REALISING PREFERENCES AND TRANSACTIONS AT AN UNDERVALUE

PART 1

May 2014

REALISING PREFERENCES AND TRANSACTIONS AT AN UNDERVALUE

31.4A.4 Identifying potential recoveries

Obviously, the recoveries referred to in this chapter will not be scheduled as assets in the statement of affairs or referred to in the preliminary examination – although reference thereto may be made in the latter. Transactions may have occurred which have removed the property from the company or the bankrupt’s estate which it may be possible to overturn to produce a recovery for creditors. During the course of a preliminary examination, it may be possible to detect that such a transaction has occurred.

Paragraph 31.4A.6 gives guidance of the types of events that may lead to an antecedent recovery.

 

31.4A.5 Antecedent recoveries contractor

On the 8th September 2013 The Service entered into an agreement with Clarke Willmott for that firm to take on all antecedent recoveries (see paragraph 31.4A.7) on behalf of official receivers.  Paragraphs 31.4A.6 to 31.A4.16 give an overview of the Service Contract and procedures relating to that arrangement.  

 

31.4A.6 Events leading to an antecedent recovery

Where real property has been sold or otherwise transferred, the official receiver acting as liquidator or trustee should always seek to satisfy him/herself that the property was transferred at a fair market value, and any transaction with a relative or associate of the insolvent may be viewed with suspicion, as a transaction at an undervalue (see Part 3) in these circumstances is not uncommon.

Where there have been new borrowings by the insolvent, consideration should be given as to whether the monies have been used to discharge debts owed to other creditors, particularly connected creditors, as this may be a preference (see Part 2).

Advice and information of the types of enquiries required to confirm that an antecedent recovery is appropriate can be found in later Parts of the chapter.

 

31.4A.7 No Minimum level of recovery

Clarke Willmott will accept instructions in respect of all antecedent recoveriesand there is no minimum amount.  

 

31.4A.8 Conditional fee arrangement

Clarke Willmott will undertake recoveries under the arrangement on a conditional fee basis, meaning that they will undertake legal action at their own risk.  Clarke Willmott will pay for the fees and deal with any costs (including adverse costs) associated with bringing a legal action.

Under the agreement, the official receiver will have no liability for costs in the event of an action being unsuccessful.

No fee is payable where no realisation is made and no fee is payable where the action taken against the debtor is unsuccessful. All adverse costs and fees incurred in taking the action will be payable by Clarke Willmott under the conditional fee agreement.

 

31.4A.9 Referral to Clarke Willmott

The official receiver should endeavour to refer antecedent recoveries to Clarke Willmott via the Debt View website at the earliest possible opportunity (as time is usually of the essence in these matters), but not before the relevant information is obtained. This can be in advance of the transfer of the case to an LTADT if there are other matters delaying the case transfer of the case to the team.

The method of referral is by completion of an ARIA (Antecedent Recovery Instruction to Agent) form, a Word template produced in ISCIS.  This form sets out the information that is required to make a referral;

  • Estimated amount of debt
  • Name of person who owes money
  • Details of conduct/transaction
  • Other matters to consider (listed on the ARIA)

The matter should not be referred until the form is substantially complete, assuming the information is held or otherwise possible to obtain.

It is accepted that some of the required information may not be available and a decision will have to be taken to refer the matter with incomplete information if a potential recovery is not to be lost.

Once the form has been completed it should be submitted to Clarke Willmott via the Debt View website. Information on the service provided by Clarke Willmott and full guidance on using the Debt View website is available on the Clarke Willmott intranet page      

 

31.4A.10 Further enquiries following referral

If, after initial consideration, Clarke Willmott  agrees with the official receiver’s  view that there are reasonable grounds to pursue a realisation, they will take such action as is necessary to pursue recovery including seeking such further information from the beneficiary of the transaction as is necessary including, if appropriate, seeking and conducting private examinations [note 1] [note 2].

This should not, though, be an excuse for referring a matter with incomplete information, and the information required to be provided in the referral form (see paragraph 31.4A.9) should, in any case, be necessary to enable the official receiver to make a sound judgement that there is a matter of recovery.

