When considering voluntary insolvency be aware of additional legal claims against family and friends

Individuals and companies considering voluntary insolvency should be aware that bankruptcy, administration or liquidation may also lead to additional legal claims against them, their families and their friends.

When individuals and businesses run into financial difficulties, insolvency is often presented as a solution to their problems.  In the right circumstances, this is definitely true; however, great care must be taken to avoid unintended and potentially very damaging consequences for those closest to the insolvent party.

ORJ’s insolvency expert, Mike Smyth, has recently bought such a claim (against the wife of a bankrupt individual) to a successful conclusion; but only after a challenging and costly legal battle.

Some years before ORJ’s instruction and prior to his bankruptcy, the bankrupt had been involved in an acrimonious dispute with close family members.  Settlement discussions between the parties reached a very advanced stage and almost resulted in the claim being resolved; however, they eventually broke down and the bankrupt was advised he could either fight to a trial or petition for his own bankruptcy.

The bankrupt was concerned he would have insufficient financial resources to conclude the case at trial, so he decided that bankruptcy was the best option available to him.  He petitioned for his own bankruptcy (with the support of his wife) shortly thereafter.

Following any bankruptcy order, the finances of the bankrupt and the realisation of their assets are managed by the Official Receiver, and then (in certain cases) a specialist insolvency practitioner.  Two of the main issues to be considered in most bankruptcies, concern the bankrupt’s home and any pre-bankruptcy transactions (known as antecedent transactions) that might be reversed by the legal framework applicable to insolvency cases.

In this matter, an insolvency practitioner was appointed as Trustee in Bankruptcy and took a very aggressive approach (which is not uncommon), primarily focused on the bankrupt’s wife; who subsequently approached ORJ’s Mike Smyth for legal assistance.

The Trustee sought to make financial recoveries in relation both to the matrimonial home and to funds collected by the bankrupt’s wife in order to facilitate the settlement of the bankrupt’s dispute.  Fortunately, the matrimonial home was entirely owed by the bankrupt’s wife and was therefore outside of the bankruptcy estate; however, the position regarding the settlement pot was much more difficult to resolve.

The bankrupt’s dispute had been ongoing for a considerable amount of time and when it became clear that there was a good prospect of agreeing an acceptable settlement with the claimants.  The bankrupt (with his wife’s support) decided that it would best to try and resolve the matter.  The bankrupt’s main difficulty at that time was that he had insufficient money to pay the required settlement amount himself.  In order to obtain the required funds, therefore, he had to rely on his wife; who was able to raise money from a number of sources, including a close family member.

The monies were paid into the bankrupt’s solicitor’s account and when the settlement negotiations fell apart, they were paid to his wife; immediately before the bankruptcy petition was made.  The Trustee in Bankruptcy attacked this payment as a preference and / or transaction at an undervalue.

When insolvency occurs, the law requires every unsecured creditor of the insolvent party to be treated in an identical manner.  If one creditor is paid proportionately more than others (preferred) or given something of value for less than its true worth (transaction at undervalue); those transactions can be undone by the Courts and the monies ordered to be restored to the bankruptcy estate.

In this case, the dispute focused upon the true circumstances and intended nature of the payment into the bankrupt’s solicitor’s account.  It was rendered far more difficult to resolve because of a failure by the bankrupt’s legal advisers to give due consideration to the potential consequences of the bankruptcy; both for the bankrupt and his wife.  By the time the relevant facts did fall to be considered (some years later); critical evidence was no longer available and the documentation that did survive did not tell the full story.

Eventually, with the benefit of advice and assistance from ORJ, the bankrupt’s wife was able to agree an acceptable resolution; however, this process would have been far simpler and much less costly had they both sought specialist insolvency advice at the time of the bankruptcy.

The crucial lesson for any party (and the people most closely connected to them) considering insolvency is to seek expert legal advice before any bankruptcy petition is made.     For further information contact Mike Smyth on 01785 223440 or by email: michael.smyth@orj.co.uk

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