Asset Protection

4.1 INTRODUCTION: Transfers of assets may be open to challenge under two sets of legal rules. The first set of rules are known as "fraudulent conveyance" rules.  The second set of rules relate to bankruptcy.  The legal provisions applicable in these two scenarios are considered separately below.

4.2.1 FRAUDULENT CONVEYANCE RULES: The earliest United Kingdom statutory provisions relating to Transfers of assets generally are found in the "Statute of Elizabeth", enacted in England in 1571.  Most Common Law countries, including the United States, have adopted similar legal rules as a result of their common legal heritage.

4.2.2 The Statute of Elizabeth is entitled "An Act against fraudulent deeds, alienation, etc." - it is also known as the Fraudulent Conveyances Act 1571.  The Act declares to be "clearly 
 and utterly void" any conveyance of land, goods, or chattels made with the purpose or intent of hindering or defrauding creditors and others of their just and lawful debts.

4.2.3 Subsequent Case Law clearly expanded the scope of the Statute to include future creditors.  The inclusion along with "creditors" of the undefined category of "others" was held to allow a future creditor, whose debt was not in existence at the time of the Transfer, to apply under the Statute to set aside the Transfer, by showing that his/her subsequent claim is also delayed or hindered by the Transfer.

4.2.4 The creditor/applicant has the burden of proof of establishing that one of the Transferor's objectives in making the Transfer was to delay or hinder or defraud the creditors and others.  But the tendency through the Case Law has been for judges to be relatively easily swayed by arguments in the public interest.  In addition, the expression "intent to defraud" was given a broad meaning, not requiring anything like a criminal intent.

MacKay v. Douglas (1872) L.R. 14 Eq. 106
Butterworth ex. p. Russell (1882)19 Ch. 588 
Re Wise (1886)17 QBD 290
Cadogan v. Cadogan (1977) 1 All ER 200

4.2.5 Statute of Elizabeth contained no limitation period: thus, actions to set aside a given Transfer could be brought at any time, and the length of time between the Transfer and the aggrieved Creditor's claim (or the application to Court) was of no consequence.

4.2.6 If the Court made an Order under the Statute setting aside the Transfer, then the Transfer was held void ab initio, and of no effect.  If the Transfer created a Trust, and remained its only funding, then it followed that the Trust would also be voidable or void.

Smith v Dresser (1866) LR 1 Eq. 651
Ideal Bedding Company v Holland (1907) 2 Ch. 157

4.2.7 The United Kingdom provisions are now contained in the Insolvency Act 1986 ss.423-425, replacing the old s.l72 of the Law of Property Act 1925.  These provide that if the Court is satisfied that the Transfer into Trust was made for the purpose of putting assets beyond the reach of a person who is making, or may at some time make a claim against the Settlor, or otherwise prejudices the interests of such claimant or potential claimant, the Court can Order that the Transfer be set aside

4.2.8 Underhill & Heyton on Trusts & Trustees (14th Edition) state in their Article 17 (p.223-226), on the effect of settlements intended to prejudice Creditors apart from bankruptcy, the following:

"Thus, if a professional man in a partnership is worried that the amount of professional indemnity assurance cover may prove insufficient for possible future claims so that he had better preserve his house, and so vests it in in his wife then the transaction will be impeachable, irrespective of the man being adjudged bankrupt "

4.2.9 As a comparative note, similar rules also exist in Civil Law jurisdictions, deriving from Roman Law.  These rules provide for a legal action called "action revocatory" or "action paulienne".  The effect of the rules is broadly similar, enabling creditors to recover property disposed of by a debtor with fraudulent intent.

4.3.1 BANKRUPTCY LAWS:  Bankruptcy legislation is also of critical importance.  The earliest provisions relating to official collection and realization of a debtor's estate under English Law date from 1542 (34 and 35 Hen VIII Cap 4) "An Act against such persons as do make bankrupt", applying only to traders.  Prior to 1542, falling into debt was considered a mortal sin. The Bankruptcy Act 1861 extended the legislation to non-traders.

4.3.2 The United Kingdom provisions are now contained in the Insolvency Act 1986 ss.339- 342, replacing the old s.42 of the Bankruptcy Act 1914.  These provisions enable existing, future or contingent claimants to set aside Transfers (voluntary settlements) made gratuitously or at an undervalue, if the Settlor is adjudged bankrupt within a defined period (of up to ten years) of the Transfer.

4.3.3 Contingent creditors are protected, such as a victim of the Transferor's torts who has not yet obtained judgment or even commenced proceedings against the Transferor.  A future victim would not, however, be protected.

Crossley v. Elworthy (1871) LR 12 Eq. 158 
Re Ridler (1882) 22 Ch. D 74
Official Receiver v. Saebar (1972) ALR 612

4.3.4 The distinction between the Settlor's solvency and insolvency is critical as to limitation. If the Settlor was insolvent at the time of the Transfer, the Transfer can be act aside up to 5 years prior to the commencement of the bankruptcy, However, if the senior was solvent at the time. the Transfer can only be set aside if made within 2 years prior to the commencement of the bankruptcy. 

4.3.5  In the United Kingdom Insolvency Act 1986, "insolvent" is defined as either being "unable to pay debts as they fail due", or having less assets and liabilities.

4.3.6 There is also a presumption of insolvency where the Transfer is to an "associate" of the Transferor.  Under s.435, a Trustee is an "associate" if the Beneficiaries of the Trust include the Settlor, or the Trust terms confer a power alat may be exercised for the benefit of the Settlor or an "associate" of the Settlor.

4.3.7 Thus, a potential Settlor will not be able to make a valid Transfer of assets to a Trustee unless he/she can show a lot at the time of the Transfer he/she was not insolvent, and was not Transferring the assets while the intention of defeating debts or liabilities due to known and identifiable claimants.  [For these purposes it is assumed that a bankruptcy occurs within five years of the Transfer.]

4.3.8 Conversely, if the Transfer was made at a time when the Transferor was solvent, and as a result of the Transfer the Transferor remained able to pay all of his/her actual or contingent liabilities known to exist at the time, then the Transfers cannot be invalidated under the Insolvency Act provisions unless the Settlor/Transferor becomes bankrupt within two years. 

4.4 PROTECTIVE TRUSTS:  Protective Trusts are a statutory exception (s.33 Trustee Act 1925) to the common law rule that a beneficiary's interest under a Trust may not be subject to conditions or provisos excluding them from claims of creditors.  A distinction must be drawn between Trusts created by a third party, and Trusts where the Settlor is also the protected beneficiary: in the latter case, the Settlor/Beneficiary will not be protected from Creditors in the event of his/her own bankruptcy. 

4.5.1 The rules thus seem fairly clear-cut.  Why therefore is there a need to "go Offshore" at all if the legal system in the home jurisdiction will uphold the validity of the Transfer into the Trust, provided the Transfer.