This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. The statutory basis for this in England and Wales is in sections 339-423 of the Insolvency Act 1986. A good example of what happens if property is transferred to a trust to avoid creditors is the case of  IRC v Hashmi & Hashmi [2002] EWCA Civ 981 [2002] . On appeal to the Court of Appeal the point at issue was whether the High Court had been correct in finding that the transfer by Mr Hashmi to the trust should be set aside. Section 548 of the Bankruptcy Code provides that a trustee or DIP "may avoid any transfer... of an interest of the debtor in property, or any obligation... incurred by the debtor" within two years before a bankruptcy filing if the transaction was actually or constructively fraudulent. Matthews Folbigg is one of Western Sydney's leading law firms located in the heart of Parramatta. This was the case of  Swift Advances PLC v Anjum Ahmed and Parveen Ahmed [2015] EWHC 3265 (Ch) 165. The second protector, Viktor, acted on his father's instructions and, whilst the other beneficiaries (his children) would benefit from the trust, they only did so through the decisions of Mr Pugachev. Debtors are motivated to renounce or disclaim' property to which they become entitled, whether by bequest, devise, or inheritance, in order to shield the property from creditors and avoid taxes.2 Although the Bankruptcy Reform Act of 19783 specifically attempts to prevent Mr Pugachev fled Russia and moved to England. Parenting and Child Custody: Plain English Guide, Probate and Administration of Deceased Estates, Wills, Enduring Powers of Attorney and Appointments of Enduring Guardians, Enduring Power of Attorney: Plain English Guide, Appointment Of Enduring Guardians: Plain English Guide, Insolvency, Restructuring & Debt Recovery, The meaning of ‘detached studio’ under the Codes SEPP, Debt Restructuring Part 2 – affects on a company under restructuring, Debt Restructuring Part 1 – Introduction, Eligibility & the Restructuring Practitioner, Don’t Go Chasing Waterfalls – COVID-19 Safe Harbour is (still) not Safe, SME Debt Restructuring Legislation Passed, Level 7, 10-14 Smith St I. (For more on the consequences of failing to disclose a property transfer, see Hiding Assets in Bankruptcy.) Following the 2008 financial crisis the bank suffered losses and was ultimately declared insolvent in 2010.    Liability limited by a scheme approved under Professional Standards Legislation. By using and browsing the CII website, you consent to cookies being used in accordance with our policy. . Mr Mohamed Akram Hashmi’s tax affairs were under investigation by HMRC. . This is especially important where the settlor is one of the trust beneficiaries or has reserved extensive powers for himself. This interpretation was later applied by the Supreme Court of NSW in the case of Bechara v Haratsaris [2013] and it is therefore important to check if a contract could be reversed by the courts in instances where there may be an third party contract dispute for instances such as selling or buying a property. Namely, there will be no protection for trust assets if at the time of making the transfer to the trust the settlor is already insolvent (or becomes insolvent as a consequence of the transfer) or the transfer is made with a view to avoiding creditors. How the Trustee Recovers Fraudulently Transferred Property. The Court of Appeal decided that, on the evidence before them, the High Court had been entitled to hold that a major factor in Mr Hashmi’s decision to set up the trust was the possibility of putting the property beyond the reach of creditors, including HMRC. The High Court decided that the transfer was caught by section 37A because the transfer was intended to defraud Mrs Marcolongo. A recent High Court decision has found that the transfer of property from a former Irish dancing teacher to his wife was carried out with an intention to avoid an order requiring him to pay €400,000 damages to a former pupil who fell victim to his sexual abuse. The solicitor and his wife were directors of the companies that acted as trustees. The Chapter 7 Trustee refuses to pursue the fraudulent transfer claim, and the Bankruptcy Code’s two-year statute of limitations expires. Sometimes a “proper” trust may be created but with the specific intention of avoiding creditors; in other cases there may only be an appearance of a trust. If the trustees do not assume proper control over the trust property and simply follow the settlor’s instructions, the chances are the trust will be declared to be a sham or a mere illusion (there is only a subtle difference in law between the two). . HMRC applied to the High Court to have the trust deed set aside under the Insolvency Act 1986. The Uniform Fraudulent Transfer Act, which has been adopted in North Carolina, is designed to prevent fraudulent transfers and allow a … The “debtor” made a transfer of its property with “actual intent to hinder, delay, or defraud [a] creditor” in collecting a monetary “claim”, and without “receiving a reasonably