Re: Heginbotham's Petition: Manx Fraudulent Transfer Law Does Not Apply to Potential Future Creditors

by Christopher M. Riser, J.D., LL.M.
Mayer & Riser, PLLC
Highlands, North Carolina

Christopher M. Riser is a member of the firm of Mayer & Riser, PLLC in Highlands, North Carolina. He practices in the areas of asset protection and offshore planning, estate planning, and business planning. The author wishes to thank Charles Cain, MA, ACIB, TEP, of Skyefid Limited, Ramsey, Isle of Man, for bringing the subject case to his attention.

Until recently, the status of the Isle of Man as an asset protection jurisdiction was somewhat diminished in relation to other offshore jurisdictions because the issue of the application of England's Statute of Elizabeth of 1571 to Manx fraudulent transfer law was unsettled.⁽¹⁾ Although the common law systems of the Isle of Man and England are similar and English case law is of persuasive influence in Manx courts, English law was never formally received in the Isle of Man, as it was, for example, in the United States.

In addition to the uncertainty as to the application of the Statute of Elizabeth under Manx common law, there are no specific asset protection statutes in the Isle of Man. Given the uncertainty and the lack of specific statutory guidance, a conservative planner had to presume that the Isle of Man's Fraudulent Assignments Act 1736 would be interpreted in a manner similar to the Statute of Elizabeth and would void a transfer to a trust if the transfer could be interpreted as having been intended to hinder, delay, or defraud creditors, including potential future creditors.⁽²⁾

The Case Facts

The case arose from a petition under the Fraudulent Transfers Act 1736 for an order that the petitioner could enforce a judgment against two Manx companies. The petitioner, Mr. Heginbotham, a local real estate agent, had sold his business to Ashbrooks Ltd. a company wholly owned by a Mr. Weyde. Manx law requires a real estate agency business to have a qualified person in management. Mr. Weyde was not qualified, but Mr. Heginbotham was. So, the new company retained Mr. Heginbotham as a director.

A disagreement ensued and Mr. Heginbotham did not stay on as a director. Ashbrooks Ltd., needing a qualified person, entered into a transaction with a Mr. Marsden, another local real estate agent. Part of the business was transferred to Ashbrooks Management Ltd., a new company owned by Mr. Weyde's wife and another person, and of which Mr. Marsden was a director. The rest of the business was transferred to Weyde & Marsden Ltd., another new company owned by Messrs. Weyde and Marsden.

After counterclaiming in a suit originally brought by Ashbrooks Ltd., Mr. Heginbotham eventually obtained a judgment for specific performance of the original sales contract. However, he was unable to enforce the judgment against Ashbrooks Ltd., because all of the assets of Ashbrooks Ltd. had been transferred to Ashbrooks Management Ltd. and Weyde & Marsden Ltd. Therefore, Mr. Heginbotham petitioned under the Fraudulent Transfers Act 1736 to have the transfers from Ashbrooks Ltd. voided as fraudulent transfers, arguing in his petition that the Statute of Elizabeth applied under Manx law to void fraudulent transfers as to potential future creditors.

The Court's Analysis

The judge who authored the opinion, Deemster Cain, noted that although the Fradulent Transfers Act 1736 has been said to have the same effect in Manx law as the Statute of Elizabeth had in English law, it is in very different terms. The essential element of the Statute of Elizabeth is an intent to delay, hinder, or defraud. There is no reference to intent in the 1736 Act. However, the expression 'fraudulent Assignments or Transffers' must impute an intent to transfer property fraudulently, i.e., dishonestly.

Thus, the question is raised as to whether the intent to defraud creditors applies only to creditors known and ascertainable at the time of the transfer, or also to future creditors. In analyzing the relationship between the Statute of Elizabeth and the Fraudulent Transfers Act 1736, Deemster Cain noted that in Corlett v. Radcliffe, the Judicial Committee of the Privy Council, on appeal from the Court of Chancery of the Isle of Man, determined that, generally, a transfer is void against creditors if it leaves the transferor insolvent or has the effect of leaving the transferor unable to pay his 'present debts'.⁽⁴⁾ Deemster Cain held that the term 'present debts' cannot have been a reference to debts that a person might possibly incur at some future date.

Deemster Cain also acknowledged the case of Re Corrin's Bankruptcy, which has often been cited to stand for the proposition that "the common law of the Isle of Man is substantially the same as the law of England under the Statute of Elizabeth."⁽⁵⁾ Deemster Cain stated that "[u]nfortunately, the case of Re Corrin's Bankruptcy is unreported, and no transcript of the judgment... has been made available to this court. The comments attributed to [the author of the opinion], which may have been taken from a newspaper report, must therefore be treated with caution."

The Holding

In applying his analysis of Manx law to the case at hand, Deemster Cain found that Ashbrook Management Ltd. and Weyde & Marsden Ltd. were incorporated for legitimate business purposes, and that consideration was paid. Deemster Cain also found that no part of the transactions were intended to defraud the then present known and ascertained creditors of Ashbrooks Ltd. Bolstering that point was the fact that Mr. Weyde had used his own funds to ensure that the then present creditors of Ashbrooks Ltd. were paid in full.

Finally, Deemster Cain held that Mr. Heginbotham's claim against Ashbrooks Ltd. did not create a present debt, nor did it create a known and ascertained future debt. Therefore, Mr. Heginbotham was not a creditor for the purpose of the Fraudulent Transfers Act 1736 at the time that Ashbrooks, Ltd. made the transfers in question.

Thus it is now settled under Manx law that for the Fraudulent Transfers Act 1736 to apply, there must be an intent to defraud creditors. This intent applies only to present debts, not contingent or future debts which may never materialize. For the purposes of the 1736 Act, 'present debts' include, of course, known and ascertained debts which are to fall due on a date in the future.

Conclusion

The issue decided by this case had long been unsettled under Manx law. It is of particular relevance because the Isle of Man does not have specific asset protection legislation. The case establishes that a transfer of assets to an Isle of Man asset protection trust or to a Manx LLC, for example, cannot be set aside as long as the transferor is not insolvent at the time of the transfer, i.e., he can pay his known and ascertained debts. The result of this important case is that the Isle of Man now should be considered a very favorable jurisdiction for asset protection planning.

1. 13 Eliz. 1, c. 5. The Statute of Elizabeth generally provides that transfers made with the intent to defraud, hinder, or delay creditors, including potential future creditors, are void as against such creditors.

2. The Fraudulent Transfers Act 1736 provides that "... all fraudulent Assignments or Transffers [sic] of the Debtor's Goods or Effects shall be void and of no Effect against his just Creditors, any Custome or Practice to the contrary notwithstanding."

3. Re the Petition of Christopher Jollian Heginbotham, 2 ITELR 95 (1999).

4. Corlett v. Radcliffe, 14 Moo PCC 121, 15 ER 251 (1859).

5. Re Corrin's Bankruptcy, unreported (1912).