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Gift or Prohibited Transaction to Defraud Creditors? Court of Appeal Ponders

Those who believe they can avoid their creditors by transferring their assets to their loved ones are in general mistaken. However, as an important Court of Appeal decision showed, there is such a thing as a genuine gift and discerning motives is an issue of fact to be decided on the evidence.

The case concerned a foreign fraudster who had embezzled vast sums of money from an overseas bank that he formerly controlled. After he fled to the UK, the bank pursued him through the English courts and ultimately obtained a $5 billion judgment against him. He had repeatedly lied under oath and defied a worldwide asset-freezing injunction. He was ultimately sentenced to 22 months’ imprisonment for contempt of court, but avoided incarceration by escaping abroad.

At around the same time that he perpetrated the fraud on the bank, he transferred £1.1 million from a Swiss bank account to his son, who was then a 17-year-old schoolboy in London. In seeking recovery of that sum, the bank argued that the transfer should be set aside as a transaction that was intended to defraud creditors, within the meaning of Section 423 of the Insolvency Act 1986.

In dismissing the bank’s claim, however, a judge found that the money was a gift and that the transfer had not been made for a prohibited purpose. Although the fraudster may have been conscious that a by-product of the transfer would be that the money would be placed out of the hands of potential creditors, his overriding purpose had been to benefit his son.

In challenging that ruling, the bank argued that adverse inferences should be drawn from the fraudster’s proven dishonesty. It also pointed out that, whenever a person makes a gift, it can always be said that it was made for the purpose of conferring a benefit on the recipient. To find that the transfer had not been entered into for a prohibited purpose would be to defeat the object of the legislation.

In dismissing the appeal, however, the Court noted that reaching conclusions on the evidence as to the fraudster’s motive in executing the transfer fell squarely within the province of the judge. It was for him to make relevant findings of fact and it was impossible to say that he had erred in law.

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