Gratuitous Alienations Flashcards
What are gratuitous alienations?
Gratuitous alienations are simply gifts or part-gifts. Gifts made when a debtor is absolutely insolvent can be challenged by creditors and ‘reduced’. The law is governed both by common law and statute.
Where are the rules on gratuitous alienations found?
The rules on gratuitous alienations are found in s 34 of the Bankruptcy (S) Act 1985 and s 242 of the IA 1986.
⁃ These are very important - read them
What do you need for a gratuitous alienation?
See s 34 1985 Act, s 242 1986 Act [read this section]
⁃ 1. There must be an alienation by the debtor.
⁃ 2. The alienation must transfer the debtor’s property or discharge or renounce a claim or right.
⁃ 3. Sequestration, grant of trust deed or appointment of judicial factor.
⁃ 4. Alienation within appropriate time period
⁃ 5 years if to an associate
⁃ 2 years in other cases.
So it applies to ANY alienations (heritable, movable, corporeal, incorporeal) which are transfers of property. But it goes beyond that. It also includes discharging or renouncing a claim, e.g. Renounce right to payment of legal rights (NB the classic situation is a transfer, every transfer is potentially challengeable).
An alienation however will involve an action of the debtor. This does not mean a voluntary act in the same way as inhibitions.
The legislation is structured so that it attacks EVERY transaction which is entered into on a relevant day before sequestration or liquidation. From the perspective of the trustee in sequestration or the liquidator of the administrator all they must do is to show that the transaction took place. It is then for the person who the transaction took place with (the grantee) to show that one of the defences applies to demonstrate why the transaction should not be struck down. [So it’s almost as if there is an evidential presumption that the transaction is going to be struck down and it is for the grantee to show why it shouldn’t be.]
What is required for alienation by the debtor?
⁃ This includes voluntary transactions by the debtor of ANY type of property. It has to be something the debtor agrees to.
⁃ If there had been an adjudication carried out on the debtor’s asset and a declarator of expiry of the legal was obtained and the asset was transferred, this is not a voluntary transaction by the debtor. Similarly if there had been compulsory purchase of the debtor’s property this would not be voluntary. THESE TRANSACTIONS CANNOT BE AFFECTED.
⁃ It also applies to cases where the debtor gives up a right. This means that if you voluntarily renounce legal rights, for the purposes of s 34 you are alienating your property (i.e. diminishing the value of your estate).
What transactions does this apply to?
⁃ It only applies to transactions which occur within 2 years or 5 years before sequestration or insolvency or administration. 5 years if the transaction is to an associate[ defined in s74 and applies to liquidations and sequestration. it is a list of relationships and includes husband, wife, civil partner, relatives of husband, wife or civil partner. (lineal descendants) includes employees and employers. some people fall outside the list. A fiance falls outside the list (has been asked in an exam in previous years!!**).
Cohabitants do not appear directly in the list, so when you have a potential gratuitous alienation must go to s74 and see if they tick off the categories in a 5 year period (if not then it is 2 years). ] (defined in s74 of the Act). If the action is initiated by the creditor the date is usually the date on which the petition for winding up is presented to the court.
⁃ The transaction/alienation must be completely effectual[ this means that the real right transfers within the time period. So if you transfer something to a third party on Day 1 and they do not register for 2 months and then 3 days later they become bankrupt. it is the date upon which the real right is acquired, so if the real right is acquired within 2 years.
Example: 31 March, Missives to Sell to A - 4th April Disposition to B. Then registration takes place on 9th April, 2015. if sequestration takes place on 8th April 2017, the disposition transfers a real right to B on the 9th, within the 2 year period therefore that transaction can be struck down, it does not matter that the missives preda†e the period.
] within this time period.
⁃ So if you are sequestrated on 1 April 2014, this means that your time periods go back to 1 April 2012 (2 years) and 1 April 2009 (5 years). It was held in the case of Accountant in Bankruptcy v Orr 2005 that the date on which a transaction becomes effectual is when the real right transfers or is created (so for heritable property the date of registration is when a transaction becomes completely effectual).
What is an associate?
⁃ The 5 year rule is relevant where the grantee is an associate. This is defined in s 74 of the 1985 Act (see notes above). In this section there is a long list of relationships which give rise to this. Just remember to look up this section
What are the defences?
[Look up section]
There is a presumption that the transaction is challengeable and it is for the transferee to prove that it should be struck down. The defences are set out in s34(4) [read this section]: ⁃ a. The debtor was not absolutely insolvent[ So if the debtor was absolutely solvent at any time when the transaction was made or after it was made then the transaction is safe.] [balance sheet insolvency — so at any time after the transaction is entered into, the transaction is safe - it is absolute solvency at any time after the transaction becomes completely effectual]. ⁃ b. The alienation was for adequate consideration[ See below] [note what this does not say — it does not say it has to be the best price that you can get — not complete market value — simply has to be “adequate”]. ⁃ c. The alienation was a permitted gift [ See below](birthday present &c or for charitable purpose) if reasonable in circumstances s34(4)(c)(i) and (ii).
