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New Zealand Law Commission - Previously Unpublished Papers |
Last Updated: 20 June 2016
FRAUDULENT CONVEYANCES: OPTIONS FOR A
PROJECT
L aw Commission
June 1994
CONTENTS
Page
Executive Summary: Fraudulent Conveyances ii
I Introduction 1
IIPreliminary Research 1
Current law on fraudulent conveyances 1
Law and economics aspects 2
Protection of the debtor' s family 3
Overseas law reform 4
IIIOptions for a Project 7
Reform already proposed 7
Two options 8
Option (1) 8
Option (1): evaluation 9
Option (2) 10
Option (2): evaluation 10
IVSummary 11
EXECUTIVE SUMMARY: FRAUDULENT CONVEYANCES
1 The Commission is concerned with the practice of individuals, often
professionals or business people, transferring their
assets into trusts or to
their family or friends prior to entering into business, partnership or some
other activity which carries
a risk of liability. This may result in
unfairness when creditors cannot, at some later date, gain access to those
assets to have
debts owed to them satisfied.
2 The current law seem inadequate to deal with this problem. The
main provision which enables gifts or other dispositions
to be overturned (at a
time when the debtor is not bankrupt) is s 60 of the Property Law Act 1952.
However, s 60 has not been applied
to the situation where the person is solvent
at the time of disposing of the property and continues to be solvent for
sometime afterwards.
3 The Commission is therefore considering a project which would
investigate ways of extending s 60 to enable dispositions,
made before an
individual was under the risk of liability, to be overturned.
4 In considering an extension of this type other issues arise. One
particularly important issue is the extent to which the
law should protect the
family of an individual, in order to provide for their basic needs, from the
creditors of that individual.
This relates closely to fraudulent conveyances
because a common motivation for these dispositions is to protect an individual'
s family from the individual' s creditors.
5 The Commission is considering the following two alternative options
for a project on fraudulent conveyances:
Option (1)
⋅Comprehensively review s 60 with a view to extending it considerably
so that creditors may challenge dispositions of assets
by a debtor which occur
at an early stage or which take place over a period of time as part of a process
of " salting away" , if
the debtor or the debtor' s family continue to have
access to these assets.
Option (2)
⋅Review s 60 as described in option (1), and
⋅address the broad question of to what extent should assets be
protected, against the debtor' s creditors, for the purpose of
meeting the needs
of the debtor' s family.
6 Option (1) is narrower, it would involve focusing mainly on s 60.
Option (2) is somewhat broader, it would involve looking
into matrimonial
property law and insolvency law.
I INTRODUCTION
1 The basic purpose of a project in this area is to deal with the
unfairness which results when individuals divest themselves
of assets in
anticipation of entering business or undertaking some activity which carries a
risk of liability. Creditors are often
unable, at some later date, to gain
access to those assets to have debts owed to them satisfied. There is evidence
of considerable
public concern, and some political concern, about the use of
devices which allow the debtor to continue to live in comfort after
incurring
substantial debts which will never be paid. This concern is well-founded since
the law appears powerless to prevent these
devices.
2 This is intended as a background paper to inform the Commission and
those with whom we consult of
⋅the preliminary research which has been done, and
⋅the options for a possible project which are being
considered.
II PRELIMINARY RESEARCH
Current law on fraudulent conveyances
3 The main provision relating to fraudulent conveyances is s 60 of
the Property Law Act 1952. The Law Commission has a particular
interest in the
section. It reviews the machinery provisions of the section in its forthcoming
report: A New Property Law Act. Essentially s 60 provides that a
conveyance made with the intent to prejudice a creditor or creditors is voidable
at the instance
of a creditor prejudiced by it. In addition there are other
provisions which enable transactions to be overturned but they are much
more
restricted in their application: s 47 Matrimonial Property Act 1976 (only covers
agreements relating to or dispositions of matrimonial
property between spouses
within 2 years of bankruptcy); and the voidable transactions provisions in the
Insolvency Act 1967, Companies Act 1955 and the Companies Act 1993 which in most
cases only apply to transactions within 1 or 2 years of bankruptcy or
liquidation.
