If family members or friends are facing bankruptcy, it may be tempting to assist them in keeping their assets away from the clutches of creditors. The folly of such conduct was, however, strikingly revealed by a Court of Appeal case concerning a family clothing business.
Shortly before he was declared bankrupt – and after a petition for his bankruptcy had been presented – a businessman transferred his minority shareholdings in three family companies to his brother. Some of the shares were later distributed to his three sisters. His trustees in bankruptcy, however, launched proceedings against the four siblings under Section 284 of the Insolvency Act 1986 in order to recover the value of the shares for the benefit of their brother's creditors.
The siblings ultimately accepted that the transfers were void and delivered the shares up to the trustees shortly before the trial of the action. The judge, however, ordered them to pay to the trustees the difference between the fair value of the shares as at the date on which they received them – assessed at £2,216,000 – and their fair value as at the date when they were returned to the trustees.
In ruling on the siblings' appeal, the Court noted that the case involved serious dishonesty, in which the businessman's brother had played a central role. Once the trustees had been appointed, he came under an immediate obligation to notify them that he held the shares and to restore them to his brother's bankrupt estate. His failure to do either of those things constituted a breach of trust.
In allowing the siblings' appeal in part, however, the Court found that the sums payable to the trustees should be calculated on the basis of the fair value of the shares as at the date when the trustees would have sold them. Such a sale would not have occurred until three to six months after the transfers.