Chapter 5Non-corporate organisations – sole traders and partnershipsfarmer to his wife (to ensure that his creditors did not
get vacant possession of the property and to discourage
its sale to repay a loan they had made to him) was a
transaction at undervalue and could be set aside, even
though the wife agreed to pay an annual rent of £37,250,
which was a proper market rent. This was because the
wife had received substantial benefits over and above the
specific rights of the tenancy agreement. She had safe-
guarded the family home, enabling her to acquire and
carry on the family farm, and acquired a surrender value
for the tenancy. Even more significantly, she could hold
the mortgage corporation to ransom since it would have
to negotiate with her and pay a high price to get vacant
possession before selling the farm and repaying the debt
owed to it.
(b)Cases where Fred has decided to pay certain of his
creditors in full and prefer them to others. He might, for
example, have decided to pay in full a debt to a person
who had been particularly helpful to him in business or
a debt which he owed a relative. This is not a transaction
at undervalue because the person concerned is paid in
full but it is a preference.
2 Fred’s trustee can recover property or money passing
in a transaction at undervalue or as a preference as follows:
(a)if the bankrupt was a party to any transactions at
undervalue in the five years before the presentation of
the petition (this is before he was made bankrupt by the
bankruptcy order), the trustee can apply to the court to
have the transaction set aside, provided that the trustee
can show that the debtor was insolvent at the time of the
transaction or became insolvent as a result of it;
(b)if the transaction at an undervalue took place within
two years before the bankruptcy, insolvency of the debtor
(Fred) at the time or as a result is not a requirement and
the transaction can be set aside;
(c)where the transaction at undervalue is in favour of
an ‘associate’ (e.g. a close relative), there is a presump-
tion of insolvency, though the debtor can bring proof to
show that this was not so;
(d)the trustee can make an application to have set aside
any preference made within six months before the peti-
tion or within two years if the preference is in respect of
an associate, e.g. a spouse or children.
The trustee must prove that in our case Fred was insolv-
ent at the time of the preference or became insolvent as
a result of it, and where the preference is in favour of an107Carrying on the business and
disclaimer1 Fred’s trustee may, with the permission of the com-
mittee of creditors or the court, carry on Fred’s business
for a while (but not for too long) if it will bring more
money in for the creditors.
2 As we have seen, when the court makes the bank-
ruptcy order Fred’s property comes into the ownership
and control of his trustee for the benefit of his creditors.
One result of this is that in the case of an interest in land,
such as a lease, say, for 20 years, the trustee becomes in
effect the owner of the lease and the landlord can ask
the trustee, quite legally, to pay the rent. If, as is likely,
the trustee is an accountant with a good practice, he will
obviously be in a position to pay the rent and cannot
really defend himself if he does not do so. The trustee
may find, additionally, that the lease has repairing clauses
which Fred has not carried out and the landlord may call
upon the trustee to put the premises in good order.
3 The trustee will therefore write to the landlord dis-
claiming the property. He then has no personal liabil-
ity, nor has Fred any personal liability. The landlord is
left to prove for his lost rent and perhaps the fact that
Fred has not kept the premises in good order as damages
in the bankruptcy. The landlord will get such payment
as Fred’s assets will allow. He is therefore by disclaimer
put in the same position as the other creditors in the
bankruptcy and loses any personal claim he may have
made against the trustee or Fred.
Transactions at an undervalue and
preferences1 Fred’s trustee may swell the amount of assets avail-
able to the creditors by using those provisions of the
Insolvency Act 1986 which deal with two problems:
(a)Cases where Fred might have decided to transfer his
property to his wife receiving little or nothing in return.
This is called a transaction at an undervalue. However,
the matter is not simply one of money paid for property.
In the case of Agricultural Mortgage Corporation plc
v Woodward and another(1994) the Court of Appeal
decided that a tenancy of a farm granted by an insolvent