4 Section 60 and similar fraudulent conveyance provisions in other jurisdictions are said to be derived from the Statute of Elizabeth of 1571 (13 Eliz c5). Section 60 is in virtually the same terms as, and hence seems to have come directly from, the now repealed s 172 of the Law of Property Act
1925 (UK).
5 A survey of the case law under s 60 indicates that the provision has only infrequently been used in New Zealand to overturn dispositions carried out, before embarking on business or other activity, to provide a safety net in case of future liability. However, the possibility of it being applied
in such a situation is not necessarily precluded. In an early English case
the Court overturned a settlement made, for the purpose
of protecting the
transferor and his family, at a time when he was about to enter into a
speculative business venture (Mackay v Douglas [1872] UKLawRpEq 96; (1872) LR 14 Eq 106).
Such an order need not be related to any existing indebtedness of the business.
The courts accept that someone who becomes a creditor
subsequent to the relevant
disposition can claim relief under the
section (L E Borrell & Son Ltd v Hulena unreported,
19/10/90, Master Williams QC, HC, Wellington, CP526/90).
6 However, the difficulty in the situation with which we are
concerned would be in proving intention to defraud. In general
it is said that
the question of intent is one of fact and the courts seem willing to infer
fraudulent intent from the surrounding
circumstances. It is accepted that an
intention to prejudice creditors by putting assets partially or wholly beyond
their reach
is an intention to defraud for the purposes of the section (Re
Hale (a bankrupt) [1989] 2 NZLR 503, 508). But our search has not so far
revealed a case which applies the principle to a person who is solvent at the
time of the disposition
and continues to be solvent for some time
afterwards.
7 Causation is also an underlying factor in determining whether a
debtor had the intention to prejudice future creditors.
In terms of s 60, a
creditor must have been prejudiced by the disposition in order to take an
action. Some of the early English cases support the proposition that, if the
necessary result of a disposition
is to defeat a creditor' s claim, then the
debtor must be taken to have intended this result (eg Freeman v Pope
[1877] UKLawRpCh 103; (1870) 5 Ch D 538). The proposition was later rejected as being too broad
(Re Wise, ex parte Mercer [1886] UKLawRpKQB 72; (1886) 17 QBD 290). It makes sense that there
should be some link between an earlier disposition and any prejudice later
suffered by a creditor. For
example, what if a debtor makes a gift at a time
when he or she is solvent and faces no immediate prospect of incurring liability
but some years later the debtor becomes insolvent due to an unexpected happening
(eg the discovery of substantial fraud by a fellow
partner in a law firm)? In
such a case it may be more logical to treat the untoward event, rather than the
gift, as being the reason
for the prejudice suffered by debtor' s
creditors.
8 In its present form s 60 is not sufficiently clear and therefore does not
provide a strong basis for attacking the type of dispositions
with which we are
concerned. See, however, para 29 for a discussion of the limited reform which
the Commission is about to recommend.
Law and economics aspects
9 There is some literature containing analysis of fraudulent conveyance law from the perspective of laws and economics. There seem to be two theories. One, which is loosely labelled a " contractarian" account, asserts that, even if there were no fraudulent conveyance provisions, most debtors and creditors would agree to fraudulent conveyance provisions in their loan agreements anyway and therefore having the provisions enacted saves negotiation costs (Baird and Jackson,
" Fraudulent Conveyance Law and Its Proper Domain" (1985) 38 Vand LR 829).
The other theory also favours fraudulent conveyance law
but apparently on the
basis of some sort of externality (Rose-Ackerman, " Inalienability and the
Theory of Property Rights" (1985) 85 Colum LR 931). The problem identified is
that, without fraudulent conveyance law, debtors would behave in an
opportunistic manner by giving away
their assets prior to bankruptcy.
