Putting assets out of reach of creditors
Published 20/02/2013 | 05:36
Abraham Lincoln was a bankrupt. When he was in his 20s, Abe worked in a general store which had to close. He and a friend thought they could fill the gap and opened their own store, buying all their stock on credit. Things didn't go so well for them and they soon went out of business. Sadly, the friend died, leaving the future president saddled with the debts. He had no choice but to declare bankruptcy and it took 10 years before he was free of it.
Declaring bankruptcy is a last resort for a debtor. It gives him protection from creditors. The creditors cannot sue, or continue court proceedings, while the debtor is in the bankruptcy process. The debtor must give up all his assets, including his family home, so they can be sold and divided between his creditors. At the end of the process, he is free of the remaining debt. The new bankruptcy law in Ireland will allow this process to be completed in three years. Up to now, the minimum was 12 years.
Short of bankruptcy, or even with bankruptcy in mind, some debtors will consider transferring their assets to family or friends.
There are a number of legal provisions that allow transfers to be overturned where the intention was to deprive creditors.
As far back as the Conveyancing Act 1634, creditors have been able to take action to reverse fraudulent conveyances. These provisions are now contained in the Land and Conveyancing Law Reform Act, 2009. Section 74 says that any transfer of land made with the intention of defrauding a creditor is voidable by that creditor. The creditor will have to prove that the intention was to defraud him. In a 2008 case under the old law, the court had no evidence of the debtor's state of mind when he transferred the property, but it inferred from the circumstances that his intention was to deprive the creditor and it reversed the transfer.
Section 59 of the Bankruptcy Act 1988 provides that any disposal of property (not just land) made within two years of bankruptcy may be set aside. This period of two years may be extended to five unless the debtor can prove that, at the time of the transfer, he could pay his debts even though he had transferred the asset.
A further power to set aside transfers was given to NAMA by Section 211 of the NAMA Act, 2009. It provides that where an asset of a debtor was disposed of and the effect was to defeat, delay or hinder NAMA in acquiring the asset, the court may set aside the transfer. NAMA does not have to prove what the debtor's intention was, only that the effect of the transfer is to defeat, delay or hinder NAMA.
These provisions are some help to ordinary creditors and to NAMA. However, many creditors do not have the resources of NAMA or, say, the Revenue Commissioners. A creditor must consider the cost of legal proceedings to overturn a transfer, before deciding whether or not to pursue the asset.
Incidentally, Lincoln wasn't the only US president who filed for bankruptcy. So did Thomas Jefferson (several times), William McKinley and Ulysses S. Grant.
Mark Bennett is a partner in the firm of Mannix & Company, Solicitors, 12 Castle Street, Tralee. Phone 066 7125011. Email firstname.lastname@example.org