Insolvency: Post Petition Dispositions of Property

Mon, 13 May 2019

Section 284 of the Insolvency Act 1986 acts to make void any disposition of property made by a bankrupt during the period beginning with the day of presentation of the bankruptcy petition and ending with the vesting of the estate in the trustee in bankruptcy. Section 127 of the Insolvency Act 1986 contains a similar provision in respect of winding up of companies.

In the recent case of (1) Kashif Ahmed (2) Bushra Ahmed (3) Tesneem Ahmed (4) Tabasum Hussain v (1) David Ingram (2) Michaela Hall (Joint Trustees In Bankruptcy Of The Estate Of Eaitisham Ahmed) [2018] EWCA Civ 519 the Court of Appeal has provided some helpful guidance as to the limits of section 284 and specifically applications made pursuant to that provision where an award of compensation is sought.

The Claim arose as a result of the transfer, by the Bankrupt, of his minority holding of shares in various companies to his family members, after presentation of a bankruptcy petition against him in January 2007, but before the bankruptcy order was made in April 2009.

The Joint Trustees applied for a declaration pursuant to section 284 that the share transfers were void, on the basis that they were made post-petition, and additionally sought to recover the loss in the value of the shares. Shortly before trial, the Bankrupt's family members accepted that the transfers were void and delivered up share certificates to the Joint Trustees. Accordingly, the issue for determination by the Court was limited to whether the Joint Trustees were entitled to recover equitable compensation for the diminution in value suffered by the Bankrupt’s estate as a result of the shares having been wrongfully retained.

At first instance, Proudman J held that the Joint Trustees were entitled to the difference in value of the shares from the date of the original transfer from the Bankrupt to his family members.

The Bankrupt’s family members appealed.

The Court of Appeal held that section 284 only operates to avoid relevant dispositions of property and does not provide a free-standing right to recover compensation; the right to a remedy, including the right to recover equitable compensation, must be decided under the general law and on a restitutionary basis.

The correct approach in determining liability to pay equitable compensation is to show actual loss caused by a breach of trust. In this case, the Judge at first instance had been wrong to accept that the Bankrupt’s estate had suffered loss at the date of transfer of the shares since there was no corresponding finding, or even allegation, that the Joint Trustees would have sold the shares on that date. Rather, the loss to the Bankrupt’s estate would have occurred on the date the Joint Trustees would have likely sold the shares and it was from this date, found on the facts to be June 2010, that the Bankrupt’s family members were liable for equitable compensation.

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