10 However, the material brings out some points in relation to the
broader costs and benefits to society of fraudulent conveyance
law. A potential
macroeconomic benefit is that, to the extent that creditors perceive that
fraudulent conveyance law reduces the
risk involved in lending, the law may
result in a lower cost of credit. Against this, if fraudulent conveyance law
is over-protective
or unduly broad, it could potentially cause harm to the wider
economy in the following ways:
⋅It may unduly restrict risk-taking on the part of those in business.
However, any averseness to risk could be seen as a consequence
of the duties and
obligations imposed by the law generally (eg the provisions imposing personal
liability on directors in the Companies
Act 1993) rather than a consequence of an extended fraudulent conveyance law. Nevertheless, this point may have some validity if fraudulent conveyance law is used to overturn corporate transactions. In the United States, fraudulent conveyance statutes have been used as a basis to attack leveraged buy-outs (see: Fogelson,
" Toward a Rational Treatment of Fraudulent Conveyance Cases involving Leveraged
Buyouts" (1993) 68 New York University LR 552).
⋅It may lead to greater reluctance and uncertainty in transactions between parties due to perceived risk of transactions being overturned. This is less of a concern in relation to commercial transactions because these would usually not have a prejudicial effect on creditors and would therefore tend not to be challenged. However, it certainly could be a concern in relation to transactions involving family members, friends, or other related parties
(ie non-arms length transactions) where the likelihood of challenge is
greater.
⋅It would reduce the incentive for creditors to do the monitoring which
they are capable of. This point really applies only
to those creditors, such as
banks, who have the ability to monitor their debtors. Ongoing monitoring is
simply not feasible for many
creditors, like small businesses, or for those to
whom a debtor has incurred liabilities in tort or restitution.
11 A limitation of the material, for our purposes, is that it does not
focus on the situation where the conveyances are mainly
to the detriment of
future rather than present creditors. Much of the analysis applies only in
respect of voluntary creditors who
give credit before the relevant conveyances
are carried out.
Protection of the debtor' s family
12 There are important related questions as to whether the family of a
debtor should be protected from the effects of debtor'
s liability and if so how
much protection should be given. The basic conflict here is between the
interests of the debtor' s family
in having their basic needs provided for and
the interests of the debtor' s creditors in having their claims
satisfied.
13 The provisions of the current law which provide protection for the family of a debtor are contained in the Matrimonial Property Act 1976 and the Joint Family Homes Act 1964. Section 20 of the Matrimonial Property Act gives each spouse a protected interest in the matrimonial home of
$58,000 or one half of the equity of the married couple in the home,
whichever is the lesser. The interest of each spouse is protected
against the
unsecured personal creditors of the other spouse. The Joint Family Homes Act
provides a similar level of protection
for homes settled as joint family homes.
In general terms, settlement puts the family home beyond the reach of unsecured
creditors
of either spouse to the extent that the home does not exceed a certain
value ($58,000).
14 Section 20 of the MPA was introduced for the sole purpose of
providing a modest degree of protection and security for the
family (see NZ
Parliamentary Debates, vol 408, 1975, 4567: Hon David Thomson) while the JFHA
had, in addition, other purposes relating
to the avoidance of death duties and
giving equal rights of possession, enjoyment and ownership in the family home
for each spouse.
15 There is a clear link between these provisions and issues relating to
fraudulent conveyances because the motivation for many such
conveyances
(especially the kind with which we are concerned) is to protect the debtor' s
family against the claims of the debtor'
s creditors. The extent and
adequacy
of the protection for the debtor' s family provided by the law (Matrimonial
Property Act and the Joint Family Homes Act), then, needs
to be examined. The
extent to which these provisions are found to provide more or less protection
than is needed would influence
one' s view of how far creditors should be able
to void dispositions made to protect the family of a debtor.
