Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
Restructuring & Insolvency (3rd edition)
The BIA and the CCAA allow for pre-insolvency transactions to be set aside in two situations:
i) preference; and
ii) transactions at undervalue.
Provincial legislation permits the setting aside of preferences and transactions to defeat, delay or defraud creditors and can be used where the applicable BIA time periods have passed.
A trustee (under the BIA), and a monitor (under the CCAA), can initiate proceedings to challenge a transaction as a preference or transfer at undervalue. In situations where the trustee refuses to act, a creditor can initiate proceedings.
In a preferential transaction, one creditor receives payment over another creditor before the initial bankruptcy event, or the date proceedings were commenced under the CCAA, with the effect of the debtor preferring one creditor over another.
For a transaction to be considered a preference:
i) If the debtor and creditor are not related, it must have been made within three (3) months of the initial bankruptcy event (or the date proceedings were commenced under the CCAA).
ii) If the parties are related, such as a family member, it must have been made within twelve (12) months of the initial bankruptcy event (or the date proceedings were commenced under the CCAA).
A transaction deemed preferential is void and will be set aside by the court. The money is then distributed to the bankrupt's estate in the order set out in Question 5.
Transactions at Undervalue
In a transaction at undervalue, if the debtor was insolvent at the time the transaction occurred, or became insolvent as a result of the transaction, and the intent of the debtor was to defeat, delay or defraud its creditors. The transaction must have occurred:
i) If the parties are not related, within one year of the commencement of the bankruptcy proceedings (the date that proceedings were commenced under the CCAA); or
ii) If the parties are related, within five years of the commencement of the bankruptcy proceedings (the date that proceedings were commenced under the CCAA).
When the Court determines that a transaction at undervalue has occurred, the Court can:
i) set aside the transaction; or
ii) order the recipient to pay the difference between what the debtor paid for the property and the actual fair market value of the property.
British Virgin Islands
The IA provides a number of voidable-transaction claims that a liquidator may make to seek recover of assets for the benefit of the company and its creditors.
There are four types of voidable transaction that a liquidator can bring upon a company going into insolvent liquidation: unfair preferences, undervalue transactions, voidable floating charges and extortionate credit transactions. In relation to most of these, several defined terms are used: ‘insolvency transaction’, ‘vulnerability period’, and ‘connected person’.
In relation to unfair preferences, undervalue transactions, and voidable floating charges, the liquidator must show that the transaction was an ‘insolvency transaction’: in order to be an insolvency transaction, the transaction must either have been made at a time when the company was insolvent, or have caused the company to become insolvent. For these purposes, ‘insolvency’ means cash-flow insolvency or technical insolvency and expressly does not include balance-sheet insolvency. The liquidator is not required to prove that an extortionate credit transaction is an insolvency transaction. In some contexts, the court will presume that the transaction was an insolvency transaction, as explained below.
In relation to unfair preferences, undervalue transactions, and voidable floating charges, the ‘vulnerability period’ is the period beginning six months before the onset of insolvency and ending on the date on which the liquidator was appointed unless the transaction was with a person connected to the company, in which case the period is two years. In the case of extortionate credit transactions, the vulnerability period begins five years before the onset of insolvency and again ends with the appointment of the liquidator. A person is treated as being ‘connected’ to a company if they fall within the list of persons set out in Section 5 IA which includes inter alios directors or members of the company or of a related company, a different company that has a common director with the company, a company that is a subsidiary or holding company of the company, and relatives of directors.
The term ‘onset of insolvency’ is defined as the date on which the application for the appointment of a liquidator was filed (in the case of insolvent liquidations by order of the court), or the date on which the liquidator was appointed (in the case of voluntary insolvent liquidations).
Looking at each claim in turn, a company gives an unfair preference if it enters into a transaction within the vulnerability period that has the effect of putting a creditor in a better position in the event of the company’s liquidation than the position in which the creditor would have been if the transaction had not occurred: section 245 IA. The transaction is not an unfair preference if it is undertaken in the ordinary course of business and if the transaction is with a connected person, it is presumed that the transaction was not in the ordinary course of business.
Of note, unlike in many other common-law jurisdictions, it is not necessary for the liquidator to prove that the transferor had any intention or desire to prefer the recipient.
A company enters into a transaction at an undervalue if it transfers an asset to another for no consideration, or sells an asset for consideration that is worth significantly less than the asset’s market value: section 246 IA. The transaction must be an insolvency transaction and it must have taken place within the vulnerability period.
The transaction will not be an undervalue transaction if it can be shown that the company acted in good faith and for the purposes of its business, and if at the time of the transaction there were reasonable grounds for believing the transaction would benefit the company. If the transaction is entered into between the company and a connected person, the court will presume that the transaction was an insolvency transaction and that the company did not act in good faith or have reasonable grounds for believing the transaction would benefit the company, though these presumptions can be rebutted.
If the grant of a floating charge took place within the vulnerability period and was made at a time when the company was insolvent, or caused the company to become insolvent (i.e., was an insolvency transaction), it will be voidable, to the extend that it secured previously unsecured debt: section 247 IA. It will not be voidable if it secured new borrowing or liabilities. If a charge was created in favour of a connected person, it is presumed that the charge was an insolvency transaction.
Finally, a transaction is an extortionate credit transaction if it is concerned with the provision of credit to the company and either the terms of the credit arrangement require grossly exorbitant payments to be made in respect of the provision of credit (whether unconditionally or on the occurrence of certain contingencies) or otherwise grossly contravenes ordinary principles of fair trading: section 248 IA. It is not necessary to show that the extortionate credit transaction was an insolvency transaction.
