Family gifts can unravel: Transfer of assets to spouses and children can be challenged in court by frustrated creditors

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The Independent Online
CREDITORS can challenge the transfer of assets to spouses or children many years after the switch has taken place.

Many people who run their own companies transfer their own assets, which will often include their home, to family members to ensure they are not seized in the event of the business going bankrupt.

In 1982, Ron Wyatt and his wife bought a large country house in West Sussex in their joint names through a mortgage with Midland Bank.

As with many other mortgages, a condition in the document was that they were not to dispose of their legal or equitable interest in the property without the prior written consent of the bank.

At the time of the house purchase, Mr Wyatt was working for a textile firm. Four years later, he decided to set up his own company.

He said: 'I was professionally advised to enter into a trust arrangement with my wife, giving my equity in the family home to my wife and daughters.

'This was for two reasons - to formalise my intention to endow my children at what was considered the right age, and also as a safeguard should I finally set up my own company and thus protect my familyfrom long-term commercial risk.'

The declaration of trust was dated 17 June 1987.

Mr Wyatt did not tell Midland about the document, so the bank was under the impression that Mr Wyatt remained a full joint owner.

In January 1988, Midland lent Mr Wyatt some money to set up his own business. The business was initially a huge success, but then it foundered. Midland sued Mr Wyatt for the money owed - pounds 63,134 plus costs - and in July 1991 succeeded in getting a judgment against him.

Midland tried to get an order charging Mr Wyatt's interest in the house for the outstanding amount and accruing interest. Mr Wyatt objected and the case went to court. Mr Wyatt argued that because of the declaration of trust Midland could not charge his share of the property because it was no longer his.

He lost his case. The declaration of trust had fallen foul of a section of the Insolvency Act, which says that you must not enter into a transaction for the purpose of putting assets beyond the reach of your future creditors. The bank could now proceed against Mr Wyatt's share of the property to recoup its money.

Mr Wyatt said: 'There will now be the other side's costs to pay. Six days in the High Court plus all the preceding costs. I suppose it could be pounds 40,000 to pounds 50,000.' A spokesman for Midland Bank said: 'If Midland is owed a substantial sum and an attempt is made to put assets beyond the bank's reach, we can and will apply to the court to investigate and resolve the matter.'

Philip Freedman, a property partner with solicitors Mishcon de Reya, said: 'The Insolvency Act gives creditors a number of ways they can attack a transfer of assets. The one used in the Wyatt case applies where a gift of property is made by an individual for the specific purpose of putting the asset beyond the reach of anyone who may at any time make a claim against him. If that intention can be proved, the gift can be clawed back by a creditor even if the donor was perfectly solvent when he made the gift and is still solvent when the creditor challenges it.'

What is worse is that there is no time limit. Claims can be made years after the transfer was made.

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