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When the Act was first introduced in 1986, it was to prevent property owners, up to their eyeballs in debt and with the threat of bankruptcy hanging over them, deliberately transferring their assets away to a family member or close associate, to avoid creditors. Primarily, that's still its purpose and with the current high levels of activity in the housing market, thousands of transactions still require insurance as a result of the legislation.

Give with one hand, take with another

Under the Act, if an owner gifts their property or sells it at less than its market value and is declared insolvent up to five years later, the transfer can legally be 'set aside'. This means the property would be deemed to be part of the original owner's assets and used to pay off their outstanding debts.

Despite bankruptcy being as prevalent now, if not more so, than it was in the 1980s, most properties that are gifted or transferred at undervalue are for perfectly legitimate reasons. Examples of valid arrangements can include a husband and wife transferring equity from sole to joint names for remortgage purposes; conversely, it may be a transfer from joint to sole names due to a divorce; or in the case of a company transfer, gifting property to a company director in return for a loan to the business.

Often, a mortgage will be necessary at the time of the transfer or gift. If so, the lender will insist on an Insolvency Act indemnity policy to cover the likely shortfall in the outstanding mortgage should the borrower default because it transpires that the transaction was to deliberately avoid creditors; the transfer is subsequently set aside, and the property is claimed back.

Our policy does not normally cover the individuals acquiring the property under the transfer or gift, because they will have benefited directly from it, and normally have a close relationship with the person who made the transfer. If the property is sold before the five year period has expired, and the property is subsequently 'set aside', the most recent third party purchasers, as well as their lender, are clearly innocent parties and in these circumstances, our policy protects both.

Large deposits

Over the last year or so, we have been regularly presented with a new scenario. With a great many new mortgage offers now requiring a substantial deposit, we have increasingly seen requests from solicitors for cover where parents gift their children some or all of the deposit for a house or flat. This is to protect the lender's security should the parent be subsequently declared bankrupt within the time frame set out by the Act. So, whether it's a traditional enquiry or something a little more contemporary, we have a number of policies to cater for the range of different scenarios and types of transaction, including company transfers. To find out more about our Insolvency Act indemnities, please call us on 01603 617617 or email enquiries@cli.co.uk.