Welcome To SingingPig.co.uk

I have just encountered a situation that I think we all need to be aware.  This is not scare mongering it is actually occurring and the purpose of this post is purely to make others aware.

I purchased a property last year for £131k with a value of £170k.  The family rented it back and are nice people.  I have a signed declaration from them that they were solvent and not expecting bankruptcy proceedings.  10 months later the tax department petitioned for bankruptcy and the trustee has informed me I am liable to have the transaction reversed or have to pay the equity difference between my purchase price and the assessed market value.  I have looked at every angle I can find here including trying to insure against this, without success.  It seems that if, at any time up to 5 years from the sale, the vendor is made bankrupt then the trustee can come after you for the proceeds if it can be shown to be an undervalue transaction.  They are not concerned that the price paid was what it was worth for a quick sale.  The only concern is that it proceeded at under open market value so they can claim the difference. Relevent sections of the act if anyone wants to check this out is 339 & 340 undervalue transactions.

i have some professional experience of this from cases I have worked on in the past

the initial intention of reversing out such transactions was to prevent people on the verge of bankruptcy from moving assets around for future benefit; usually to a spouse.

maybe you could defend it along the lines of you are not a connected party (i.e. have not had any past dealings or a family member) and if they have no interest in the property beyond renting. if there is a buy back option it could be a bit more complicated. you could asks have an initial consultation with an IP if you feel like defending it.
 

Hi Paul,

In this situation who determines what the market value of the property was at the point of your transaction? Will the trustee have access to the valuation that you had done at the time? If not then how can the trustee comment as to the state of the property at the time and hence its value?

Will they just come in with a heavy hand and TELL you what the valuation was at the time?

I seem to remember a previous post of yours where you mention red book valuations. What would that be now? What would an auction guide price be?

Do you have photos of the property at the time maybe showing less than perfect condition?

As you are not related to the vendors then the vendors have not gained by selling at what may appear to be below a true market value. Isnt this really what the trustee is looking for. The old sell cheap to mate and pocket some cash.

Just trying to throw some ideas up in to the air and see what sticks as I have never (and it sounds like no one else has too) dealt with a situation like this.

If the deal was overturned and you lost the property then would Gordon come knocking for tax evasion? stamp

Does any one remember "Auf Weidersein Pet"? When the ganster bought the manor house and had the lads pull the place to pieces to de value it.

Regarding insurance, have you tried Catlins? 

Cheers

Andy 

Hi the Grinch,

I am still arguing this with the trustee along the lines you mention and haven't given up yet.   There is no buyback option.

Hi Griff,

The value is another thing I am negotiating.  She claims she has had a drive by val done and that they valued it at £185k for the time of purchase.  I have a mortgage val done at £170k which is more realistic.  The red book valuation is something I will bring up with her when we get to the negotiating point of how much she would get if the transaction is reversed, plus of course al the hassle and expense of reaching that stage.

Insurance, I have had my solicitors and brokers try everyone, including NU who do a lot of this type of underwriting and no luck with any of them. 

Hi Pal

I am concerned about this too. I asked my solicitor to arrange indemnity insurance but apparently this ONLY covers the lender and not the purchaser (me). Can anyone come up with an insurance contract to cover ourselves???

A small percentage of our vendors wlil go bankrupt within 5 years so this is something we need to deal with not hide from.

 Simon

Hi Simon,

It doesn't matter that the insurance only covers the lender if you managed to break even or cash-out on the deal: the sale can be reversed, the insurance pays off the mortgage and you just walk away leaving the trustees to sell the property for what they can get.

Regards,
Paul.

PAL Many thanks for bringing your situation to everyone's attention!!

It is in general fairly rare for a creditor to make someone bankrupt, however the tax man is one who will only be strung along for so long, before he makes someone bankrupt. A couple of building suppliers also are quick to make someone BR.

This is why I think that when you go into a purchase situation, you should always do a full financial fact find on the person that you are purchasing off. This way you will have a better picture of what the future might be like.

A short time ago a very prominent BMVer asked me to look at two of his now tenants, as they were thinking of going BR. Yes I suppose they should have gone BR, but had they of done; then they would have been evicted from the house, and the deal undone for the BMVer. Too many loosers!! In this particular case we are putting into place an alternative solution, that keep the creditor, BMVer and the tenant reasonably happy.

I have also posted about this in the past, and I will try to list them below:-

BMV & Bankruptcy

BMV & DMP 

 There are some more on SP I will try to find them and then put a link to this post.

YOU CAN BE SURE IT WILL HAPPEN AGAIN!!! 

You defence under the Insolvency Act 1986 and the test a court would apply in the case would be as follows:-

 "was the vendor aware of any intending litiation or court action from creditors at the time of sale of the property"  - he has signed a bit of paper to say

he wasn't but was this form signed under a sworn affadavit or in the presence of a solcitior that gave him independant legal advice. ?  If not, then you may as

well throw it away

 What other proof do you have that the vendor was solvent at the time of the sale ?  It is time to sit down with the vendor and have a serious and honest talk to

him about this and get PROOF that he was solvent or at least had apsolutely no threat of bankrupcy proceedings at the time of sale to you.

Basically you bought the property from the vendor at a price that was agreed at the time of purchase that reflected the current market and the fact the vendor wanted an immediate sale.  If the vendor genuintly and honestly didn't beleive he was going under and the fact you were no a related party or prefered creditor under the act, I would say that the trustee is just trying to rattle you.

 Write a shitty letter back saying that the vendor was solvent at the time of sale - enclose proof in any way you can - get an affidavid signed by the vendor.  The fact he is now a tenant is immaterial and pays you rent.

 <Dear Mr Trustee,

 RE: MR XXX ESTATE IN BANKRUPCY

I am in receipt of your letter dated xxxx and note the contents therein.   

 You are incorrect to state that you are entitled to an interest in the property known as xxxx . due to the fact that the individual in

bankrupcy was not aware at the time of sale of his property that any involvency or court proceeding were immienent or being threatened. 

I enclose proof of this.

 Also I did not know the vendor until I purchased his/her house and am not a preferered creditor under the meaning of the act.

I am unwilling to assist you any further in this matter.

Yours sincerely,

XXX>

 I am not a lawyer so this is all given without prejudice and if the vendor can not prove he was solvent to a court if it comes to that then I would suggest a

comprimise with the official reciever and given the fact that you were deceived into entering the transaction by the vendor by him signing a document saying he

was solvent then you would be succesful in making a claim for your losses as a "preferred creditor" under the meaning of the act. Funny how your losses will work out to the equity you picked up in the deal !!!

If you need any further help then let me know. 

Ed