Despite these claims being termed ‘voidable transactions’, a successful claim by the liquidator does not necessarily (or ordinarily) result in the transaction being voided. In practice, the court has a very broad discretion as to what relief it grants and can make any order it deems appropriate. It may order that the transaction be set aside in whole or in part, or alternatively/additionally, it may order the defendant to make a contribution to the company to restore the parties to their original positions or otherwise.
Pre-insolvency transactions can be challenged if they constitute a voidable preference, a disposition at an undervalue, or fraudulent trading or dispositions. Property dispositions and transfers of shares made after the presentation of a winding up petition will also be void if the Court makes a winding up order, unless the Court orders otherwise.
Voidable preferences arise where a company has, within the six months immediately preceding the commencement of the liquidation of the company and at a time when it was unable to pay its debts, made a transfer of property, granted a charge, or made payment to a creditor, if the transaction is made with a view to preferring that creditor over other creditors. The liquidator of the company may seek an order from the Court to declare the transaction void and to order that the property be returned to the company.
Where the recipient of the property is a related party to the company, the transaction is deemed to have the requisite intention to prefer.
Transactions at an undervalue
A transaction will constitute a disposition at an undervalue where a company has disposed of property at an undervalue with the intent to defraud its creditors (which requires an intention to wilfully defeat an obligation owed to a creditor). Any disposition at an undervalue made by the company in the six years prior to the commencement of the liquidation with an intent to defraud its creditors shall be voidable at the instance of the liquidator of the company.
The liquidator of the company may seek an order from the Court to declare the transaction void and for restitution. If the recipient can satisfy the Court that it had not acted in bad faith in respect of the transaction, the recipient will have a first ranking charge over the property of an amount equal to the costs properly incurred by the recipient in defending any proceedings challenging the relevant disposition, and the disposition will be set aside subject to the proper costs, pre-existing rights, claims and interests of the recipient.
If the company's business was carried on with the intent to defraud its creditors or for any fraudulent purpose, the liquidator may apply to Court for a declaration that any persons who were knowingly parties to the fraudulent trading shall contribute to the company's assets in the amount that the Court thinks proper.
If any of the company's property has been disposed of with an intent to defraud and at an undervalue, then any creditor prejudiced by the disposition can seek an order from the Court that the transaction is void. Any such claim must be brought within six years of the relevant transaction.
Avoidance of property dispositions and transfers of shares
When a winding up order has been made, any disposition of the company's property and any transfer of shares or alteration in the status of the company's shareholders made after the commencement of the winding up (which usually deemed to be at the time of the presentation of the winding up petition) is void, unless the Court orders otherwise. The liquidator of the company can seek appropriate relief from the Court for the property to be returned to the company.
The administrator may request the court to invalidate any transfer of assets for no consideration, transaction for a clearly unreasonable price, provision of security for any unsecured debt, prepayment of any debt that are not due, or waiver of any claim, in each case by the debtor within one year before the court accepts the bankruptcy filing, or any repayment of certain debts within six months prior to the acceptance of the filing. The right to request for invalidation as described above is vested in the administrator, with the debtor being listed as defendant and the third-party victims as beneficiary. The Enterprise Bankruptcy Law of China does not provide a statute of limitation for making the request. If successfully requested, the debtor’s act in question will be deemed void ab initio, and the interests of the third parties will be restored to the state as if the debtor’s act has never taken place.
On certain conditions, the debtor’s pre-insolvency transactions may be avoided by the insolvent estate. Avoidance means that an otherwise valid transaction made by the debtor is reversed if the transaction in question has defeated the assets of the estate or increased the debtor’s debt.
If the trustee believes that that debtor’s actions are contrary to the avoidance rules of the Danish Insolvency Act, the insolvent estate must no later than 12 months from the issue of the insolvency order institute legal proceedings against the third party or creditor that was given preference by the debtor’s voidable transaction.
The debtor’s voidable transactions under the Danish Insolvency Act include:
- gifts from the debtor;
- payment of debt,
- transactions giving preference to a creditor over the other creditors;
- transactions that mean that the debtor’s assets avoid being included in the assets of the insolvent estate; and
- transactions that mean that the debtor’s debt increases.
If the trustee is successful in the claim for avoidance against a third party, the third party must give up and return the preference to the insolvent estate that he has obtained through the debtor’s voidable transaction, but not more than the loss of the estate.
French law provides for some rules which make it possible to declare certain transactions entered into by the company void or voidable during the so-called “hardening period” which is the period between the date of insolvency (which may be carried back up to 18 months prior to the judgement opening the insolvency proceeding) and the opening of insolvency proceedings. Some transaction entered into during the hardening period are automatically void and include in particular;
- any deed entered into without consideration transferring title to movable or immovable property;
- any bilateral contract in which the debtor’s obligations significantly exceed those of the other party;
- any payment by whatever means, made for debts that had not fallen due on the date when payment was made;
- all payments for outstanding debts, if not made by cash settlement or wire transfers, remittance of negotiable instruments, or “Daily assignment of receivables”;
- any mortgage or pledge granted to secure a pre-existing debt.
In addition, any payment made or any transaction entered into during the hardening period may be at the discretion of the court, subject to two conditions: (i) the payment or transaction took place during the hardening period and (ii) at the time of the payment or transaction, the contracting party knew that the debtor was insolvent.
The claw-back action is exercised by the judicial administrator, the legal representative, the supervisory judge (juge-commissaire) in the implementation of the plan or the public prosecutor.
