Joint Committee on Legislation debate -
Friday, 24 May 1985

SECTION 57.

Question proposed: "That section 57 stand part of the Bill."

Deputy Noonan

(Limerick East) A “preference” is the term which is customarily applied to any act of a debtor which is done to give a particular creditor a preference relative to other creditors. This section provides for the avoidance of fraudulent preferences. It reenacts the present law which is set out in section 53 of the 1872 Act as replaced by paragraphs 1 and 2 of the Eleventh Schedule to the Companies Act, 1963. Minor amendments have been made. For example, the section will no longer apply to arrangements under the control of the court because of their essentially voluntary character. Subsection (1) explains the meaning of a fraudulent preference in much the same terms as those contained in the Eleventh Schedule. A payment to a creditor made with the intention of preferring him or with a view to releasing a surety or guarantor from the debt due to the creditor can be set aside. However, repayment can be obtained only from the creditor to whom payment has been made. It cannot be obtained directly from the surety or guarantor.

Subsection (2) reproduces, with appropriate amendments, section 287 of the Companies Act, which paragraph 2 of the Eleventh Schedule applied to bankruptcy. Section 287 of the Companies Act was principally designed to remove difficulties which would otherwise arise for banks in consequence of the provisions of subsection (1) regarding guarantors and sureties. Its effect is to enable a bank, which has been compelled to refund to a liquidator moneys paid into an account within the prescribed period of six months before winding up, with a view to giving some guarantor or surety a fraudulent preference, to recover from the person concerned the sum which the bank had been compelled to pay to the liquidator.

Paragraph (a) deals with the situation where the person preferred is not personally liable as surety for the bankrupt's debt but instead has an interest in property which has been mortgaged or charged to secure the bankrupt's debt. This paragraph confers on the preferred person the same rights and liabilities as if he were personally liable as surety for the debt to the extent of the charge on the property and the value of his interest in it, whichever is the less.

Paragraph (b) provides for the preferred person's interest in the property to be determined as at the date of the fraudulent preference. This provision prevents the principal creditor from being advantaged or prejudiced by a subsequent change in the value of the preferred person's interest in the property.

Paragraph (c) provides for the surety or guarantor to be joined as a party to the proceedings so that all questions between the Official Assignee, the creditor and the surety or guarantor can be determined in the same proceedings. This applies by virtue of paragraph (d) mutatis mutandis to transactions other than the payment of money.

Deputy Shatter

Could I raise a general point which is relevant to this section in relation to points I have been making on earlier sections? I am sorry to come back to it but it is something that is a new problem and it is only starting to percolate through the courts. In the overall context of this section could the Minister explain his thinking on what the position is in the interaction between this section and section 5 of the Family Home Protection Act? At present if a wife — particularly in a situation where there are marital difficulties — believes that her husband is in financial difficulties and is not taking proper steps to deal with those difficulties and she is aware that proceedings are being brought against her husband by creditors seeking payment of debts and believes that the family home as an asset may be proceeded against on foot of any judgments obtained against the husband — particularly in the context of a judgment mortgage being lodged against the family home — if a judgment mortgage is lodged a sale can take place and the wife is not protected under the Family Home Protection Act. But under the powers vested in them under section 5(1) of that Act the courts can make whatever orders they deem proper if the husband is behaving in a way that might lead to the loss of the family home. Pursuant to those powers both the High Court and the Circuit Court have made orders transferring a family home from the name of a husband into the name of a wife upon proof of the existence of debts, proof that a husband is taking no steps to discharge those debts and the simple likelihood of proceedings being brought against the husband which could ultimately result in a judgment mortgage. As a result what may be the only major asset in the husband's name is effectively removed as a possible asset from which the creditors can benefit.

We have a conflict of interests here. Should the creditors get some preference or do the wife and children in the family home get preference? I have constantly argued that the wife and children should get preference. In those circumstances the courts are requiring the husband with large debts to transfer a home into a wife's name and by virtue of a court order are transferring it, sometimes before judgments are delivered against him in favour of creditors, sometimes afterwards, but before judgment mortgages have been lodged. I have mentioned the Family Home Protection Act in the context of other sections to this Bill. It is not a fraudulent conveyance as such. It is having an effect on creditors in depriving them of the possibility of having debts paid, through forcing a sale of the main family asset in court proceedings in which they have no right of appearance. We have a very clear conflict of interest. It is necessary for us to have a legislative policy, not merely to leave it to the courts to muddle through balancing those interests.

