Gifts were for tax planning not defrauding creditors, says High Court

Out-Law Legal Update | 06 Mar 2019 | 5:50 pm | 2 min. read

LEGAL UPDATE: The High Court refused to make an order to unwind certain gifts made by a bankrupt to his family prior to his bankruptcy as transactions defrauding creditors. The court found that the gifts were made for tax-planning purposes and were not therefore transactions defrauding creditors.

Robin Farrell, an investment manager, ran the Arch group of companies which provided investment and other financial services. In 2007 the FSA began an investigation into one of the group's products. While the FSA's initial concerns proved not to be justified, their investigations brought to light wider issues relating to the group's performance, management and record keeping. The 2008 financial crisis also created liquidity issues for the group.

In 2009 Farrell made various large gifts of cash from his own bank account totalling £855,000 and transferred 47% of his 50% interest in the family home to his wife and to trusts set up in favour of his children. In 2011 claims for mismanagement were brought against the Arch group and Farrell personally. In 2014 damages of £24 million were ordered in relation to the mismanagement claims and as a result Farrell was made bankrupt in late 2015.

Under section 423 the Insolvency Act 1986, the court has the power to unwind gifts made by a company or person if the gifts are for the purpose of either putting assets beyond the reach of a person who is making, or may at some time make, a claim against them, or otherwise prejudicing a claim. The person applying to court must prove that the purpose of the gifts was to put assets beyond the reach of, or to prejudice, a third party claimant, on the balance of probabilities. Farrell's trustees in bankruptcy applied for an order under section 423 to unwind the gifts, saying they were transactions defrauding creditors, and return the gifted assets to the bankruptcy estate.

The High Court ruled that the primary purpose of the gifts was tax planning. Farrell had received tax advice and was motivated by his desire to provide for his family in the future and to pay for household expenses, it said. The tax planning advice Farrell had received included equalising Farrell's assets with those of his wife. The High Court was also of the view that the liquidity problems faced by Farrell's business and the FSA investigations were not sufficiently troubling as regards Farrell's personal assets at the time of the gifts for him to have potential third party claims in mind, and in fact Farrell's state of mind regarding his personal finances appeared optimistic at the time of the gifts.

The ruling is in line with past decisions on the issue. The judge was however at pains to express how borderline the case was: he admitted to very nearly finding in favour of the trustees.

The case is a good reminder of the approach the court will take in claims for transactions defrauding creditors, and the high threshold required to bring a successful claim.

No claims for transactions at an undervalue could be brought because the gifts were made more than five years before the start of the bankruptcy, and so were beyond the relevant look-back period.

Simon Gibbs is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com