16 It seems that s 20 of the MPA (and maybe even the JFHA) and the
policy behind it needs to be reviewed. One particularly
unsatisfactory aspect is
that these existing protections are unavailable where there is a de facto
relationship. Also there are
complexities in this area such as the interaction
between the MPA and JFHA, and the possibility of a spouse being taken for some
purposes as having an equitable interest in the matrimonial home over and above
the protected interest provided for by the MPA.
Any fundamental review along
these lines would need to extend to the rules relating to the enforcement of
judgment debts and bankruptcy,
and how they resolve the competing claims of the
non-bankrupt or non-debtor spouse and creditors.
17 The issues arising in this area are also linked to insolvency law,
and it may be that the more fundamental policy questions
should be addressed as
part of the Justice Department' s planned review of insolvency. We need to
consider whether it is possible
to separate out certain defined issues relevant
to fraudulent conveyances without unduly affecting the insolvency
review.
Overseas law reform
Fraudulent conveyances generally
18 There are a number of law reform reports dealing with fraudulent
conveyances. The most interesting one is that of the Ontario
Law Reform
Commission which deals with the topic as part of the law relating to the
enforcement of judgments debts: Report on the Enforcement of Judgment Debts
and Related Matters (1983) Pt IV. The Commission proposed a change in the
approach of fraudulent conveyance law from focusing on the intent of the debtor
to looking at the effect of the transaction. If a transaction has the effect of
defeating, hindering, delaying, or defrauding creditors,
then it can be
impeached under the proposals. This is a significant change which would make it
much easier for creditors to attack
prior transactions of the debtor.
Interestingly, the Commission also recommended that only existing creditors
(those who became creditors
before the relevant transaction) should have
standing to apply to the court to impeach the transaction. The Commission took
the view
that, because those who become creditors subsequent to a transaction,
or transactions, taking place could investigate the financial
circumstances of
the debtor before extending credit, they should be taken to have lent on the
basis of the debtor' s financial position
at the time. Even though that type of
investigation is not feasible for all creditors, it was thought that the risk of
debtors having
divested themselves of their assets before incurring debt should
be borne by these creditors.
19 The most substantial effort on fraudulent conveyances appears to be
the Law Reform Commission of British Columbia Report on Fraudulent
Conveyances and Preferences (LRC 94, January 1988). In comparison with the
nature of the reform we are contemplating, the British Columbia proposals are
very
conservative. Therefore the report has limited utility for our purposes.
The main aim of their reform was to modernise the Fraudulent
Conveyance Act 1979
(BC). The provision proposed by the British Columbia Law Reform Commission is
restricted in the following ways:
⋅at the time of the transfer the debtor must have been insolvent,
rendered insolvent by the disposition, or been on the eve
of
insolvency;
⋅only present creditors may claim relief; and
⋅relief must be claimed within one year of the transfer.
20 The Scottish Law Commission and the Australian Law Reform
Commission have looked at fraudulent conveyance law in the context
of insolvency
law. The ALRC reviewed s 121 of the Bankruptcy Act 1966 (Cth) which relates to
fraudulent dispositions (see ALRC, General Insolvency Inquiry R 45,
Canberra, 1988, pp 280-283). The exercise was basically one of updating and
improving aspects of the provision, and no
major changes were proposed. The
basic approach of requiring that the disposition be made with an intent to
defraud is retained.
To make it easier to prove such an intention, it was
proposed that three further factors should be added to the matters which the
court should take into account. These were:
⋅the debtor' s solvency at the time of, and immediately after, the
disposition;
⋅ whether the debtor was engaged or about to engage in business for
which the remaining assets were unreasonably small, and;
⋅whether the debtor intended or believed that debts would be incurred
beyond his or her ability to pay.
(These factors correspond with the three situations of " constructive" fraud developed in the United
States law of fraudulent conveyances.)
21 The Scottish Law Commission report, Report on Bankruptcy and
Related Aspects of Insolvency and Liquidation (SLC 68, Edinburgh, 1982)
mentions fraudulent conveyance law briefly. The Commission proposes a provision
for challenging, during
insolvency, transactions for inadequate
consideration.
