What is Gratuitous Alienation?
Basically, in terms of Section 242 of Insolvency Act 1986 provides protection against company’s directors and individuals disposing of assets beyond the reach of its creditors. It also includes the transfer of a property from a debtor to another connected person for no consideration or for inadequate consideration before signing a trust deed or going bankrupt.
Any property transactions carried out by a company or an individual to protect assets from a creditor can be called into question or challenged by a trustee (liquidator) and can ultimately be unwound by a court.
As far as a property is concerned, gratuitous alienation is where the company or the individual has given away the property for nil consideration or for an amount which is under market value. The intention of the transfer is irrelevant, it is the effect which is important. If a trustee raise’s an action and wins then the property is returned to the position it was before the transfer.
The legislation states, if the asset is transferred to someone associated with the insolvent company or person and the transfer is completed in the last 5 years, it can be unwound by the court. If the transfer is in favour of someone not connected to the debtor then the relevant time period is normally 2 years. If you are aware the transfer of the property is for under market value or you have knowledge of the person transferring the property is doing so for under market value then the transfer can be attacked by the trustee. If a third party has acquired the property in good faith, and for adequate value, then the reduction of the transaction by a trustee becomes very difficult and the trustee is unlikely to be successful. The criteria of “good faith” and for “adequate value” is open to interpretation. It is still important that your solicitor checks the dispositions for any transfer of the property in the last 5 years for inadequate consideration.
It is therefore important that you get your solicitor not only to check the solvency of the person selling you the property but any previous suspicious transfers for under market value in the last 5 years.