- General requirements
According to German law, any transaction or action that harms the creditors as a whole, and which has been executed within certain hardening periods of up to 10 years prior to or after the filing of the petition for the opening of insolvency proceedings, could potentially be subject to contestation/claw-back rights which are executed by the insolvency administrator (or the insolvency monitor in the case of self administration/DIP proceedings).
Voidable “action” is understood in the broadest sense, including, e.g., the granting of collateral or satisfaction, as well as the omission to sue, claim or defend in court.
An action is detrimental to the creditors if it leads to a direct or indirect reduction of the value of the debtor’s estate, or to a complication regarding the enforcement of the estate’s rights.
- Specific grounds of contestation materialized
In addition to these general requirements, a specific ground of contestation must be realized. Such specific grounds are:
Congruent coverage, Sec. 130 Insolvency Code (Kongruente Deckung)
Pursuant to Sec. 130 Insolvency Code, fulfilling a debt, granting collateral or enabling the other party to seize such fulfillment or collateral can be challenged if the action in question was committed up to three months prior to the filing of the opening petition, the company had been illiquid at that time, and the counterparty was aware of that state of illiquidity.
Incongruent coverage, Sec. 131 Insolvency Code (Inkongruente Deckung)
In contrast, a coverage is deemed incongruent, when a creditor receives something other than agreed upon, according to the (initial) contractual agreement, for example, a granting of collateral or premature satisfaction of a claim, or the creation of a set-up situation that has not been owed. Such actions can be challenged, if they were undertaken (i) during the month prior to the date of the application for commencement of insolvency proceedings or following such application, (ii) within the second or third month prior to the date on which the application for commencement of insolvency proceedings is filed and the debtor was illiquid when the act took place or, (iii) within the second or third month prior to the date on which the application for commencement of insolvency proceedings is filed and the creditor was aware when the act took place that it would prejudice the insolvency creditors.
Detrimental actions, Sec. 132 Insolvency Code
Any action on the part of the debtor constituting a direct disadvantage to the creditors may be contested if it was taken (i) during the last three months prior to the insolvency filing, if the debtor was illiquid at the date of such transaction, and if the other party was aware of the insolvency on that date, or (ii) subsequent to the insolvency filing if at the time the legal transaction was made the other party was aware of either the insolvency or of the request for the opening of insolvency proceedings.
Legal acts of willful detriment to the insolvency creditors, Sec. 133 Insolvency Code (Vorsatzanfechtung)
Pursuant to Sec. 133 Insolvency Code, a prerequisite for contestation is that the debtor acted with the intent of impairing its creditors, and that the counterparty was aware of such intent. Sec. 133 Insolvency Code allows for the challenge of a transaction made by the debtor not more than 10 years prior to the filing of the insolvency petition. In the case of actions granting security or satisfaction to the counterparty, this hardening period is shortened to four years.
Granting of gratuitous services, Sec. 134 Insolvency Code
The granting of performances free of charge, falls under the scope of Sec. 134 Insolvency Code, and can be clawed-back up to four years before the filing for insolvency proceedings.
Shareholder loans, Sec. 135 Insolvency Code
Payments the debtor made in order to repay a shareholder loan (or equivalent claim) within one year prior to the filing for the opening of insolvency proceedings can be challenged. The same applies vis-à-vis the shareholder, if a third party loan secured by a shareholder was repaid by the debtor within the one year period.
- Exemption from voidance in cases of cash-transaction (Bargeschäft, Sec. 142 Insolvency Code)
If an action constitutes a so-called privileged cash transaction as defined by Sec. 142 Insolvency Code, it can be challenged only in accordance with Sec. 133 Insolvency Code provided that the other party recognized that the debtor acted unfairly. A privileged cash transaction requires (i) that performance and consideration be equivalent in value (Gleichwertigkeit) and (ii) a close time connection (Unmittelbarkeit) between performance and consideration, such that they are deemed linked.
- Consequence in law, Sec. 143 Insolvency Code
In the case of a successful contestation, everything received from the debtor’s estate pursuant to the challenged transaction(s) must be restituted to the insolvency estate. The insolvency estate only has to return the consideration/values received if such are still identifiable and available in the estate (which is rarely the case).
Certain transactions entered into by a company that subsequently becomes insolvent can be set aside in order to claw back the proceeds and restore the company to the position that it was in before the transaction.
Any conveyance or other disposition of property (including any inter-group disposition) made within six months before the commencement of its winding-up will be void if it was made:
- with the intention to fraudulently prefer one or more of the company's creditors; and
- at the time that the company was unable to pay its debts as they became due.
A creditor can set aside a transaction or disposition of property at an undervalue where it can be shown that the dominant purpose was to put the property beyond the creditors' reach. An eligible creditor is a person who:
- is owed a debt by the transferor on, or within two years after, the transfer;
- on the date of the transfer is owed a contingent liability by the transferor, where the contingency giving rise to the obligation has occurred; or
- on the date of the action to set aside the transfer is owed an obligation arising from a cause of action that occurred before, or up to two years after, the date of the transfer.
Invalid floating charges:
Where it can be shown that a floating charge was created (i) within 12 months of the commencement of insolvency proceedings; and (ii) immediately after the creation of the charge, the company became insolvent, a floating charge would be considered invalid.
Disclaimer of onerous/unprofitable contracts
Provided the court grants permission, the liquidator of a company can in certain circumstances disclaim any property or contracts that it considers to be onerous, unprofitable or unsaleable.
A liquidator may apply to the court for an order to set aside a transaction entered into by a company if:
i. it was entered into at a time when the company was insolvent; or
ii. the company becomes insolvent as a result of the transaction.