The relationship between fraudulent conveyance law and professional
liability
22 Professional liability is an area which needs to be considered carefully
in relation to fraudulent conveyances. It relates closely
to fraudulent
conveyances because a common motive for disposing of one' s assets, in the
situation with which we are concerned, is
to protect oneself against potential
liability as a professional. The situation of unlimited liability which some
professionals
(eg lawyers and accountants) face is often the main reason why
professionals transfer their assets to a family trust or into the
ownership of
their spouses, children or relatives. Therefore, it is often in this context
that the concern over the ability of individuals
to shelter assets from their
creditors arises. It should be noted that the reform which we are contemplating
would considerably
extend the reach of fraudulent conveyance law beyond what has
been proposed in other countries.
23 There are a number of reports and discussion papers of various
types which look at professional liability. An important
theme underlying these
reports is the question of what balance should be struck between the obligations
of professionals and the
rights of those they serve. Listed below is an outline
of the important points to come out of these reports:
⋅The problem of unlimited liability faced by certain professions gives rise to:
-the threat of high damages awards, and
-insufficient professional indemnity insurance to cover all potential
liability.
⋅The potential and actual effects of unlimited liability (especially if it stems from the collapse of a
large firm) are:
-loss of people from the profession and (in the future) a reluctance to join partnerships;
-encouragement to divest oneself of one' s assets (fraudulent conveyances);
-defensive professional practices.
⋅Some proposed solutions are:
-statutory caps on liability;
-permitting limited liability incorporation;
-compulsory professional indemnity insurance.
⋅There is particular concern over the potential liability of auditors.
(See Department of Trade and Industry, Professional Liability: Report of the
Study Teams (1989) and Company and Securities Law Review Committee
(Australia) Report to the Ministerial Council on the Civil Liability of
Company Auditors (1986))
24 The New Zealand Law Society is looking at professional indemnity
insurance and limitation of liability. The professional
indemnity committee
is working on a proposal for a compulsory professional indemnity scheme. In
relation to limitation of liability,
the NZLS committee is working with the New
Zealand Society of Accountants on a joint proposal. They are looking at the
options of
statutory caps and limited liability incorporation. Developments in
this area are taking place in Australia as well, with the New
South Wales and
Western Australian Parliaments considering legislation on statutory caps on
liability.
25 We need to keep a close eye on these developments. In terms of
policy, fraudulent conveyances cannot be divorced from
questions of
professional liability. Given that unlimited professional liability seems to
be a strong motivating factor behind
many conveyances, it may that any extension
of fraudulent conveyance law would not be acceptable unless some limitation on
professional
liability were put in place. As indicated by the Wellington
District Law Society seminars held in September last year, on
protecting one' s
assets, the view of many in the profession seems to be that transferring assets
to family members or into a trust
are justifiable means of protecting oneself
from professional liability. When it is considered that this liability can
arise
through no fault, involvement or knowledge on one' s own part this
attitude is understandable.
26 Fraudulent conveyance law does not increase a professional' s
liability. It ensures that the liability will, if at all
possible, be met
out of assets which should properly be regarded as the professional' s
property. Assuming that professional
liability can be appropriately limited,
there will still be a place for fraudulent conveyance law. It will apply to
those who do
not meet the legal conditions on which the privilege of limited
liability is given; for example, a requirement that a debtor must
act
responsibly towards creditors if there is a risk of insolvency. Such conditions
require a strong incentive - that is, an effective
debt enforcement system - to
ensure they are observed.
Protection of the debtor' s family
27 Some law reform reports have looked at issues relating to the
protection of the debtor' s family from creditors. The California
Law Revision
Commission published a report, Recommendation relating to the Liability of
Marital Property for Debts (1983). The report focuses on questions
concerning the extent to which the community property and separate property of
each spouse
should
be available to satisfy debts owed separately by each spouse and those owed
jointly. (There is a useful discussion of various systems
utilised in
different states). The Commission recommends continuing the " management" based
system subject to certain exceptions
to protect the basic needs of the spouses.
