Defrauding creditors by transferring assets to trusts

The Supreme Court has provided further guidance on when it will rule that the transfer of assets to a trust constitutes intent to defraud creditors.

In Regal Castings v Lightbody the Supreme Court considered a transfer of property by a debtor to his family trust which was said to have been made with intent to defraud creditors. The Court found that the transfer of property was void.

The facts of the case

Regal Castings loaned Lightbody a substantial sum to provide capital for Lightbody's business. Without telling Regal Castings, Lightbody transferred his house, which was his only substantial asset, to a family trust. When Lightbody subsequently defaulted on the loan, Regal Castings obtained judgment against him. The creditor then brought the present claim under section 60 of the Property Law Act 1952 (PLA 1952) to set aside the transfer of the property as having been made with an intent to defraud.

It was suggested during the hearing that a transfer of property for no consideration gave rise to a presumption of an intention to defraud. The majority of Court found it unnecessary to decide whether this was correct. They instead held that the question of intent remains one of fact, but accepted that an inference of fraudulent intent may be drawn from the facts.

Counsel for Regal Casting argued that Lightbody's financial circumstances were precarious, and the position of Regal Casting was inevitably prejudiced by transferring Lightbody's only substantial asset. In those circumstances an intention to defraud was established.

The Court agreed that the circumstances showed an intention by Lightbody to defraud his creditors. In reaching this conclusion, in our view the Court has lowered the bar for the conduct sufficient to trigger section 60 of the PLA 1952. Lightbody knew that one of the effects of the trust arrangement was to protect assets, but there was nothing untoward in the terms of the trust deed. The house had been transferred at value, and the gifting programme was normal. To find Lightbody had an intent to defraud the creditor ultimately required the Court to infer a level of calculation and sophistication on the part of Lightbody that arguably did not exist.

The effect of the decision

Since 1 January 2008, it is no longer necessary to prove that the debtor disposed of the relevant property with intent to defraud creditors. A transaction may be set aside if the relevant property was disposed of:

• as a gift; or

• without receiving reasonably equivalent value in exchange.

The case of Regal Castings is, however, still relevant because section 346 of the PLA 2007 provides that a disposition of property may be void if it is done with intent to defraud creditors. Also, transfers of property to trusts prior to 1 January 2008 are still governed by section 60 of the PLA 1952 and the decision in this case.