Any payment made within six months (or two years in the case of a "connected party") immediately preceding the application for a compulsory winding up (or a resolution for voluntary winding up) is vulnerable to be set aside.
A company is deemed to have given a preference to a person where:
i. "that person is one of the company’s creditors or is a surety or guarantor for any of the company’s debts or other liabilities"; and
ii. the company, "does anything, or permits anything to be done, which improves that person’s position in the company’s liquidation".
It is also important to consider whether the company was (and ultimately the directors as decision makers were) influenced by the necessary "desire" to prefer. In practice, establishing a desire to prefer will be a factual exercise to show that the company was influenced by an intention to produce the result of putting one or more creditors in a better position than the general body of creditors.
Any transaction with a "connected party" during the reference period which would constitute a preference is presumed to be outside of the ordinary course of business and made with the requisite desire to prefer.
If a preference has been given, the court has wide ranging powers to make any order it thinks fit to restore to the position of the company to where it would have been absent the preference. The range of possible orders includes making directors personally liable.
Transactions at an Undervalue/Fraudulent dispositions
While there is no codified law relating to transactions at an undervalue (as there is in the UK), similar actions may be available to liquidators under Guernsey's customary law.
One possibility is to claim that the directors committed an equitable wrong, i.e. establish that the recipient of the company’s assets had knowledge that the directors were acting in breach of their fiduciary duties (by selling company assets at an undervalue) and that the knowledge was such that the recipient’s ‘conscience’ was so affected that it would be impermissible to allow them to retain the misappropriated asset. As such, a claim may be founded by suggesting the recipient was a constructive trustee of the company’s assets.
Another possibility may be for a liquidator to bring a customary law Pauline action. In essence, a Pauline action is concerned with setting aside a transaction undertaken to defraud creditors where the debtor was insolvent at the time or as a result of the transaction.
The critical elements to such an action would be that:
i. the debtor must have been insolvent on a balance sheet basis at the time of the transaction; and
ii. the debtor carried out the transaction with the intention of defrauding creditors.
A Pauline action has been held in Jersey to be an action personnelle mobilière, for which the limitation period for bringing a claim in Guernsey is six years. There have been two Guernsey cases decided on principles akin to the Pauline action, the remedy for which is restitutionary in nature meaning that, if the action is successfully established, the transfer of assets is set aside such that the assets become available to satisfy the creditor's claim. There is no entitlement to compensation.
The Companies Act 2014 provides that any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against an insolvent company within 6 months of the commencement of its winding up (or two years in the case of a connected person) with a view to preferring that creditor over others, shall be deemed to be an unfair preference and accordingly, the transfer is void and the property must be returned to the company. Where the transaction involved a connected person, there is a rebuttable presumption in law that the intention was to unfairly prefer that connected party.
Where a person acting with bona fides has acquired an interest in the assets of the company for value, that person’s rights are not affected by a determination that the transaction concerned was an unfair preference.
Improperly transferred assets
Under the Companies Act 2014, if it can be shown to the satisfaction of the High Court that company property was disposed of (which would include by way of transfer, charge, security assignment or mortgage) and the effect of such disposal was to “perpetrate a fraud” on the company, its creditors or members, the High Court may, if it deems it just and equitable, order any person who appears to have “use control or possession” of such property or the proceeds of the sale or development thereof, to deliver it or pay a sum in respect of it to the liquidator on such terms as the High Court sees fit.
There is no requirement to prove fraud – it must merely be proven that the effect of the disposition was to perpetrate a fraud. It is not necessary for the company to be insolvent at the time of the disposition, although the application can only be made in respect of a company that is being wound up. In addition, there is no time limit specified under the section, therefore, theoretically at least, any transaction could be challenged.
The Court, in making any order with regard to property that has been improperly transferred, must have regard to the rights of person who have bona fide and for value acquired an interest in the property concerned.
Breach of fiduciary duty to preserve the assets of the Company
Where a company is insolvent, that company ceases to be the beneficial owner of its assets and the directors no longer have the power to dispose of the assets. The Irish Supreme Court has held that in such a situation, the directors owe a duty to the creditors to preserve the assets to enable them to be applied in discharge of the company’s liabilities. Where directors of an insolvent company are aware or ought to be aware of its insolvency, they hold the assets of that company in trust for the benefit of the company’s creditors.
The rights of a person that bona fide and for value acquires an interest in the property of a company that is insolvent, and who is not on notice of that insolvency, will not be affected by the lack of capacity of the directors.
- Post-declaration the Viscount and post-appointment a liquidator, both have a wide range of powers to obtain the books and records of a company. There are also powers to examine directors and officers, investigate unlawful trading and unwind unlawful transactions.
- The principle grounds for challenging pre-insolvency transactions are in respect of:
(i) Where by any transaction, an existing creditor is put in a position which is more favourable than that which it would have been in had the transaction not occurred, and that transaction occurred when the debtor was insolvent or became insolvent by reason of that that transaction, that transaction may be set aside. (Désastre Law 17A and Companies Law Art.176A)
(ii) A preferential transaction undertaken up to 12 months prior to the declaration or winding up may be set aside.
(iii) A transaction will not be set aside where:
(a) it prejudices an interest in property which was acquired from someone other than the debtors and was acquired for value or in good faith; or
(b) it requires a person who is not a creditor, who received a benefit in good faith and for value to make a payment to the debtor's estate.
