Certain kinds of transaction entered into by debtors before insolvency proceedings are initiated against them may be ineffective.
The transactions must be challenged by the insolvency administrator within a year of the decision on bankruptcy taking effect.
The insolvency court then considers whether the transaction was effective and for whose benefit or in whose favour it was entered into.
If the court upholds the challenge, the beneficiary of the transaction is then required to release the relevant assets, which become assets of the insolvency. If release is not possible, the beneficiary (or his successor's in title) must pay compensation.
The transactions which may be challenged by an insolvency administrator are:
- transactions without reasonable consideration
- preferential transaction
- intentional curtailing acts
Transactions without reasonable consideration includes transactions for which the debtor received either no consideration, or significantly less than it would have otherwise received.
Preferential transactions includes transactions in which the debtor intentionally enhanced a creditor's position in the event of the debtor's bankruptcy. Transactions which are and are not deemed to be preferential are clearly set out in insolvency legislation.
For both of these types of transaction:
- it must have occurred when the debtor was insolvent, or resulted in the debtor's insolvency
- it is presumed to have happened when the debtor was insolvent if the beneficiary of the transaction is affiliated with the debtor
- the insolvency administrator is entitled to examine transactions with affiliates of the debtor entered into up to three years before insolvency proceedings were initiated, and up to one year for all other transactions
Intentional curtailing transactions are those entered into by the debtor with the intention of curtailing the satisfaction of creditors and where the other party was, or should have been, aware of such intention, having regard to all the circumstances. In this type of transaction:
- knowledge of intention is presumed where the other person is affiliated with the debtor
- the insolvency practitioner is entitled to examine transactions entered into up to five years before insolvency proceedings were initiated
Law: Insolvency Act, no. 182/2006 Coll.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 23/03/2009.