Gratuitous Alienation

What is Gratuitous Alienation?

Basically, in terms of Section 242 of Insolvency Act 1986 provides protection against company’s directors and individuals disposing of assets beyond the reach of its creditors. It also includes the transfer of a property from a debtor to another connected person for no consideration or for inadequate consideration before signing a trust deed or going bankrupt.

Any property transactions carried out by a company or an individual to protect assets from a creditor can be called into question or challenged by a trustee (liquidator) and can ultimately be unwound by a court.

As far as a property is concerned, gratuitous alienation is where the company or the individual has given away the property for nil consideration or for an amount which is under market value. The intention of the transfer is irrelevant, it is the effect which is important. If a trustee raise’s an action and wins then the property is returned to the position it was before the transfer.

The legislation states, if the asset is transferred to someone associated with the insolvent company or person and the transfer is completed in the last 5 years, it can be unwound by the court. If the transfer is in favour of someone not connected to the debtor then the relevant time period is normally 2 years. If you are aware the transfer of the property is for under market value or you have knowledge of the person transferring the property is doing so for under market value then the transfer can be attacked by the trustee. If a third party has acquired the property in good faith, and for adequate value, then the reduction of the transaction by a trustee becomes very difficult and the trustee is unlikely to be successful. The criteria of “good faith” and for “adequate value” is open to interpretation. It is still important that your solicitor checks the dispositions for any transfer of the property in the last 5 years for inadequate consideration.

It is therefore important that you get your solicitor not only to check the solvency of the person selling you the property but any previous suspicious transfers for under market value in the last 5 years.

Defences for Gratuitous Alienation

• The gratuitous alienation was a charitable gift to someone not associated with the debtor.
• The alienation was made for adequate consideration (so make sure you have independent reports to back-up the consideration paid).
• Immediately, or at another time after the alienation the company or individual assets were greater than its liabilities (how you intend to prove that can be difficult if you don’t have access to the company’s or the individual’s asset and liabilities.) It is important that your lawyer looks carefully at the disposition and gets the full facts of any previous transfers for below market value and fully checks out any bankruptcy or sequestrations from previous owners.

What can you do to avoid gratuitous alienation claims?

• Take a Title indemnity policy, there are companies who specialise in this type of insurance. You will be unlikely to get insurance if there is some doubt about previous owners debt situation. Basically, insurance will cover you when you pay inadequate consideration for a property and where there is no evidence of any insolvency or proceedings against previous owners.
• Get a declaration of solvency from the directors or individuals any time you buy a property for inadequate consideration. This still does not protect you but would help with any claim against a director or individual providing they actually have assets to claim against. You don’t normally have to concern yourself with properties bought for under value from a trustee or at auctions.

What can you do if a trustee raises gratuitous alienation action to recover a property you have bought?

You must seek immediate legal advice so your lawyer can challenge the gratuitous alienation with the trustee. Not all gratuitous alienation actions by trustees’ are successful so it’s important that we are aware of all the facts to make a successful defence. We can also raise a claim against the seller for any losses you are likely to suffer. We will also check if your solicitor who you used to purchase the property has carried out all the proper checks on previous sellers for any insolvency proceedings and if there were any caveats placed on the title.

What if you knew there was a potential gratuitous alienation when you bought an undervalued property?

McEwan Fraser Legal has experience in dealing with this exact scenario and if you were in a position of knowledge as the purchaser and relied on that information to make a decision to purchase a property that you did not bring to attention to your solicitor then you can’t argue that you bought the property in good faith. You are unlikely to defeat a trustee in any claim for a reduction of the disposition.