What is adequate consideration?
⁃ It is not a gratuitous alienation is adequate consideration is given. This does not mean the best price that could have been received. It is what would be reasonable assuming the parties are in good faith and negotiated at arms length. It is objectively determined by the court it is irrelevant what the transferee subjectively thought they were going to get or their conduct. But in the case law sometimes the courts take quite a harsh line and assume the price should be better than it would have been.
** Short’s Trustee v Chung 1991
⁃ Chung bought property from a shop. The property was bought at ~60% market value. Chung thought he was getting a bargain.
⁃ But the court held that the price paid did not reflect adequate consideration - it should have been higher.
- Seller, desperate to get rid of property sold it to Chung for less thant he should have.
What are permitted gifts?
⁃ There are two types:
⁃ 1) Christmas and birthday gifts and some other conventional gifts.
⁃ 2) Charitable gifts (but not to associates).
⁃ Provided such gifts were reasonable in the circumstances then such gifts are fine.
- This takes account of you asset base and the value of the gift (so assets worth £30k and give away a £10k car is unreasonable - 1/3 asset base).
Who can raise the action?
Trustee in sequestration, or in the case of insolvency proceedings by the liquidator or administrator, any creditor whose debt was incurred before the alienation.
What remedies are available?
(Set out in s34(4) and s248(4))
⁃ Reduction[ remedy available when the transaction is one entered into by deed. where you strike the document down e.g. transfer of land or an assignation. the effect of a reduction is that the asset goes back to the transferor. ], restoration or other such remedy as is appropriate.
⁃ Short’s Trs v Chung confirms that the default remedy is reduction (for heritable property at least).
⁃ However under the old system of Land Registration you couldn’t register a decree of reduction in the Land Register - it could only be presented to rectify ownership but only where there was no proprietor in possession. In this case the Keeper rejected the decree and the Keeper wouldn’t rectify because Mrs Chung was a proprietor in possession. She was in occupation of the property, in good faith, and she had not caused the problem so they could not rectify the register against her.
⁃ So Short’s Trs went back to court…
⁃ Short’s Trs v Chung (No 2)
⁃ In this case the trustee argued that because they couldn’t register the reduction they were not getting restoration of the property (to get the asset back). So the court was asked to grant a remedy transferring the property back to the trustee in sequestration. The court ordered that Mrs Chung be ordered to convey the property back to the trustee who could then register (authority for “other redress as may be appropriate”). So the court takes a strong line that the property go back to the trustee in sequestration.
- Nonetheless a gratuitous alienation creates a voidable title, if you transfer this to a good faith purchaser, they get an absolutely good title (cannot be set aside). So Mrs Chung in this case (if she had paid her husband to buy the property she would have been protected and would not have to have given the property back, but because she inherited property there was no value paid so she also got a voidable title as a third party inquirer in good faith but had not purged the final aspect of ownership).
⁃ If it is a transfer of corporeal moveables the default remedy is not reduction - it is delivery of the transferred property back to the estate. Restoration here is an action of delivery.
⁃ Since the remedy is reduction or delivery this means that the grantee has a voidable title. This means that if they transfer to a third party who is in good faith and gives value then they will obtain an absolutely good title that cannot be challenged. But if they transfer as a gift (i.e. not for value) or to someone in bad faith then the title of the third party is still reducible.
- The remedies give a degree of flexibility available to the trustee in sequestration to maximise the body of return to every creditor. They want to ensure the maximum amount is there in order to pay the debts.
McDougall’s Tr v Ironside 1914 SC 186
Jones’s Tr v Jones (1888) 15 R 328
** Short’s Trustee v Chung 1991 SLT 472
* Short’s Trustee v Keeper of the Registers of Scotland 1996 SC (HL) 14
** Short’s Trustee v Chung (no 2) 1998 SLT 200
MacFadyen’s Tr v MacFadyen 1994 SLT 1245 (on the meaning of consideration)
Accountant in Bankruptcy (Brown’s Trustee) v Brown [2009] CSIH 2; 2009 S.C. 236 (can a creditor sue as well as the insolvency practitioner?)
Accountant in Bankruptcy v Orr 2005 S.L.T. 1019 (when is the alienation effectual?)
Johnston’s Trustee v Baird [2012] CSOH 117; 2012 G.W.D. 25-514 (is the rule ECHR compatible)
Common Law or Statute?