Broadly, under this type of system a creditor can reach property over which the
debtor
spouse has management and control - in practice this generally means that
a substantial amount of the separate property of each spouse
can be accessed as
well as the community property.
28 In Australia, the Family Law Council in its report, The Interaction of Bankruptcy and Family
Law: A Report to the Minister of Justice (Australian Government Publishing Service, Canberra, June
1992), looked at the conflicts arising between family law and bankruptcy law.
The report examines how the law resolves the competing
claims of the
non-bankrupt spouse and family and the bankrupt' s unsecured creditors. In
such situations, bankruptcy law and family
law often apply simultaneously. The
recommendations made were designed to identify and resolve these conflicts, and
achieve a fair
balance between the competing interests.
III OPTIONS FOR A PROJECT
Reform already proposed
29 To a limited extent, reform of fraudulent conveyance law is already
being proposed by the Commission in ss 63 to 69 of the Commission' s draft
Property Law Act (as part of the Commission' s project on rewriting the Property
Law Act 1952),
which are a rewrite of the current s 60. The new sections may
perhaps make it somewhat easier to overturn a disposition because
they specify
the three situations of constructive fraud developed in United States fraudulent
conveyance law and contained in the
US Uniform Fraudulent Transfer Act. This
means that it is not necessary to prove actual intent to defraud creditors if
the elements
of one of the constructive fraud situations can be proved. These
situations are where the debtor, has made a disposition, and
⋅was insolvent at the time or became insolvent as a result of the
disposition, or
⋅was engaged in, or was about to engage in a business or transaction
for which the remaining assets of the debtor were unreasonably
small in relation
to the nature of the business or transaction, or
⋅intended to incur, or believed or reasonably should have believed that
he or she would incur, debts beyond his or her ability
to pay. (Section
65)
This is an improvement on s 60 of the present Act because it makes explicit
the situations in which the courts should infer an intent
to defraud creditors.
Nevertheless, the changes would not substantially change the existing law, but
merely put into statutory form
some of the common law glosses on the section.
For example, the second situation described above is exactly the type of
situation
that existed in the case of Mackay v Douglas [1872] UKLawRpEq 96; (1872) LR 14 Eq
106 in which the court accepted that an intent to defraud should be
inferred.
30 These changes may extend the reach of the law slightly but probably
not enough to enable creditors to attack many transactions
carried out before
the risk of liability has arisen. A brief survey of the cases in the United
States has not revealed any where
the creditors have successfully obtained
relief if dispositions were carried out at a very early stage or in the
situation where
assets are slowly " salted away" over a period of
time.
Two options
31 The motivation, then, for a project in this area is to deal with
the problem of individuals being able to protect themselves
from the adverse
effects of liability and harm the interests of their creditors by disposing of
their assets. Set out below, in
brief terms, are two ways of approaching a
project in this area:
(1)Comprehensively review s 60 with a view to extending it considerably so
that creditors may challenge dispositions of assets by
a debtor which occur at
an early stage or which take place over a period of time as part of a process of
" salting away" , if the
debtor and the debtor' s family continue to have access
to these assets.
(2)Review s 60 as described in option (1) and, in addition, deal with the
broad question of to what extent should assets be protected,
against the debtor'
s creditors, for the purpose of meeting the needs of the debtor' s
family.
32 Option (1) is narrower and would involve focusing almost
exclusively on fraudulent conveyance law. Option (2)
is broader and would
involve looking into matrimonial property law and insolvency
law.
Option (1)
33 This option would focus on ways of extending s 60. One approach
would be to introduce provisions which deem dispositions
to family members or
dispositions where the debtor retains the use and enjoyment of property to have
been made with the intention
of defeating creditors. Another approach would be
to move away from intent as the basis for the provision and instead focus on
the
effect of a transaction, for example by providing that any transaction which
has the effect of hindering, delaying, defeating
or defrauding creditors may be
challenged (as recommended by the Ontario Law Reform Commission).
