Date 19 July 2007
This case summary should be of particular interest to both Insolvency Practitioners and advisers on Trust issues alike.
It has long been settled law that there is no time limit for a person wishing to bring an action against a party involved in a transaction to defraud creditors. Section 423 Insolvency Act 1986 sets out the conditions to be satisfied and is drafted in fairly wide terms to cover a person 'who is making, or may at some time make, a claim’. The essence of this section has been that it allows the court to avoid transactions entered into at any time, if made by a person at an undervalue and with the purpose of prejudicing his creditors. It (along with pre 1986 legislation) has played a very important role in recovery actions, applying even where a debtor is not in a formal insolvency.
The recent case of Hill (Trustee in Bankruptcy of Mr Nurkowski) -v- Spread Trustee Co. Ltd & Anor [2006] EWCA Civ 542 has however raised issues as to whether or not a limitation period should be applied to S.423 actions. It was held that the Limitation Act 1980 should now apply. The case also clarified the requirements of bringing a claim under S.423 but that issue will have to be the subject of a future report. The case is summarised below.
Background
Mr Nurkowski ("the Debtor") entered into a number of transactions, 13 years prior to his bankruptcy in 1999 on the petition of HM Revenue & Customs ("the Revenue"). The main transactions involved purchasing plots of land, setting up a trust ("the Settlement") for the benefit of his daughter, gifting some land into the Settlement, and submissions to the Revenue regarding the value of the land (at the time of the gift) into the Settlement. The value was at a substantially decreased rate than a later valuation obtained on a subsequent sale, and various loans out of the Settlement to himself secured over a number of properties owned by the Debtor.
Held
On the application in 2002, of the Debtor's Trustee in Bankruptcy ("the Trustee"), it was held that certain transactions entered into by the Debtor constituted transactions within s 423(3) and the relevant order for relief was made against the Respondents (being the trustees of the Settlement - Spread Trustee Company Limited), to indemnify the bankruptcy estate of the Debtor against any claim by the Revenue for tax liabilities due to them (albeit previously compromised, in full and final settlement of their claim); for the setting aside of those transactions and for the repayment of sums due there under to the Trustee.
Limitation issues
The Respondents entered a defence that the claim by the Trustee was statute barred. This defence was rejected and it was held that the claim under S.423 was a specialty subject to a 12 year limitation period (S. 8(1) of the Limitation Act 1980).
It was further held that the Trustee's cause of action could not have arisen before the making of the bankruptcy order on 28 January 1999, so the claim was not statue barred as the Trustee had 12 years beginning with the date of the bankruptcy order, within which to bring his claim.
On appeal
The Respondents appealed against the decision. Amongst other issues on appeal, the issue of limitation was dismissed. It was held that, whilst the period of limitation can begin many years after the date of the actual transaction, it is not necessary that a trustee be appointed before a S.423 claim can be pleaded. Another party (who is also a “victim” of the transaction can make a claim prior to his appointment.
Conclusion
If the period of limitation can run several years after the date of the transaction, then separate limitation periods apply to different applicants. Whilst these differences were not directly discussed here we note that the Revenue could also have been a victim (if later found to have been prejudiced at the time of the transaction) for the purposes of S.423(5).
This is a new development in a difficult area and until further clarification is provided by the Court it would be prudent for Insolvency Practitioners and those that advise on Trusts to seek specific advice on any queries arising.
Please contact Guy Thomas or Sharon Stone with any queries on this or any other Corporate Recovery matters. Tel: 01727 798000, or email at guy.thomas@salaw.com or sharon.stone@salaw.com.
© SA LAW 2007
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.