Transactions at an undervalue
(iv) Where a debtor enters into a transaction whereby a benefit is conferred for no value or a value which is significantly less than the value of the benefit conferred, or by way of a gift or marriage settlement, at a time when the debtor is insolvent or by that transaction became insolvent, the transaction may be set aside as a transaction at an undervalue. (Désastre Law 17 and Companies Law Art.176)
(v) A transaction which occurred no more than 5 years prior to the declaration or winding up may be set aside as a transaction at an undervalue.
(vi) A order setting aside the transaction may not be made where:
(a) it would prejudice an interest in property acquired from a person other than the debtor in good faith and for value; or
(b) it would require a person who received benefit for value and in good faith to make a payment to the debtor's estate.
Other impugnable transactions
(vii) Other transactions which may be impugned on the application of the Viscount or a liquidator include where a debtor has entered into extortionate credit bargains or an individual has made excessive pension contributions.
Transactions entered into before the insolvency declaration knowingly defrauding creditors can be set aside if the transaction is gratuitous or, not being gratuitous, the third party shares the defrauding purpose.
Further, certain transactions carried out within the retroactive period will be presumed to be fraudulent as to creditors and will also be set aside. The retroactive period is the period that begins 270 days prior to the concurso declaration. This period is doubled (ie, to 540 days) with respect to related-party transactions. The judge may extend such period upon the reasoned request of the conciliator or any creditor but up to a maximum of three years.
Avoidable transactions carried out within the retroactive period include granting of collateral or additional collateral if not contemplated in the transaction documents; payments-in-kind if such method of payment was not agreed in the transaction documents; certain related-party transactions; gratuitous transactions; transactions under which the debtor pays a consideration whose value is notoriously excessive or receives a consideration whose value is notoriously lower than the consideration of its counterpart; transactions in conditions or terms that significantly different from prevailing market conditions; any debt remission made by the debtor; and payment of unmatured obligations. All of these transactions are presumed to be fraudulent; however, some of them allow for the presumption to be rebutted.
Pursuant to Article 19.1 of the Insolvency Act a judge shall take clawback actions such as the annulment of liens, transfers, agreements and any other legal acts, whether with or without valuable consideration, performed by the debtor if they have not been executed as part of the debtor’s ordinary course of business and have impaired the debtor’s equity within one (1) year before any of the following: (i) the filing of an insolvency petition by the debtor (voluntary proceeding); or (ii) when INDECOPI notifies debtor about the filing of an insolvency petition by the creditor (involuntary proceeding).
On the other hand, Article 19.3 of the Insolvency Act establishes that any disposal of assets by the debtor within the avoidance period (which starts with the debtor’s or the creditor’s insolvency petition and ends when the Creditor’s Meeting appoints or ratify the administration of the debtor or when the related Liquidation Agreement is approved and executed) will be declared null and void by the judge when it relates to:
a. Any anticipated payment for obligations that are not due, in any form in which it is carried out;
b. Any payment for obligations due not carried out according to the original form negotiated or established in the contract or in the respective title;
c. Acts and contracts for valuable consideration, carried out or celebrated by the insolvent which are not related to the normal development of its activities;
d. Set-offs performed among reciprocal obligations between the debtor and its creditors;
e. Encumbrances and transfers carried out by the insolvent on his property, whether for value or for free;
f. Guarantees granted on property of the debtor within the term previously referred to assure the payment of obligations contracted previously to the commencement;
g. Judicial or out-of-court executions of his property, since the commencement of the procedure; and,
h. Mergers, absorptions or spin-offs that imply a detriment to the patrimony.
Upon the judge’s declaration of nullity, the judge shall request the clawback of the assets involved to the debtor’s assets or the annulment of liens granted, as the case may be. Furthermore, the Liquidator i.e. the person or entity who serves as the administrator or liquidator of the debtor’s assets, or one or more creditors are entitled to file a legal action.
In addition to that, any third party who has acquired title for valuable consideration from the debtor in good faith and who appears in the appropriate Registry as entitled to grant it, will not be subject to clawback for any operations during the avoidance period, once it has registered such title.
Under Polish Bankruptcy Law, particular transactions (or broaden: acts in law), are - by operation of law – ineffective with respect to the bankruptcy estate or may be ineffective with respect to the bankruptcy estate based on the Judge – Commissioner’s decision. In result – said transactions or acts in law are construed within bankruptcy proceedings as they have never occurred.
Acts in law that may be challenged include among others those performed gratuitously (or significantly undervalued) within 1 year before filing the bankruptcy petition, whereby the debtor disposed of his assets. The same applies respectively to the court settlement, admission of an action, and waiver of a claim.
Moreover, ineffective with respect to the bankruptcy estate are securities and payments of an unenforceable debt, given or made by the debtor within 6 months before the filing the bankruptcy petition.
There is also possibility to challenge by the Judge-Commissioner transactions with related-parties and/or family, performed by debtor within 6 months preceding the date of filing the bankruptcy petition, as well as encumbrance of the bankrupt’s assets with (among others) mortgage or registered pledge, if the bankrupt was not a personal debtor of the secured creditor and if the encumbrance was established within one year prior to the filing of a bankruptcy petition, and the bankrupt did not receive any consideration for the establishment of such encumbrance.
The other party to ineffective transaction/ act in law is obliged to contribute to the bankruptcy estate anything that has been transferred out of, or has not been contributed to, in result of ineffective act.
In particular cases reciprocal consideration provided by other party may be returned to the same. If the consideration cannot be returned, that party may assert its claims in bankruptcy proceedings on a par with other creditors.
On the other hand, party who received the payment or the security may, by bringing an action or charge, seek the recognition of such acts as effective if at the time when the same were performed they were unaware of the existence of grounds for declaring bankruptcy.