34 This option would essentially involve evaluating which is the best
method of extending s 60. The core issues or areas which
would need to be
considered are described below:
⋅How far back in terms of time should the law enable prior transactions of the debtor to be overturned? For instance should it be possible to overturn a transaction undertaken many years before the debtor incurred any liability? This involves deciding where to strike the balance between the interests of creditors in obtaining satisfaction of debts owing to them and the interests of debtors in being able to deal with their property
and plan their estates as they please.
⋅Should the law treat certain types of transactions differently? There
are two aspects here:
-Some transactions, because of the surrounding circumstances, are more likely
to be prejudicial than others and therefore may need
to be treated differently
under the law. Obviously, transactions between family members are an example of
this.
-Exemptions may be justified in some cases, for example, for gifts given on
customary occasions or in satisfaction of moral obligations.
It may be possible
to have
a general exemption for gifts given where the debtor does not retain any
interest or control over the property gifted.
⋅The effect of overturning a transaction, on a third party who relies
on its validity, will need to be considered. The effect
will often vary
according to the type of party involved. For example, the consequences maybe
more severe for a private individual
than for a company.
⋅Should a welfare provider (such as the Department of Social Welfare) have standing to apply under the section and, in addition, to share in the benefit if a creditor makes a successful application? The problem here is that benefits or legal aid may often be paid to someone who has deliberately disposed of their assets. In respect of welfare beneficiaries, s 74 of the Social Security Act 1964, gives the Social Security
Commission power to reduce or refuse to pay any benefit if an applicant has
deprived himself or herself of property or income. We
may want to investigate
whether this provision effectively deals with the problem.
⋅In terms of the broader economic or societal effects, there are two
aspects worth considering:
-Would an extension of fraudulent conveyance law cause undue uncertainty and
insecurity because of an increased risk that transactions
will be voided and if
so what detrimental consequences would follow?
-How are debtors or potential debtors likely to respond? It may be that a
change may simply encourage those whom we are aiming to
catch to develop more
sophisticated methods of protecting their assets from the effects of future
insolvency.
Option (1): evaluation
35 The viability of this option depends on whether we can manage the
link with the areas of professional liability and protection
of the debtor' s
family.
36 As already pointed out, the topic is closely linked with that
of professional liability. Professionals who cannot
limit their liability, or
adequately insure against the contingency of liability, can at present make use
of family trusts to insulate
their families from some of the adverse
consequences. These trusts are subject to the law of fraudulent conveyances, but
it is unlikely
that a trust of longstanding will be successfully
attacked.
37 The balance would be upset if the law of fraudulent conveyances
were significantly extended. Any proposal to do that, not
made in conjunction
with changes to the law of professional liability, could be strenuously opposed.
This would increase the risk
that any recommendations made by the Commission
would not be enacted.
38 But the Commission should not attempt to deal with professional
liability as part of the proposed project. It raises
issues relating to the
nature of the services which the various professions provide which are quite
different from the types of issues
which arise here. Including it here would
change the focus of the project away from the original concern. We could
proceed with
option (1) on the assumption that problems in this area will be
dealt with separately.
39 Similar comments apply in relation to the link with the need to
provide some protection for
the debtor' s family. We cannot proceed with option (1) unless we know that
the issues in this area and the current provisions (especially
s 20 of MPA) are
being reviewed. Many of the transactions with which we are concerned are
intended as a means of protecting the
debtor' s family in case the debtor incurs
liability in the future. Therefore the extent to which the needs of the debtor'
s family
should be provided for and how to achieve the desired level of
protection need to be examined. Presumably the Department of Justice
is, or
will be, dealing with this in the context of either matrimonial property or
insolvency. Even then, we would need to
consult with the Department on the
substance of what they are likely to recommend because it could affect the type
of provision we
want to recommend. It may be that any proposals we make would
need to be contingent on reform of s 20 of the MPA.
