Insolvency Made Clear: A Guide for Debtors

Effect Of Bankruptcy
the seller goes to the first car dealership they know about. Transactions at
an undervalue are usually only identified in extreme cases, where the best
explanation for why the item was sold at that value is the desire for the
purchaser to make a profit at the expense of the soon-to-be bankrupt. This
desire is not a requirement of a s339 transaction.
2. Preferences: s340 of the Act. Where a bankrupt has ‘at a relevant time’
given a preference to any person, the Trustee can apply for an order for the
court to restore the position to what it would have been had the individual
not given that preference. A ‘preference’ is given where one creditor (or a
guarantor of the bankrupt’s debts) is deliberately put in the position where
they are better off. It will be assumed that the preference was deliberately
given if it was received by an ‘associate’ of the bankrupt. Outside of an associate,
it is often difficult for a Trustee to show that a preference was given
with the wrong intention. An example of a preference is when a bankrupt
repays her parents’ loan in full. Even though the money was owed to the
parents, the parents would be in a better position than had they received
the same treatment as their daughter’s other unsecured creditors.
‘Associate’ is defined in s435 of the Act, but it commonly refers to a relative or a
spouse. It excludes best friends, perhaps because it would be difficult to demonstrate
that two people were sufficiently friendly. This does not mean it is acceptable
to grant a preference to a best friend – this could be a criminal offence if the
intention was to defraud creditors – but only to note that it is more difficult for
the Trustee to undo the preference. An associate includes an employer or employee.
A company is an associate of another person if that person has control
of it, or if that person or their other associates together have control of it. Merely
because someone is a ‘business associate’ of the bankrupt does not mean that
they are an associate for the purposes of s435 of the Act, although the two might
be associates through joint control of a company.
Although a transaction at an undervalue does not need to be to an associate,
in practice a Trustee will most likely suspect a transaction has been made at an
undervalue when it was made to someone connected with the bankrupt in some
way. It would be peculiar for a bankrupt to make a transaction at an undervalue
with a stranger: there would be no reason not to obtain full value.
The ‘relevant time’ is defined in three ways.
• For a transaction at an undervalue, it is five years before the day when the
bankruptcy petition was presented.
• For a preference which is not a transaction at an undervalue but is given to
an associate, it is two years ending with the presentation of the bankruptcy
petition.
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