CHARLES LYSAGHT
Recent litigation challenging the validity of gifts to members of their family made by persons who later go bankrupt pinpoints a serious gap in our insolvency laws
Strange as it may seem, this matter is still largely governed by a prolix statute passed in the reign of King Charles 1 in the first half of the 17th century which invalidates in general terms assignments of property made in order to defraud creditors.
As interpreted by judges down the centuries this law has suffered from the defect that a subjective intent on the part of a debtor to defraud his creditors at the time that a gift or other assignment was made has to be proved before the creditor is permitted to seize the gifted property or its proceeds to satisfy the debt.
It is not enough just to show that the effect of the gift has been to deprive the creditor of the possibility of recovering the sum owed from the debtor.
The Bankruptcy Act 1988 (amended by the recent Personal Insolvency Act 2012) supplements this law in cases where a debtor is declared bankrupt. Gifts made within three years of the bankruptcy must be set aside on the application of the officer of the court responsible for recovering the property for the creditors.
Gifts made within five years of the bankruptcy must be set aside unless the person who made the gift can show that at the time the gift was made he was able to pay all his debts without the aid of the property gifted.
The recommendation of a high-powered committee chaired by the elder Mr Justice Budd that the latter provision should apply to all gifts made within 10 years of the bankruptcy was disregarded.
It fell to me to consider this matter when I was with the Law Reform Commission in the 1980s as part of the topic of debt collection referred to the commission by Attorney General John Rogers.
Accepting the old adage that one must be just before one is generous, it seemed wrong to me that businessmen should be able to insure themselves against the consequences of failure by assigning assets to their families before they embarked on risky enterprises.
I wrote a paper suggesting that property deriving from gifts made by debtors should be available to meet that person’s debts unless the person who received the gift could establish that this would be unfair because, for example, he or she had altered their position irreversibly in reliance on the gift.
I departed from the commission shortly afterwards and the new/incoming commission took no action on my suggestion.
The issue may not have been regarded as of much importance at the time. Events since 2008 have changed that. Yet, in its report on Debt Enforcement, published in 2010, the Law Reform Commission failed to deal with the matter either in its proposals for amending bankruptcy law or otherwise.
The Personal Insolvency Act, 2012 provides that gifts made up to three years before an adjudication of bankruptcy should be set aside irrespective of whether the donor was solvent at that time.
It had been two years under the 1988 Act. This is a marginal improvement and may be useful in some blatant cases but it does not get to grips with the fundamental defect in the whole law.
Gifts to spouses may need to be treated more restrictively because the rights one spouse enjoys in relation to another’s property under family and succession law means that such gifts are now a less outright disposal than gifts to others.
We hear much bleating about putting our erring capitalists behind bars.
It is, to my mind, much more important to secure the maximum repayment of their debts and to ensure that they are not allowed to evade these debts and to go on living the good life financed by money they have gifted within their families. Those responsible for law reform should address this at once.