Option (2)
40 The reasoning behind option (2) is to address some of the more fundamental
policy issues which have just been outlined and which
must be taken into account
in resolving the immediate problem. Defining the exact boundaries of this
option is difficult because
the issues relate to a number of different areas:
matrimonial property, insolvency and the enforcement of debts. There does not
seem
be any one clearly defined area of law which we can focus on. Broadly this
option would involve:
⋅Reviewing s 60 as described in option (1); and
⋅Reviewing the existing law relating to protection of the debtor' s family from creditors of the debtor.
We would need to:
-consider, in terms of policy, the extent of the protection which should be
given the debtor' s family,
-review ss 20, 23 and 25 of the MPA, and
-review the procedures relating to the enforcement of debts and bankruptcy
from the point of view of protecting the interests of the
debtor' s
family.
Option (2): evaluation
41 The advantages of this option are that the Commission would be able
address some of the causes underlying the problem (ie
inadequate protection for
the debtor' s family) and explore some of the main policy issues underlying the
problem.
42 The main problem with this option is that it would involve looking
at parts of matrimonial property law and insolvency law,
areas which are
themselves in need of review. In terms of matrimonial property, we need to
know whether the Department is planning
a major review of the present system or
merely improvements and updating (such as extending it to de factos). If the
former is
planned, then the Commission cannot proceed with this option because
any provisions which provide for the needs of a debtor' s family
must fit into
and be part of the broader matrimonial property regime.
43 In terms of insolvency, this option would involve examining some
of the procedures relating to bankruptcy. We would need
to consult closely
with the Department so as to clearly work out the
boundaries between our project and what the Department is doing or is
planning to do on insolvency. It may be possible for us to look
at certain
clearly defined parts of the law in a way which fits with the Department' s
wider review. This would require ongoing consultation.
IV SUMMARY
44 At this stage the project team has not come to a firm conclusion on
whether the Commission should proceed with a project
in this area and if so
which option should be undertaken. The pros and cons of each option, as we see
them, are summarised below.
Option (1)
Pros:
⋅The principle underlying s 60 is fundamental to the concept of personal liability. It has wider application than the corresponding provisions of bankruptcy law. Therefore it is appropriate to review this as a separate exercise from a review of the Insolvency Act
1967.
⋅The scope of the project and its purpose would be narrow and clearly
defined. Therefore, it would be relatively small and could
be done in a
relatively short period of time.
⋅The project would not overlap with any reviews planned by the Justice
Department in the areas of matrimonial property and insolvency.
Cons:
⋅We would not be able to look into closely related issues relating to
protection of the family of a debtor and therefore we
would not be able to deal
with any of the causes underlying the immediate problem.
⋅Our proposals may be dependent on reform being undertaken in the
relation to professional liability and matrimonial property.
Option (2)
Pros:
⋅This matter lies at the intersection of family law and insolvency law. Two opposed policies have to be reconciled, namely the policy of protecting the family and the policy of ensuring that debts are paid. These policies have a force of their own which are likely to be overemphasised in a review of either of the individual pieces of legislation (Insolvency Act 1967 and Matrimonial Property Act 1976). A more balanced
solution is likely if the matter is considered as a separate
exercise.
⋅We would be able to look into issues relating to protection of the
family and hence may be able to deal with some of the
causes underlying the
immediate problem for the law of insolvency.
⋅As a result of being able to look more broadly at some of the causes underlying the problem the
quality of our proposals may be improved.
Cons:
⋅It would be difficult to clearly define the limits of the
project.
⋅The project would overlap with the Justice Department' s planned
review of matrimonial property law and insolvency law.
⋅Any proposals we would make which relate to protecting the family
would need to be consistent with any reforms the Department
may propose in the
area of matrimonial property.
⋅As with option 1, our proposals may be dependent on reform being undertaken in relation to professional liability.
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