudication. But the protection fails the moment the counterparty had notice of an act of insolvency available against the debtor.
That gives the phrase real commercial weight. A supplier or bank that learns the debtor has been served with a debtor’s summons, has suffered an unsatisfied execution, or has called a meeting of creditors, deals thereafter at its own risk — and subject always to the avoidance provisions in sections 76 to 79, which section 80(2) expressly preserves.
Sources
- Insolvency Act (Chapter 253) — ss 21, 45, 71–73, 75–80
- Companies Act 1997 — ss 340, 343, 344
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.