associate, there is a presumption that our debtor Fred
intended to prefer the associate, although this may be
refuted by Fred providing evidence to the contrary.
Transactions defrauding creditors
Section 423 of the Insolvency Act 1986 applies. The
section is designed to operate in conjunction with the
above provisions regarding transactions at undervalue
and preferences. The above, as will have been noted,
have time limits after which the transaction cannot be
set aside. The value of s 423 is that it is not subject to
specific time limits. Although s 423 carries the heading
‘Transactions Defrauding Creditors’, the section itself
does not seem to require any fraudulent or dishonest
intention. Its main ingredients are:
■putting assets beyond the reach of a person who is
making or may make a claim or;
■otherwise prejudicing the interests of such a person in
relation to the claim.
There is no need for any formal insolvency procedure
to be in place before s 423 can be activated and while an
insolvency practitioner can be the claimant it can also be
a ‘victim’ creditor and such a creditor may be a person
who was not a creditor at the time of the transaction.
Enterprise Act amendments
Section 262 of the Enterprise Act 2002 inserts a new
paragraph in Sch 5 to the Insolvency Act 1986 the effect
of which is that a trustee in bankruptcy needs the per-
mission of the court or a creditors’ committee (if any)
before bringing proceedings in regard to transactions
at undervalue, preferences and transactions defrauding
creditors. There is a similar provision for company
liquidators in a corporate insolvency (see s 253 of the
Enterprise Act 2002). The object is to institute a check
on insolvency practitioner litigation. Court actions are
costly and the court or creditors’ committee will want to
be satisfied that there is a good prospect for a return on
the claim.
Protection of innocent third parties
It should be noted that a transaction cannot be set aside
under any of the above provisions against a person who
acquired property from a person other than the bankrupt
for value and in good faith without knowledge of the
Part 2Business organisations
108
undervalue or preference. Thus, if Fred disposes of his
property at an undervalue to person A, the transaction
can be set aside as against A. However, if A sells the
property to B, who takes it in good faith for value and
without knowledge of the nature of the transaction
between Fred and A, B can retain the property.Payment of the creditors –
preferential payments1 As the trustee gets in money from Fred’s business,
either as income or from the sale of assets, he will pay
Fred’s creditors in a set order of priority laid down in
Sch 6 to the Insolvency Act 1986 after providing money
for his own fees and expenses.
2 The preferential debts are:
(a) wages or salaries of employees due within four
months before the bankruptcy up to a maximum of
£800 for each employee;
(b) all accrued holiday pay of employees;
(c) any sums owed by the debtor as a contribution to an
occupational pension scheme.
Formerly, debts due to HMRC and social security con-
tributions were preferential but these categories were
removed by s 251 of the Enterprise Act 2002. They are
now ranked with ordinary trade creditors. In corporate
insolvencies a certain amount of assets are ring-fenced
for the payment of unsecured creditors and do not go
to secured lenders such as banks. For the avoidance of
doubt, it should be noted that these ring-fencing provi-
sions do not apply in bankruptcy.
If the above debts come in total to £5,000 and Fred’s
assets raise only £2,500, each claimant will get half of
what is claimed and other creditors will get nothing.Protection of employees
1 Under ss 189 –190 of the Employment Rights Act
1996 an employee who loses his job when his employer
(in this case Fred) becomes bankrupt can claim through
the Department for Business, Enterprise & Regulatory
Reform (BERR) the arrears of wages, holiday pay and
certain other payments which are owed to him rather
than rely on the preferential payments procedure.