The fraudster is insolvent – can you add more eggs to the basket?

Insolvency of the suspected fraudster may seem the end of the hunt, unless an egg-hunter can establish a proprietary interest in the assets (see our blog yesterday [1]). But it can offer additional clues, or alternative pots of treasure, whether the fraudster is an individual or corporate entity.

This is because an office-holder such as a liquidator has wide powers to require information from the directors and from third parties about the affairs of an insolvent company under s236, Insolvency Act 1986, which may shed further light on any wrong-doing and where the eggs have been hidden.

An office-holder can also bring proceedings against the individual directors in the name of the insolvent company, where the directors have acted in breach of their duties.

And last, but not least, the office-holder has significant powers to line up their egg soldiers and attack the disposition of assets, in order to increase the assets available for distribution to creditors. He or she can apply to court for orders that relevant transactions be set aside and assets transferred pursuant to those transactions be returned where, for example:

• Assets were sold for no consideration or at an undervalue, unless they were sold in good faith with reasonable grounds to believe they would benefit the now insolvent company.
  
  
• Some creditors were given preferential treatment, with the intention of improving the creditors' position on insolvency.
  
  
• Transactions were entered into whose purpose was either to put assets beyond the reach of creditors or prejudice their interests.

Whilst such orders have the potential to increase the pool of assets, there are limits on their utility. In respect of the first two scenarios above, the relevant transaction must have taken place when the company was unable to pay its debts, during the period either six months or two years before the company went into liquidation (depending on whether the other party is connected to the company). Moreover, where assets have been transferred to a third party for value who has no notice of the relevant circumstances, the liquidator must tread on egg shells and the court will not order those assets to be restored to the company.

[1] What to do if the golden egg hatches (or you need to trace into the fraudster's other assets)