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Restoring shares to the bankrupt's estate

28/07/2016

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United Kingdom

In a recent case the High Court had to deal with how the diminution in value of shares should be assessed on the restoration of the shares to the bankrupt's estate.

In a recent case the High Court had to deal with how the diminution in value of shares should be assessed on the restoration of the shares to the bankrupt's estate.

One of the duties of a trustee in bankruptcy (like the liquidator of a company that is being wound up), is to get in the estate of the bankrupt person, and to consider whether any assets can be clawed back where, for example, there has been a prior void or voidable disposal of those assets.  Any transfer of assets by the bankrupt after the date of presentation of the bankruptcy petition is void unless made with the consent of or ratified by the court.  In passing, the reason why a disposal by a receiver appointed by a secured creditor is not caught by this, despite the fact that the receiver usually acts as agent of the bankrupt or insolvent company, is because the relevant disposal is at the date of the original creation of the security, not the date of the disposal by the receiver.

In this case, minority shareholdings in a number of companies had been disposed of by the bankrupt to family members, the consideration being the satisfaction of supposed existing debts, after the presentation of a bankruptcy petition.  The shares had since fallen in value, and the trustees claimed that they would have sold them before that fall.  Of course if a creditor of the bankrupt had had fixed security over the shares no such disposal would have been possible without the creditor's consent, but the case is still of interest to creditors seeking to prove in the bankrupt's estate of an individual borrower or guarantor.

Interestingly, the original transfer of the shares was void, but was not treated as a nullity, and the respondents eventually gave up their claim that it was valid, and agreed to restore the shares to the bankrupt's estate.  The issue was now whether the trustees in bankruptcy could claim against the respondents on the basis of breach of trust (by wrongfully retaining the shares) for the diminution in value in the shares between the date they were transferred by the bankrupt and the date of restoration.  The court held that the trustees were entitled to the relief claimed, in the form of equitable compensation for breach of trust and wrongful retention of the shares, which had prevented the trustees from performing their statutory function and deprived the bankrupt's estate of value.  The shares were to be valued as at the date of the transfer by the bankrupt, deducting the value, if any, at the date of return, and leaving the respondents to fund that sum.  The court did not, however, award compound interest on the sum to be paid, because there was no evidence that the respondents had benefitted financially from the breach of trust.

*Ingram and another v Ahmed and others [2016] EWHC 1536 (Ch).

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