Although the New Zealand court suggested that it considered the trusts to be neither illusory nor shams, this was apparently based on deficient and incorrect information given to the New Zealand Court. This might be sufficient on its own to establish the required purpose under section 423, although in this case it supported other evidence to the same effect. It is also interesting because the claimants based their case on three separate arguments so as to cover all the angles. How to Avoid a Fraudulent Transfer. Often, the property is transferred for little or no money or for far less than what it is worth. Transferring Property Prior to Bankruptcy Often, people with financial difficulties facing pressure from creditors will try to protect their property by transferring it to a spouse or family member to avoid the property forming part of the asset pool if the person later becomes bankrupt. § 5101 et seq., grants a statutory remedy to creditors where a debtor has acted to hinder his creditors and identifies several factors for scrutinizing transfers as fraudulent to creditors. It is worth looking at it in detail for a number of reasons. The Bankruptcy Abuse Prevention and Consumer Protection Act allows the trustee to "avoid" transfers of property you make to a revocable trust in the 10 years before you file. The statutory basis for this in England and Wales is in sections 339-423 of the Insolvency Act 1986. The section does not apply when a transaction is made in good faith and does not have the intention to defraud creditors at the […] 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] . HMRC applied to the High Court to have the trust deed set aside under the Insolvency Act 1986. The High Court granted the application. By using and browsing the CII website, you consent to cookies being used in accordance with our policy. within two years before the date of the filing of the petition . The 2 grounds for an avoidance suit are actual fraud and constructive fraud. The Court decided that it was a sophisticated and subtle form of sham. This was the case of  Swift Advances PLC v Anjum Ahmed and Parveen Ahmed [2015] EWHC 3265 (Ch) 165. A recent BBC Panorama programme highlighted that bankruptcy isn't always what it seems. The creditor made  an application under section 423 of the Insolvency Act 1986 to set aside a deed of trust on the grounds that it was a transaction entered into at an undervalue, “a real and substantial” purpose of which was to put assets beyond the reach of a creditor, or to otherwise prejudice the interests of creditors. The Russian state agency, Deposit Insurance Agency (DIA), was appointed as liquidator. He retained extensive control because he could dismiss the trustees and veto how they exercised their powers, and consequently retained beneficial ownership of the assets he put into the trust. 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. 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. Before his death he had set up a trust for his minor son and transferred his interest in a property to it. A transfer to defeat creditors is a transaction that is void against the Trustee in bankruptcy. The transfer must be for the benefit of a creditor. 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. The Uniform Fraudulent Transfer Act, which has been adopted in North Carolina, is designed to prevent fraudulent transfers and allow a … One of the reasons for setting up a trust is to set aside property as separate from one’s personal assets. a case in which the  trust deed was produced by the debtor only after the creditor had moved to enforce its security. The High Court decided that the transfer was caught by section 37A because the transfer was intended to defraud Mrs Marcolongo. Transfer of property to avoid claim. Mr Pugachev was the settlor, discretionary beneficiary and protector of the trusts. The Risky Business of Transferring Assets to Avoid Creditors. The “trust” was set aside. © 2020 Matthews Folbigg Lawyers. . They can claim that you made the conveyances with the intent, or effect, to hinder, avoid, or delay creditor collection. your property may permit a creditor, when finally obtaining a judgment against you, to set aside the transfer of the property. The Bank… The High Court granted the application. Mr Sergei Pugachev, a Russian national, founded Mezhprom Bank in Russia in 1992. The best way to avoid a fraudulent transfer is to be honest with creditors regarding personal assets and ability to pay debts. (For more on the consequences of failing to disclose a property transfer, see Hiding Assets in Bankruptcy.) 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. We are a professional body dedicated to building public trust in the insurance and financial planning profession. Laws vary in each state. By using and browsing the CII website, you consent to cookies being used in accordance with our. This is especially important where the settlor is one of the trust beneficiaries or has reserved extensive powers for himself. An example would be a transfer under a contract for sale of a property. The Pugachev decision is interesting as it comes soon after the Panama Papers and Paradise Papers and the considerable publicity given recently to tax avoidance involving hiding assets offshore. Doubtless, some of the ways of hiding money involves trusts. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies. He was also sentenced to two years' imprisonment for contempt of Court which he has not served as he fled to France. In either case the Courts are likely to set such a trust aside. 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). 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. 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 … The Chapter 7 Trustee refuses to pursue the fraudulent transfer claim, and the Bankruptcy Code’s two-year statute of limitations expires. The creditor may suggest that certain transfers of your assets to other people or entities or investing money in exempt asset vehicles (such as annuities) constitute a fraudulent transfer or fraudulent conversion. The Chapter 11 debtor continues in possession, without appointment of an official committee. First Hypothetical:Debtor makes a fraudulent transfer shortly before filing Chapter 7 bankruptcy. The trusts held assets largely for the benefit of Mr Pugachev, his partner and their minor children. If you transfer money or property to an insider, such as your spouse, a family member or business associate, the 90-day look-back period increases to one year. . The High Court held that the transfer to Mr Chen was caught by section 37A and overturned the decision of the NSW Court of Appeal. 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. Creditors are usually sophisticated in tracking personal assets, so any attempt to hide or transfer property … There was in fact an earlier case involving these trusts brought in the New Zealand Court where the original trustees had been removed with the agreement of the Court. 4th 8, 13.    Liability limited by a scheme approved under Professional Standards Legislation. Parramatta NSW 2150. The solicitor and his wife were directors of the companies that acted as trustees. The section does not apply when a transaction is made in good faith and does not have the intention to defraud creditors at the time of transfer. 7 Mr Pugachev was the protector of each of the trusts, with Viktor named as successor protector. The transfer occurred within 90 days of the filing of the bankruptcy, or one year if the creditor was an insider. 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 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. As for trying to avoid creditors, even if a trust is not a sham, there is no absolute protection. The High Court decision of Marcolongo v Chen [2011] provides direction for those seeking to challenge a transfer under section 37A.  Mr Chen acted in a representative capacity for the company that owned the property. 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. There was another more recent case involving a so-called  “deed in the drawer” , i.e. Some of Britain's biggest bankrupts are going to great lengths to hide their money while declaring themselves bankrupt to escape their debts. Yaesu Electronics Corp. v. Tamura (1994) 28 Cal. Clearly, it is possible, in principle, to protect assets from creditors by setting up a suitable trust. 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. The Bankruptcy Code provides that "[t]he trustee may avoid any transfer . The transfer must be used to pay an antecedent debt (a debt that existed before the transfer occurred). Further, a transfer of property to your trust (at any time) can be clawed back if it was transferred with the intention of defrauding creditors. Some people filing for bankruptcy use transfers as a way to try to hide assets from the bankruptcy court. This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. 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. Before his death he had set up a trust for his minor son and transferred his interest in a property to it. Before his death he had set up a trust for his minor son and transferred his interest in a property to it. . Given the extensive powers that Mr Pugachev reserved for himself it is not really surprising that the Court found against him, especially given the specific facts and circumstances, which are probably not that common. The Illinois Fraudulent Transfer Act refers to transfers of money or property in order to avoid paying a creditor or a potential creditor. of an interest of the debtor in property . Under section 37A of the Conveyancing Act 1919 any transfer of property with the intention to defraud creditors can be retrieved by the courts. Copyright ©2020 The Chartered Insurance Institute. 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. However, there are limits on such protection as explained below. 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