Certain antecedent transactions may be unwound by a liquidator or judicial manager upon an application to Court:
a. A liquidator or a judicial manager has the power to set aside undervalue transactions that took place up to five years from the commencement of winding up or judicial management, if the transaction was carried out when the company was insolvent or became insolvent as a result. There is a presumption of insolvency if the transaction was carried out with a related party.
b. The Court may also impugn a transaction intended to prefer one or some of a company’s creditors over others, if the transaction was carried out when the company was insolvent or became insolvent as a result. There is a presumption of an intention to prefer if the counterparty to the transaction is a related party.
c. The liquidator or judicial manager may also set aside a floating charge that has been created six months prior to the commencement of a winding up or judicial management, except to the amount of any cash paid to the company at the time of, or subsequent to, the creation of and in consideration for the charge, together with interest on that amount at the rate of 5 percent per annum.
d. Extortionate credit transactions may also be set aside if the terms of the agreement are exorbitant, unconscionable, or substantially unfair. Such transactions may be set aside or varied by the Court if they are entered into within a period of three years before the commencement of winding up or judicial management.
As part of any bankruptcy proceedings, the official receiver will review the debtor’s trans-actions, in most cases payments, for a certain period prior to the proceedings being opened.
Generally speaking – under certain circumstances and with varying look back periods depending on type of transaction and who the parties are – any type of transaction may be challenged and set aside or reversed. Provisions to this effect are found in the Swedish Bankruptcy Act, which in short include;
- a general clause setting aside any type improper payment, transfer or other transaction within a five-year period (no limitation for closely related parties), where the debtor was insolvent at the time of the transaction or became insolvent as a result hereof, and where the other party favored by the transaction was in bad faith;
- payment of debt within a three-month period (two years in relation to closely related parties) prior the bankruptcy proceedings, if i) payment is made in advance, ii) is made in kind or iii) exceeds some 10% of the debtor’s total assets, and unless the payment is deemed normal and made in due course of business.
- creation of security for old debt within a three-month period prior to the bankruptcy proceedings; and
- gifts from the debtor, unreasonable salary or pension payments and matrimonial dispositions etc.
The official receiver has exclusive rights to pursue and bring a claim challenging a reviewable transaction. However, if the receiver will not exercise that right, any creditor will have a secondary right to do so on behalf of the bankruptcy estate.
A successful challenge will result in the transaction in question being unwound by a court order, and the receiving party being obligated to give up or return to the insolvent estate whatever money, asset or preference obtained through the voidable transaction. The creditor will then normally be entitled to lodge a corresponding claim in the bankruptcy proceedings and receive dividend in competition with all other creditors.
The following avoidance actions are available to the relevant insolvency practitioner or a creditor (if the relevant rights have been assigned to it):
- Avoidance of gratuitous transactions targets, in particular, all gifts and all dispositions made by the debtor without any or without adequate consideration;
- avoidance for over-indebtedness targets the granting of a security interest for existing debts without a prior contractual obligation, the settlement of a monetary claim in a manner other than by usual means of payment and the payment of a debt which was not yet due, in each case provided that the recipient is unable to prove that it was unaware and must not have been aware of the debtor's over-indebtedness at the time the transaction was carried out; and
- avoidance for intent targets dispositions and other acts made by the debtor if the disposition was made by the insolvent with the intent to disadvantage its creditors or to prefer certain of its creditors to the detriment of other creditors and if the privileged creditor knew or should have known of such intent.
Targeted transactions must have occurred during certain look-back periods: Avoidance of gratuitous transactions and avoidance for over-indebtedness is available where a relevant act has occurred during the year prior to the opening of bankruptcy proceedings, the granting of a moratorium or the seizure of assets. A five years period applies to avoidance for intent. Following the opening of bankruptcy proceedings or the conclusion of a composition agreement with assignment of assets, the avoidance claims must be pursued within two years (statute of limitations).
For all challenges, it is further required that the challenged transaction has caused damages to other creditors of the debtor. In addition, it is noteworthy that the rules regarding avoidance for intent as well as avoidance of gratuitous transactions provide for an inversion of the burden of proof whenever these transactions are entered into by related parties (including affiliated entities).
If all requirements are met, the court orders the defendant to return the specific assets to the estate. If this is no longer possible, the court may order the defendant to compensate the estate in cash. The defendant has a return claim for its own performance which is to be performed in kind as an obligation of the estate or, if no longer possible, by admittance of an unsecured and non-privileged insolvency claim.
Article 71 of SIA regulates the reintegration action. This legal action aims to revoke acts that are detrimental to the aggregate assets of the debtor or the acts that distort the par condition creditorum performed by the debtor within the 2 years before the date of DIP. Once the insolvency proceeding is initiated, this detrimental acts, may be revoked, even though there may not have had with a fraudulent intention. The SIA determines some cases when the presumption of detriment accepts evidence to contrary and when the presumption is not rebuttable (art. 71.1 and 71.2 SIA). However, there are some acts that under no circumstances can be revoked, as the ordinary acts of the professional or business activity of the debtor performed under normal conditions (art. 71.5 SIA).
The reintegration actions shall be processed by an insolvency procedural plea (art. 72.4 SIA) and it could be initiated in any phase of the insolvency proceeding.
Regarding the legitimacy of the action, only the IA will be legitimized to file a reintegration actions. Nonetheless, the creditors that have required to IA in order to he file a revocation action, they will be entitled to exercise this action if the IA do not apply for it within the 2 month following the requirement (art. 72.1 SIA).
