Beyond the Reach of Creditors. The Best Laid Plans for Wealth Protection : Insolvency Act Section 423


There are numerous reasons as to why a family may want to ensure that accumulated wealth is safeguarded from unexpected misfortune; and a wide variety of steps that can be taken to preserve family assets. This article looks at the sometimes-narrow dividing line between legitimate wealth protection and steps that may be seen as putting wealth beyond the reach of creditors and which can therefore be unwound in the future.

Section 423 Insolvency Act 1986 has application where an individual (or company) has entered into a transaction at an undervalue (i.e. gift or consideration significantly less than value given) for a 'prohibited purpose' (i.e. to put assets beyond the reach of creditors who are making or may make in the future some claim against the individual). There is no limitation period applicable to this 'clawback provision' and it is therefore of concern in the case of any gift/transfer where the transferor will, or could at some time in the future enter into some form of insolvency process.

Two very recent cases have looked at the question of when this provision may bite. The Wotherspoon case concerned the most common form of wealth protection, the gift by a husband to his wife of his share in the matrimonial home.

The case is interesting as the reasons put forward for the transfer (1) a promise made on marriage in 1993, (2) the ill-health/risk of surgery to the husband in 2008 and wish to provide ready cash to the family, were rejected; furthermore the evidence put forward by the husband and wife as generally discredited. However the trustee in bankruptcy (TiB) was unsuccessful in setting aside the transfer as he was unable to satisfy the court that on the balance of probabilities the gift was for a prohibited purpose.

The key takeaways from this case include:

  • It was not enough that the TiB discredited the husband and wife's evidence – the rejection of their reasoning was not enough to infer the gift was for a prohibited purpose.
  • There was no evidence that the husband had any creditors in mind or consider possible financial misfortune lay ahead when making the gift.
  • There was no evidence that the husband was made insolvent by the gift.
  • There seems to be an implied rejection of the TiB's case that the transferor should have regard to some unforeseen creditor/the economic conditions/the potential risks in the future.

In regard to this final point, in October the Supreme Court in the case of Sequana  while looking at whether a director owed a duty to creditors, gave guidance as to when creditor claims, and the threat of insolvency should be an overriding consideration. Despite contingent claims being in existence at the time of transaction (in this case a dividend to shareholders) the Court stressed that there is a sliding scale of potential insolvency; and even if there was a 'real' and not fanciful risk of insolvency, an overriding duty to creditors only arises where there is probable risk.

Taken together these cases appear to offer greater latitude to those thinking of protecting their wealth in case of future financial misfortune. However it remains appropriate to ensure that any step of wealth protection is for an appropriate reasons (e.g. tax planning, family provision etc.) and that this is documented at the time of the transfer. Furthermore that at the time of transfer regard is had to potential creditors and the risk of insolvency.  

In light of the uncertain economic climate in coming months and years it is worthwhile reaching out to private wealth professionals to get advice on appropriate wealth protection and how to avoid attack many years in the future.

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