equivalent value in exchange for the transfer” (Civil Code § 3439.04); and; The other factors in … However, if you sell property to what is called a bona fide purchaser for value, i.e., someone that is without knowledge that you have a creditor problem and that person pays you fair value for the property, the buyer of your property, will not have his property acquisition set aside since … We exist to make a difference and we take pride in our work and in the role we play in helping our clients to find solutions, resolve disputes, seize opportunities, and create and protect value. Fraudulent Transfer of Property and the Avoidance of Legal Duty. HMRC applied to the High Court to have the trust deed set aside under the Insolvency Act 1986. Under section 37A of the Conveyancing Act 1919 any transfer of property with the intention to defraud creditors can be retrieved by the courts. The trusts held assets largely for the benefit of Mr Pugachev, his partner and their minor children. The reality of the situation will be of paramount importance and the Courts will carefully examine all the evidence. Although the majority of the assets had notionally been settled on trust by Mr Pugachev’s son, Viktor, the assets originated from Mr Pugachev (indeed the judge decided that Mr Pugachev should be treated as the settlor of the trusts as Viktor was in effect acting as his nominee). We are leaders in commercial, private client, and government law, Home News & Publications Property Law Transferring Assets to Avoid Creditors. There have been a number of cases where a trust has been declared to be a sham and therefore not valid. Transfer of property to avoid claim. If you transfer property valued at $600 or more to a creditor, the look-back period is only 90 days. . A fraudulent conveyance, or fraudulent transfer, is an attempt to avoid debt by transferring money to another person or company.It is generally a civil, not a criminal matter, meaning that one cannot go to jail for it, but in some jurisdictions there is potential for criminal prosecution. First Hypothetical:Debtor makes a fraudulent transfer shortly before filing Chapter 7 bankruptcy. DIA began enforcement proceedings in England and obtained a GBP £1.1 billion worldwide freezing order against Mr Pugachev's assets. Debtors should understand that a fraudulent transfer to a family member or friend likely will cause them to be named … Importantly, the High Court interpreted the reference “intention to defraud” to include hindering or delaying creditors. If the creditor believes that there was collusion between the two, then the creditor may add the debtor as a party. of an interest of the debtor in property . App. The Risky Business of Transferring Assets to Avoid Creditors. It is well known that, for a trust to be legally effective, the settlor must divest himself of the beneficial ownership of the trust property. He was also sentenced to two years' imprisonment for contempt of Court which he has not served as he fled to France. In determining if a transfer of property is void, consideration is given to both the physical transfer of property and the intent with which the transfer was made. The property transferred to the trust was … The Court found that if the trust deeds did divest Mr Pugachev of his beneficial interests in the assets, then it was with the purpose of hiding his control of the assets in the trusts from his creditors and so should be set aside. The transfer must be for the benefit of a creditor. If you do not consent, you are always free to disable cookies if your browser permits, although doing so may interfere with your use of some of our sites or services. HMRC applied to the High Court to have the trust deed set aside under the Insolvency Act 1986. The trust was created by Mr Ahmed in favour of his wife, the second defendant, giving her beneficial ownership over two properties against which it was alleged that he subsequently secured loans. A recent decision in JSC Mezhdunarodniy Promyshlenniy Bank and another v Pugachev and others [2017] EWHC 2426 (Ch) demonstrates the willingness of the Courts to strike down sham trusts. DISCLAIMER: This article is provided to clients and readers for their general information and on a complimentary basis. The “trust” was set aside. However, there are some important lessons here for all  potential settlors, namely that the  retention of excessive control over a trust arrangement may lead to successful claims by third parties that the settlor has never successfully divested himself of the beneficial ownership of  the relevant assets. It was also stated that the intention to defraud need not be the sole or dominant intention. where the transfer involved actual or constructive fraud. At the insistence of Mr Chen, one of the properties owned by the company was transferred by the company to him to avoid the claim of Mrs Marcolongo, amongst other things. They can claim that you made the conveyances with the intent, or effect, to hinder, avoid, or delay creditor collection. © 2020 Matthews Folbigg