This article discusses the processes involved in buying a property that was earlier sold at an undervalue or for no consideration. It also explains the rights of the buyer who has purchased such a property.
The buyer should ascertain if there was a transaction at undervalue or for no consideration in the chain of events in the title. Such a transaction can be set aside under the Insolvency Act.
Such a rule could be applicable to gifts, inter-spouse transfers on the breakdown on marriage (including those made by a court order), and other inter-vivos transactions. Even an assent is a transaction at undervalue, but they are not always followed in practice as it is assumed that the personal representatives would have made extensive enquiries regarding the debt and credit situation before assenting any part of the estate to the beneficiary.
Transactions by an individual
A transaction that takes place at undervalue within five years immediately before the current transaction if the donor is declared bankrupt under s339 of the Insolvency Act of 1986.
Transaction by a company
A transaction at undervalue when undertaken by a company within two years immediately before the current transaction, it can be set aside by the liquidator on the company’s subsequent insolvency.
Defence available to subsequent buyers
A subsequent buyer’s right to a good title can be protected if he can prove that the property was acquired in good faith from a person other than the insolvent individual or company. The following circumstances prove that the buyer has not purchased the property in good faith:
a) When at the time of buying the property, he had knowledge of the insolvency of the bankrupt individual or company and the property was purchased at an undervalue.
b) The buyer is a person who was connected with, or is associated with the individual or the company that made the original transaction at an undervalue. A connected person could include directors, associates, etc., while associates could include spouse, ex-spouse, family member, spouse/ex-spouse’s family member, partner, partner’s family, etc.
A buyer should make a bankruptcy search against the person making the transaction at an undervalue; not just for the period of ownership of the person, but for a period of five years after the transaction at an undervalue.
Registered land
Dispositions registered on or after 1st April 2000 have to include the price paid by the proprietor. If the price mentioned on the register is nil or of low value, the buyer has to pay special attention to the provisions of the Insolvency Act. When registering the land for the first time, a note is made on the Register that the title is subject to the provisions of the Insolvency Act. And when such a note is not mentioned, the buyer will have to consider the effects of the Act.
Summary
Although the law protects a buyer who buys in good faith, most lenders are reluctant to lend for a property that had a transaction at undervalue within the last five years, unless an insurance policy is obtained covering the possibility of the donor’s insolvency within these periods.
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