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Is a Bankrupt Estate really Worthless?

Most Bankrupt estates are exactly that; worthless estates with very little to distribute amongst creditors. Is that really the case though? Official Receivers and Trustees in Bankruptcy must remain vigilant to the idea that, often, Debtors will attempt to conceal assets and or place them beyond their reach. Spotting these transactions is often difficult due to the extensive ‘digging’ required or, alternatively, those involved can have superficially good reasons for the transactions There are a number of things an Insolvency Practitioner can look out for.


A Transaction at an Undervalue is defined by section 339 of the Insolvency Act 1986 which states:
Where an individual is adjudged bankrupt and he has, at a relevant time, entered into a transaction with any person at an undervalue, the Trustee of the Bankrupt’s estate can make an application to the Court to set aside that transaction or the court can, on such an application, make such order as it thinks fit for restoring the position to what it would have been if that individual had not entered into that transaction.

Section 339(3) further explains the various types of transactions which constitute a transaction at an undervalue –

(a) A person makes a gift to someone or they otherwise enter into a transaction with that person on terms that provide for them to receive no consideration;

(b) A person enters into a transaction with that person in consideration of marriage [or formation of a civil partnership] or;

(c) A person enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual.

Often, before individuals accumulate insurmountable debts and apply for bankruptcy or are made bankrupt, they either genuinely dispose of assets or alternatively attempt to place assets beyond the reach of creditors through one or more of the above methods. The beneficiary of such transactions are commonly spouses, partners, relatives, friends and business associates which become ‘scape goats’ and potentially, respondents to claims alleging that the transaction which they have entered into, is one of an undervalue. Often such transactions involve the disposal of family homes or other property or land, shares in a company and vehicles.

If legal advice is sought at an early stage, the dissipation or disposal of assets can either be prevented or the dubious transaction can be unwound. However, before doing so, an applicant will need to satisfy a number of pre-requisites.


The Value

Inevitably, the person challenging a ‘transaction’ under section 339 will need to establish that the Bankrupt acquired a value which was less than the value in money or money’s worth in consideration for the transacted property. For example, a person owns a house but before they apply for or is made bankrupt, they transfers this house to a spouse for a value which, in money or money’s worth, is less than the actual value of the house.

If no consideration is paid to the Bankrupt, then this will automatically constitute a transaction at an undervalue. If however, a property was exchanged for another, but the Bankrupt received a property which was of a lesser value than the other, then such a transaction could also be deemed a transaction at an undervalue. Finally, if no consideration is paid to the debtor himself but paid, say, to a family member then this will also automatically constitute a transaction at an undervalue.

How deep can you dig?

The history of the questioned transaction can go as far back as five years from the day the bankruptcy petition was presented or alternatively, the day the bankruptcy application was made by the Bankrupt.

If the index transaction took place within a two year period preceding the presentation of the bankruptcy petition or the application for bankruptcy, then it is not necessary to establish the Insolvency of the Bankrupt or that the Bankrupt became Insolvent as a consequence of the questioned transaction because there is a presumption that the Bankrupt was insolvent at the time of the transaction.

However, if the transaction took place more than two years before the bankruptcy petition was presented or the bankruptcy application was made, then, in addition to evidencing that the transaction was at an undervalue, it must also be proven that the bankrupt was insolvent at the time of the transaction or became insolvent as a result of it. This can sometimes be a difficult hurdle to overcome given that it could, potentially, entail the perusal of historical accounts, books or other such evidence that may substantiate the insolvency.


If the Applicant proves that the questioned transaction was at an undervalue, then the Court has a wide discretion on the order it can make. Some of the orders that the Court can make are as follows:
• Unwind the transaction and order that the property concerned is vested into the Bankrupt’s estate;
• Order any person who benefited from the transaction to pay such sums into the Bankrupt’s estate as the Court may direct; or
• Order that any security or charge imposed on a property be release or discharged.

We have recently assisted an Insolvency Practitioner recover £3.5 million from the beneficiary of a transaction at an undervalue.

At Glaisyers, we are experienced in advising Insolvency Practitioners in bringing claims for antecedent transactions. It is imperative that legal advice is sought at an early stage as these cases can often be lengthy, costly and complicated. We are happy to discuss alternative funding methods including Damage Based Agreements and Conditional Fee Agreements.

Anas Shah

Author Anas Shah

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