Insolvency Bill (Hansard, 21 April 1994)

§ Lord Coleraine

My Lords, I beg to move that this Bill be now read a second time. The purpose of the Bill, which amends the Insolvency Act 1986 and the Insolvency (Northern Ireland) Order 1989, is to enable certain transfers of property, made in good faith and for value, but with knowledge on the part of the purchaser that there has previously been a transaction at an undervalue or a preference, within defined time limits, to be proceeded with more safely than at present. Under the present law, those who receive the property under such transfer may find themselves in jeopardy because of wording first used in the sections of the Insolvency Act 1986 which allow trustees in bankruptcy and administrators and liquidators of companies to apply to the court for an order to recover property which has been given away or otherwise parted with.

In a typical case, a prospective house purchaser discovers that there has been, within the previous five years, what is referred to in Section 339 of the 1986 Act as a transaction at an undervalue. Such a transaction may be an outright gift, or a gift in consideration of marriage, or a sale at a price significantly less than the value of the house. Anyone buying the house within five years after such a transaction, and with knowledge of it, is at risk for the remainder of the five-year period. That is because, where there has been a transaction at an undervalue and the initiator, for want of a better word, of the transaction goes bankrupt within five years, his trustee in bankruptcy can make an application to the court. Such an application might result in an order being made for the transfer of the house to the trustee for the benefit of the creditors. Section 342 provides that such an order cannot be made against a third party purchaser who has acquired the property in good faith, for value and without notice of the relevant circumstances. The phrase "without notice of the relevant circumstances" is taken to mean "without notice that there has been the transaction at an undervalue or a preference within the relevant previous period", and this is what creates the difficulty. Many innocent third party purchasers will inevitably have this notice.

Where land is registered at the Land Registry, the fact that a sale at an undervalue has taken place in the past is not normally recorded in the registers of the title Therefore, a purchaser will not normally acquire knowledge of an earlier transaction at an undervalue. On 347 the other hand, where the land is unregistered, and the seller has normally to show his title for at least 15 years, the purchaser will acquire knowledge of the relevant circumstances once the title has been examined. I understand that several million houses are still unregistered, although registration is now compulsory throughout England and Wales whenever a sale takes place. It is self-evidently unsatisfactory that whether a third-party purchaser is affected by knowledge of an undervalue transaction may depend on whether or not the land has a registered title.

Transactions at an undervalue frequently take place within families, passing property between husband and wife (including transfers when a marriage is dissolved) and between the generations of a family. There are many occasions when the provisions of the 1986 Act can cause problems for subsequent purchasers. Where a purchaser has knowledge of the earlier transaction at an undervalue he will be advised, and almost certainly required where he is taking out a mortgage loan, to insure against the risk of the subsequent bankruptcy and what may follow from it. It has to be said at once that the likelihood of a sale to a bona fide purchaser being upset in favour of a trustee in bankruptcy is in fact very remote, and so far as is known there have been no attempts by trustees in bankruptcy to enforce their rights under the 1986 Act. But the premiums charged by insurance companies may run to a thousand pounds and more. Also, the need to obtain insurance will involve inquiries as to the circumstances in which the original transaction at an undervalue came to be made, and the financial circumstances of the person who initiated it. And information may not be easy to come by. This inevitably causes unwelcome delay in conveyancing which may affect not only the seller and purchaser concerned but also other sellers and purchasers in a chain. Quite apart from that, no house purchaser wants to be told that there is a chance, however remote, that he may lose his home and that if that happens he will be compensated by insurance.

I have been speaking until now in the context of the application of the Bill to purchases of land. The Bill applies to undervalue transactions and preferences affecting all forms of property, not just to land transactions. It is nevertheless largely in the case of unregistered land transactions that a third party purchaser may acquire notice of an earlier transaction at an undervalue. So the beneficiaries of this Bill are expected, for the most part, to be such purchasers.

Turning now to examine the Bill, Clause 2 provides for the usual and typical case which I have been describing. The clause provides for the amendment of Section 342 of the 1986 Act so that if the Bill becomes law, the saving in that section for a third party purchaser for value and in good faith will no longer be negatived merely by the purchaser's knowledge of an earlier transaction at an undervalue or preference. It is only if the purchaser was an associate of the person initiating the transaction at an undervalue or preference, or of the person benefiting under it, or if he also had knowledge of the bankruptcy or pending bankruptcy of the person initiating the transaction or preference, that there will be 348 a presumption that he did not buy in good faith. That resumption will be rebuttable. The result of that will be, for example, that a third party purchaser buying in good faith and for value, say two years after a gift, will not have to wait a further three years to be certain that he is safe, if he has had no knowledge or notice of a pending or actual bankruptcy of the initiator. Moreover, even if a petition or bankruptcy has been registered, almost every third party purchaser in good faith will not know the bankrupt or anything about him and may well therefore be able to rebut the presumption that he did not purchase in good faith. The effect of the clause should be to speed conveyancing and greatly reduce the need for insurance in the cases where problems arise.

The 1986 Act contains similar but less severe provisions in Sections 238 to 241, allowing administrators or liquidators of companies to recover property transferred at an undervalue or given in preference. Clause 1 of the Bill makes similar amendments to the 1986 Act for the protection of third party purchasers in such cases. I should say that I am advised that the administration and liquidation provisions have proved far less troublesome to subsequent purchasers than have the bankruptcy provisions.

Clauses 3 and 4 make similar amendments to the Insolvency (Northern Ireland) Order 1989 to those contained in Clauses 1 and 2 of the Bill, which apply only to England and Wales.

Clause 5 provides that the amendments made by the Bill to the Insolvency Act 1986 bind the Crown, and that the amendments made by it to the Insolvency (Northern Ireland) Order 1989 bind the Crown in accordance with Article 378 of that order.

Clause 6 provides that the Bill will come into effect two months after it has received Royal Assent. Clause 6 also provides, most importantly, that the Bill will apply only to interests acquired and benefits received after the Bill has come into force. I am advised that that means that the Bill will cover all third party transactions taking place after the Bill comes into force.

I have personal pleasure rising today to commend this Bill to the House, both because I have been associated intermittently since 1988 with the Law Society's efforts to secure a change in the law, and because only last year I found myself counselling and advising friends who had found just the house they wanted, only to discover that the title included a recent property transfer arising out of a matrimonial breakdown. It took the best part of six months of frustration to both parties while an acceptable indemnity was negotiated.

Gratitude is owned to the Insolvency Service, an executive agency within the Department of Trade and Industry, for readily recognising the problem affecting innocent purchasers of property, for proposing the solution contained in this Bill and for advice and assistance with its drafting. It has taken some time to bring it before the House, but it has been necessary to work out a fair balance between the interests of the creditors of a bankrupt, and the interests of third parties who have acquired property which might otherwise 349 have been available for the satisfaction of those creditors. I believe that such a fair balance has been struck in this Bill.

Finally, I would like to mention my honourable colleague, Mr. John Butterfill MP, who introduced the Bill in another place and whose efforts secured all-party support for it there, as well as a speedy passage. I commend the Bill to the House.

Moved, That the Bill be now read a second time. —(Lord Coleraine.)