It may be necessary for Clarke Willmott  to refer back to the originating OR in relation to case-specific information but once the case is with the LTADT, it will be for that office to decide in conjunction with Clarke Willmott , the determination of the claim.

 

31.4A.11 Discussion with insolvent or beneficiaries prior to referral

To avoid any prejudice on actions taken by Clarke Willmott, the official receiver should avoid asserting any intention or right to recover either a specified amount or by reference to a specific statutory provision when discussing or corresponding with the insolvent or beneficiary – either before or after the instruction to Clarke Willmott has been issued.

 

31.4A.12 Recovery action successful

Neither The Service nor the official receiver will be responsible for any fees or disbursements incurred by Clarke Willmott in taking legal action.

If the action is successful, and monies have been realised, Clarke Willmott will first deduct all disbursements from the sum realised and will be entitled to costs in accordance with the agreed levels. Clarke Willmott will then transfer the balance of monies to the official receiver following deduction of their fees.

If the action is successful but a reduced sum is accepted from the debtor as settlement, any disbursements will still be deducted first from the recoveries. Clarke Willmott will then deduct their costs in accordance with the agreed levels and transfer the balance to the official receiver.

 

31.4A.13 Expenses of winding up/bankruptcy

Costs relating to the conduct of any legal proceedings which the official receiver, as liquidator or trustee, has the power to bring which are properly chargeable or incurred are expenses of the liquidation or bankruptcy, respectively, and can, therefore, be paid out of the estate [note 3] [note 4].

 

31.4A.14 Disbursement costs

The disbursements required for legal action will depend on the nature of each case. However, typical disbursements, which Clarke Willmott expect to incur, include court fees for issuing proceedings, possible Counsel’s fees, if the action is defended, and enforcement fees if any judgment obtained requires enforcement.

 

31.4A.15 Decision to take legal action under conditional fee agreement

While the action will be brought in the name of the official receiver, the decision to take a legal action will rest entirely with Clarke Willmott, and will be taken only in the following circumstances:

  • The action is against the correct beneficiary of the transaction
  • There is proof that the debt is or was owed by that person, or that there is a valid cause of action against that person
  • The beneficiary has assets against which a judgement could be enforced or, having considered the matter, Clarke Willmott are willing to proceed prior to assessing the assets of the beneficiary
  • There is, having looked at the facts of the case, an 65% certainty that judgement could be obtained against the beneficiary.

 

31.4A.16 Paragraph deleted May 2015

 

31.4A.17 to 31.4A.21 Deleted  

 

31.4A.22 Antecedent recoveries in Limited Liability Partnerships and partnerships

The legislation relating to Limited Liability Partnerships (“LLP”) [note 9] extends the antecedent recovery provisions in the Act to LLPs.  In addition, there are special provisions relating to the recovery of withdrawals from the partnership.  Further details can be found in Chapter 53A, paragraphs 53A.59 to 53A.60.

Similarly, the provisions of the Act relating to antecedent recoveries are applied to partnerships by virtue of the Insolvent Partnerships Order 1994 [note 10] [note 11].

 

31.4A.23 Antecedent recoveries and deceased insolvents

The provisions in the Act relating to transactions at an undervalue and to preferences also apply to deceased insolvents [note 12]. 

See Chapter 54, paragraph 54.32 for more information.

 

31.4A.24 Limitation periods

Generally, the law [note 13] sets time limits to the period under which debts etc. can be recovered.  Although the legislation makes no particular provision for time limits in respect of the recovery of monies due in respect of antecedent recoveries in formal insolvency, case law has developed in this area.

In essence, the relevant legislation sets two time periods under which debts should be recovered.  These are 12 years for an action on a specialty (an obligation under a contract, bond or other instrument) [note 14], and six years for any sum due by virtue of any enactment.  Where there is an element of fraud on the part of the debtor, the time period does not begin to run until the fraud has, or should have, been discovered.

It has been held that an action to recover a transaction under the provisions in the Act  relating to antecedent recoveries is a specialty and, therefore, the 12 year period applies [note 15].  The court in that case considered that, where the substance of the claim was the recovery of monies rather than the setting aside of a transaction, the shorter six-year period may apply. 

Generally speaking, the official receiver should aim to commence proceedings (where appropriate) within the shorter, six year, period to avoid the recovery being out of time.

 

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