As a consequence of the revocation of these acts, the appealed acts shall declared ineffectiveness and the involved party shall be condemned to return the service or goods which were thereof with their fruits and interests (art. 73 SIA). The returned good shall liquidate accordance to the liquidation plan.
Yes. Sections 544, 547 and 548 of the Code authorize the debtor or a trustee to seek to challenge the debtor’s pre-insolvency transactions through what are commonly referred to as avoidance or “claw back” actions. One of the most common avoidance actions under the Code is found in section 548 which provides that trustee may avoid any pre-petition transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred within two years before the date of the filing of the petition, if the debtor voluntarily or involuntarily made a transfer or incurred an obligation with actual intent to hinder, delay or defraud any entity to which the debtor is indebted. Such avoidance affects not only the transferee but all parties in interest who have claims against the debtor. The proceeds of a successful avoidance actions are property of the estate, unencumbered by pre-insolvency liens or security interests. This impacts all creditors and parties in interest by augmenting the estate. Notably, while avoidance actions themselves are typically brought by a trustee, in certain circumstance the court may grant standing to other parties, most commonly an official committee of unsecured creditors.
Certain pre-insolvency transactions may be challenged under the Insolvency Act 1986.
Possible grounds for challenge include transactions at an undervalue, preferences, extortionate credit transactions, avoidance of floating charges, transactions defrauding creditors and property dispositions after the commencement of a winding up. Each of these grounds essentially aims to unwind transactions that would otherwise have frustrated or otherwise allowed the company to avoid the payment of creditors on insolvency in accordance with the statutory priority of claims. In most cases, only an administrator or liquidator of a company may bring a claim challenging a reviewable transaction (although claims for transactions at an undervalue and preferences can now been assigned by the officeholder to any third party). However, where there is fraud, any party that is a victim of the transaction may make a challenge.
The look-back period ranges between two years prior to the commencement of insolvency proceedings where the transaction was with a connected party (including directors, shadow directors, and associated persons and companies) to six months for other parties.
The court generally has a wide discretion to make any order it thinks fit for restoring the position to what it would have been but for the relevant antecedent transaction. There are protections for third parties who acted in good faith, for value and without notice of the relevant circumstances.
The creditor and the liquidator – on behalf of the debtor – may file for legal action before the court within 120 days of gaining knowledge, or within a one-year limitation period from the date of publication of the notice of liquidation to contest:
- contracts concluded by the debtor within five years preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, if intended to conceal the debtor’s assets or to defraud any one creditor or the creditors, and the other party had or should have had knowledge of such intent;
- contracts concluded by the debtor within two years preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, if intended to transfer the debtor’s assets without any compensation or to undertake any commitment for the encumbrance of any part of the debtor’s assets, or if the stipulated consideration constitutes unreasonable and extensive benefits to a third party;
- contracts concluded by the debtor within 90 days preceding the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, if intended to give preference and privileges to any one creditor, such as the amendment of an existing contract to the benefit of a creditor, or to provide financial collateral to a creditor that does not have any; and
- contracts concluded by the debtor within three years before the date when the court received the petition for opening liquidation proceedings or thereafter, or his other commitments, if made for the purpose of transfer of ownership by way of guarantee, or the assignment of a right or claim by way of a guarantee or exercising a collateralized option to buy, where the beneficiary exercised such acquired right by failing to fulfill his obligation of accounting toward the debtor, or did so improperly, and/or failed to pay the amount remaining after the secured claim is satisfied; if the right-holder did not have the acquisition of ownership, or the assignment of a right or claim by way of a guarantee registered in the collateral register, or his buy option in the real estate register, the conditions for lodging a contest shall be presumed to exist.
If the contest is successful, the provisions of the Act V of 2013 on the Civil Code (the “Civil Code”) pertaining to invalid contracts shall apply. The liquidator and the creditor may request to have the original state restored on the grounds of invalidity, and to have any right registered in a public register on the asset after the alienation of the asset struck from the records.
The liquidator has the powers to terminate, with immediate effect, the contracts concluded by the debtor, or to rescind from the contract if neither of the parties rendered any services. Any claim that is due to the other party owing to the above may be enforced by notifying the liquidator within forty days from the date when the rescission or termination was communicated.
The bankruptcy trustee can challenge any fraudulent transactions made to the detriment of the creditors regardless of when they occurred (actio pauliana).
The bankruptcy trustee can also challenge the following acts if they were entered into during the so-called the ‘suspect’ or ‘hardening’ period, being the period from when the enterprise ceases to pay its debts until the time when the court declares the enterprise bankrupt. Typically both dates will coincide, but the court can, at the request of the bankruptcy trustee, declare that the enterprise ceased to pay its debt before the date of the bankruptcy, with a maximum of six months in which case the following acts be challenged if they took place in the suspect period:
- gifts or transactions at no or at undervalue;
- all payments, in cash or kind, of undue debts;
- granting of security in respect of pre-existing indebtedness
Yes. The companies Ordinance stipulates that when all four conditions listed below have been fulfilled, any transaction conducted by the company prior to the insolvency proceeding to benefit one of its creditors would be void: (1) The company is in dissolution; (2) When the company conducted such transaction or action, it was unable to repay its debts when due; (3) Such transaction or action were made in order to give priority to a particular creditor, or under duress or unlawful solicitation; (4) Such transaction or action took place within three months prior to filing the motion for dissolution;
Regarding individual insolvency proceedings, in addition to the cancellation of transactions taken soon prior to the issue of a Receivership Order in order to give priority to a particular creditor, other provisions determine what transactions would be considered as deceitful sale. Those provisions distinguish between two periods: first, transfers made within two years prior to the initiation of insolvency proceeding – which would be canceled without requiring proving that the debtor was insolvent when such action was taken. Second, transactions made two to ten years prior to the initiation of insolvency proceeding – which may be canceled should the debtor be proven to be insolvent at the time of such transfer. These provisions would only apply to transactions made without equivalent consideration and other than in good faith.
