The effect of a property transaction at an undervalue and some changes to the standard PLC declaration of solvency
What is a transaction at an undervalue?
A transaction at an undervalue is, in simple terms, a transaction where an individual or corporate entity acquires a property for less than its market value.
For example, parent’s gifting property to their children to help them onto the property ladder, a gift between family members as part of estate planning or even a transfer between husband and wife pursuant to divorce proceedings could all be considered a transaction at an undervalue.
Whilst there are inherent benefits for the seller and buyer in each of the above scenarios, a buyer should always be cautious as there is a risk that if the seller later becomes bankrupt the transaction could be reversed by the seller’s trustee in bankruptcy.
What are the repercussions?
Section 238 of the Insolvency Act 1986 allows a trustee in bankruptcy to review and make an application to court to void and cancel a transaction at an undervalue provided the transaction took place within 5 years of the petition for bankruptcy.
In practical terms, this allows the trustee in bankruptcy to reverse the transaction, take control of the property and use it to discharge any of the bankrupt’s outstanding debts.
This leaves the individual acquiring the property and any subsequent buyer within that time period in a potentially perilous situation. If the transaction is set aside, they will be unable to recover the property and if any money has been given to the transferring party in consideration this will also unfortunately be lost.
How to mitigate the risk
A buyer can mitigate this risk buy obtaining a ‘declaration of solvency’ from the seller, which is in effect a statement from the transferring party certifying that they are not insolvent at the time of the transfer and will not become insolvent as a result. Recent industry guidance recommends a standard form of declaration which not only requires the transferring party to make the above statement but to set out a full schedule of their current assets and liabilities.
While it has no statutory force, the practical value of the transferring party providing a declaration is that is raises the evidential burden on a trustee in bankruptcy looking to challenge the transaction to prove that the declaration was either false or inaccurate. To cover all bases, indemnity insurance can also be purchased to cover any financial losses as a result of a transaction being set aside.
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