Lawyers. In the alternative to the first two claims, if the trusts were effective and divested Mr Pugachev of ownership of assets, they should be set aside under section 423 of the Insolvency Act 1986 because the intention was to prejudice the interests of Mr Pugachev's creditors. Uniform Fraudulent Transfer Act. In either case the Courts are likely to set such a trust aside. The Fraudulent Transfer Act is also called the “Voidable Transfer Act” because the transaction may be “voided” or reversed by a court. Copyright ©2020 The Chartered Insurance Institute. He held that in such circumstances an inference could be drawn that a reason for not doing so was to keep knowledge of the transaction private and within his control. Mr Sergei Pugachev, a Russian national, founded Mezhprom Bank in Russia in 1992. That is, if you moved the asset prior to a certain time, the transfer is safe from creditors. The transfer must be used to pay an antecedent debt (a debt that existed before the transfer occurred). Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. The intentional transfer or conveyance of property or assets to avoid payment of a claim for money owed is called a "fraudulent conveyance." How to Avoid a Fraudulent Transfer. In the event they won on all three counts. It was not necessary for the proscribed purpose to be the dominant purpose; it was sufficient if it was a real substantial purpose. The best way to avoid a fraudulent transfer is to be honest with creditors regarding personal assets and ability to pay debts. It is also interesting because the claimants based their case on three separate arguments so as to cover all the angles. Mr Mohamed Akram Hashmi’s tax affairs were under investigation by HMRC. All financial advisers need to be aware of when this can happen. a case in which the  trust deed was produced by the debtor only after the creditor had moved to enforce its security. The trust deeds provided that Mr Pugachev’s protectorship would automatically terminate in circumstances where he was “under a disability”, a term which included when Mr Pugachev was subject to the claims of creditors. Under section 37A of the Conveyancing Act 1919 any transfer of property with the intention to defraud creditors can be retrieved by the courts. AN important element of a fraudulent conveyance is that an injury must occur. Before his death he had set up a trust for his minor son and transferred his interest in a property to it. The section does not apply when a transaction is made in good faith and does not have the intention to defraud creditors at the […] The protector’s powers were unusually extensive and included powers to: Back in Russia the DIA alleged that Mr Pugachev had misappropriated Mezhprom Bank assets prior to the liquidation and in 2015 the Russian Court gave judgment against Mr Pugachev in the sum of approximately US $1 billion. This means he can undo them, taking the property back into your bankruptcy estate if he believes you moved them into the trust in an effort to avoid paying your creditors. Mezhprom Bank and the DIA (the claimants), sought to "bust the trusts" and enforce the judgement against the assets of the trusts on three separate bases: As indicated above the High Court agreed with all three arguments. The 2 grounds for an avoidance suit are actual fraud and constructive fraud. Many of them have a 4 year statute of limitations for fraudulent transfer, or 1 year after the discovery of a transfer. The Court decided that it was a sophisticated and subtle form of sham. The trusts were illusory and of no substance because the trust deeds, properly construed, did not divest Mr Pugachev of his beneficial ownership in the trust property; Alternatively, the trusts were shams and of no effect because the common intention was that the assets would continue to belong to Mr Pugachev; and. Where land is involved it is also important to remember to record any changes of beneficial ownership in the Land Registry, and that avoidance of creditors need not be the "main motive" of creating the trust for the transaction to be set aside. Some people filing for bankruptcy use transfers as a way to try to hide assets from the bankruptcy court. That means you cannot set up a trust and transfer your property to the trust for the sole purpose of putting it out of reach of your creditors. veto the distribution of income or capital from the trusts; veto the release or revocation of any power granted to the trustees; veto the early termination of the trust period; appoint and remove trustees, with or without cause; veto an amendment to the trusts by the trustees. When you file for Chapter 7 bankruptcy, you must be willing to give up your property to repay creditors. One of the benefits of this is that assets which are held in a trust are protected from creditors, for example should the settlor become insolvent or be declared bankrupt. The trusts were governed by New Zealand law and were set up with the assistance of a New Zealand solicitor. 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