The new Insolvency Law created uniformity regarding the provisions that applies in both individuals and corporates insolvency proceedings in that matter.
The first significant change in the new Insolvency Law is the cancelation of any requirement for an intention to prioritize certain creditor in order to cancel such a transaction. Therefore, the conditions for challenging pre-insolvency transactions are merely factual and consequential – (1) Debtor insolvency when making the transaction; (2) The transfer was made within three months prior to the initiation of proceeding (or within one year prior to that date in case the other side to the transaction is a "relative" of the debtor); (3) The transaction would result that creditor is being paid a larger share of his debt compared to the share payable to them in insolvency proceedings.
The Insolvency Law also provides some defenses which, if substantiated, could prevent the cancelation of such transaction: (1) The transaction was made in the normal course of business; (2) Proper consideration was paid (other than debt repayment); (3) For an individual debtor – debt lower than NIS 5,000.
Regarding to transfer of debtor's assets with no valuable consideration, the new law determine that the Court may cancel such a transaction, if taken within two years prior to the motion for an order to initiate proceedings (or within 4 years if the transferee is a relative of the debtor) and if debtor was insolvent at that time, or if taking such action caused the debtor to become insolvent. With regard to transfer of assets designed to conceal them, the law stipulates that the Court may have such transaction canceled even if the debtor was not insolvent at the time, provided that the action was taken within seven years prior to filing the motion for order to initiate proceedings.
With regard to all of the aforementioned actions, cancellation of the action would not detract from the rights of any third party who acquired rights in the asset in good faith and for payment of proper consideration.
A debtor’s pre-insolvency transactions (concluded during the 2 years prior to the opening of the proceedings) may be challenged by the judicial administrator or liquidator, if one of the below listed cases is applicable:
a) Free-of-charge transfers made during the 2 years prior to the opening of the procedure; humanitarian sponsorship is exempted;
b) Operations in which the debtor's performance manifestly exceeds that received during the six months preceding the opening of the procedure;
c) Acts concluded during the 2 years prior to the opening of proceedings, with the intent of all the parties involved to hide goods from the creditors or to damage their rights in any other way;
d) Acts of transfer of ownership to a creditor for the settlement of a previous debt or for the benefit of the creditor, incurred in the 6 months prior to the commencement of the proceedings, if the amount that the creditor could obtain in the event of the debtor's bankruptcy is less than the value of the transfer document;
e) The establishment of a right of preference for a claim that was unsecured in the 6 months preceding the opening of the procedure;
f) Early repayments of debts incurred in the 6 months preceding the opening of the proceedings, if the maturity of said debts had been due for a date subsequent to the opening of the proceedings;
g) The transfer documents or the assumption of obligations by the debtor within a period of 2 years prior to the opening of the procedure, with the intention to hide/ delay the state of insolvency or to damage a creditor’s rights.
The provisions above (excepting d-f) shall not apply to acts concluded in good faith in the performance of an agreement with creditors concluded as a result of out-of-court negotiations for the debtor's debt restructuring, provided that the agreement was reasonably able to lead to the financial recovery of the debtor and not have the purpose of prejudicing and/ or discriminating against creditors.
There are, also, a number of acts or transactions concluded by the debtor during the two years prior to the opening of the procedure with persons which have a legal relation with the debtor, that may also canceled and the benefits recovered:
a) With a limited partner or associate holding at least 20% of the capital of the company or, as the case may be, of the voting rights in the general meeting of the associates, in the case where the debtor is that limited partnership, respectively an agricultural company, in collectively or with limited liability;
b) With a member or administrator, when the debtor is a group of economic interest;
c) With a shareholder holding at least 20% of the shares of the debtor or, as the case may be, of the voting rights in the general meeting of the shareholders, if the debtor is that joint stock company;
d) With an administrator, director or a member of the debtor's oversight bodies, a cooperative society, a limited liability company or, as the case may be, an agricultural company;
e) With any other natural or legal person, having a controlling position on the debtor or his activity;
f) With a co-owner or dear owner of a common good;
g) With the spouse, relatives or affinity up to the fourth degree included, of the natural persons listed under let. a) -f).
The acquiring third party in the course of a patrimonial transfer, canceled according to the provisions stated above, will have to return the asset transferred to the debtor or, if the asset no longer exists or there are impediments of any kind for its return, the third party will reimburse the value of the asset from the date of the transfer. In case of restitution, the parties will be reinstated in the previous situation.
The acquiring third party, who has returned to the debtor's property the good or the value of the asset transferred to him by the debtor, shall have against the debtor's property a claim equal to the price paid, to which may be added the value in increase of the property determined by the possible investments made by the third party, provided that the latter has accepted the transfer in good faith and without the intention of preventing, delaying or deceiving a creditor. Upon his request, the third-party acquirer of good faith shall be entered in the Creditor’s Table with the receivable arising from the return of the asset or its value and may participate in any distribution. Any lack of good faith must be proven.
The third party that acquired the asset free of charge, and in good faith, shall return the goods in the state in which they are found and, failing that, shall return the difference in value with which they have been enriched. In case of lack of good faith, the third party will return, in all cases, the entire value of the asset, as well as any fruits.