Deputy Noonan (Limerick East)

We are going to have much debate about this. I suggest that since this section deals with fraudulent preference for creditors the matter would not directly arise under this section. It would be more appropriate under section 59 and possibly section 61. If we agree now then when we come to those sections we can tease out the family home problem and the point raised about the conflict of interest between the creditor on the one hand, and the wife and family on the other if a judgment mortgage is placed. Obviously the kind of sensitive, political reaction is that one would favour the wife and children if one is talking about the semidetached suburban house where it is simply a home. But if one is talking about a situation where the family home is not only a home but also a very valuable piece of property worth £150,000, why should a creditor be deprived of what is a very large asset if a wife and family could adequately be housed in the £30,000 house? There is obviously a conflict of interest and of where justice should lie. We need to talk that out, if that would be appropriate.

What I would like to do now is to give for the Members' benefit and also for the benefit of the record, some information on fraudulent preferences in general so that it will be there for people who are checking the record on this section.

The doctrine of fraudulent preferences is based on the principle that it is unjust to permit a party on the eve of bankruptcy to make a voluntary disposition of his property in favour of a particular creditor and therefore that a transfer made at such a period and under such circumstances should be void. Before a preference is declared void it must be shown that it was given within six months of adjudication and that at the time of the preference the debtor was unable to pay his debts in full as they became due from his own moneys in ordinary course, whether or not he might ultimately have a surplus on the winding up of his affairs. The traditional method of implementing the provision is simply to compel the favoured creditor to repay to the Official Assignee what he has received. There is a presumption that the creditor intended to obtain payment of his debt. If payment were made after the debtor "became bankrupt" and before adjudication the section did not apply. Proceedings should be taken for the benefit of all the creditors and not for an individual among them. Payments made under pressure are not within the section. The committee regarded this situation as right. They also approved of the inclusion of the words "or any surety or guarantor for the debt due to such creditor" between the phrase "with a view to giving such creditor" and the words "a preference over the other creditors". In section 53 of the 1872 Act as amended in the Eleventh Schedule to the Companies Act because bankrupts had in the past discharged their indebtedness to banks for the prime purpose of releasing guarantors. They also pointed out that under existing bankruptcy legislation banks may be liable for a fraudulent preference if they take money in reduction of an overdraft within the fraudulent period. As the proceeds of sale of a bankrupt's goods on the eve of bankruptcy are frequently employed in reducing his indebtedness to a bank, the committee considered that such money should be recoverable from the person for whose benefit it was lodged, namely the guarantor. They introduced a provision to this effect in the draft Bill. This recommendation was not carried out because section 287(3) of the Companies Act, 1963, at present ensures that in a case where the Official Assignee proceeds against the preferred creditor, for example, a bank and an application is made to the court on the grounds that the payment was a fraudulent preference of a guarantor, the bank can raise any question relating to the guarantor's liability to the creditor and have it determined in the bankruptcy proceedings instead of having to institute separate proceedings.

I just wanted that included; it might be helpful to people looking at this subsequently.

Chairman

Are you happy enough to leave the point you raised until later, Deputy Shatter?

Deputy Shatter

I am. We can deal with it as a conglomerate point as we move on. The only other point I want to mention, because it might give the Minister time to consider it in the context of that point — we are going to deal with voluntary conveyances, I think it is section 59 — is the point I made initially relating to a situation where there is a real conflict between husband and wife, with the creditor outside the courts. The other point we might consider as we move on, and I will refer to it very briefly, is the situation where there is not any real apparent breakdown of the marriage at all but one spouse sees a way out of paying debts due and the other spouse brings proceedings. They are arranging virtually to use the courts to have the home transferred from one to another, where it could not be done and where it will not be able to be done on a purely voluntary basis under this Bill because it would be seen to be fraudulent or voluntary and voidable within the meaning of this legislation. So these are the two possible scenarios and perhaps we will revert to them later.

Question put and agreed to.