In the lead up to an insolvency process, it is crucial that the debtor ensures that they acts honestly, honorably and fairly in his dealings with all of the other people who could be impacted by the process. Any ventures involving financial institutions or any third parties (not being lenders) which might negatively affect the interests of creditors will definitely be of definite concern, whether or not lenders are actually party to the matters or not. Insolvency processes include Bankruptcy, Individual Voluntary Arrangements, Company Voluntary Arrangements, Liquidations and so on.
There are two principal forms of fraudulent transactions:
Antecedent Transaction and Transaction at an Undervalue.
An Antecedent Transaction happens where, prior to the insolvency process starting, something is carried out which results in one lender being treated more favourably as compared to the other lenders or where a non-creditor benefits as a result of the actions of the borrower or of the organization going through the insolvency process resulting in the suffering of one or more of the creditors.
In such circumstances the official receiver or liquidator of the estate might have the right of recovery. The laws relating to an Antecedent Transaction vary somewhat according to the kind of insolvency process. In the event of a bankruptcy, for example, if one or more bills have been paid or greatly decreased in preference to others, the official receiver might possibly get back from the preferred creditor(s) the monies paid preferentially in this manner.
Transaction at Undervalue
A Transaction at Undervalue takes place when goods or services are sold or transferred to another party at less than their correct market value. In an insolvency process, if any goods are purposely disposed of at undervalue in order to avoid them being seized by the trustee in bankruptcy and realized for the benefit of creditors, the trustee can have the authority to claim such merchandise back from their new owner(s). Again there are different laws relating to a Transaction at Undervalue depending on the type of insolvency process and on other factors. In bankruptcy, for example, the Transaction at Undervalue must have occurred during the five years time prior to the presentation of the bankruptcy petition and where the transaction took place in the period of two to five years prior to the petition, the bankrupt must have been insolvent at that time or become insolvent as a result of the transaction and it falls to the trustee to prove that that is the case. An exception to this burden of proof arises when a transaction involved an associate of the bankrupt: the trustee won’t have to prove the insolvency of the bankrupt – there is just a presumption that that was the reality. Associates include the bankrupt’s spouse, or a relative or a relative’s spouse of either the bankrupt or of the bankrupt’s spouse.