Gifts made when insolvent can be voided, that is the gift is reversed.
This means that if a person is bankrupted any gifts made within the 2 years prior to bankruptcy are voidable as against the Official Assignee (this means that any gifts must be paid back to the bankrupt’s “estate” and can be used to satisfy creditors). Further any gifts made between 2 and 5 years prior to bankruptcy are voidable against the Official Assignee unless the recipient of the gift can prove that the bankrupt was able to pay his or her debts without the property that has been gifted.
There is no statutory test of what it means to be able to pay debts. However, case law provides useful guidance as to what the test of being able to pay debts is. The principles of which can be summarised as follows:
- although the concern as to the ability to pay debts is with the present, it may be appropriate to also consider the recent past and whether the donor has been able pay debts as they become due over that time
- account must be taken of all debts both current and outstanding
- “as the become due” means legally due, that is that payment can be demanded or required
- it is not necessary to have cash to hand to meet all debts. However, there is a need to strike a balance between liquid and illiquid assets. It is not a matter of simply measuring assets against liabilities, or to say that given enough time to assets could be realised and debts paid. There is an element of immediacy in the requirement to extract cash from non-cash assets where there is insufficient cash on hand to meet due debts
- the test is objective, not subjective. That means that the test is not from the perspective of the person making the gift
- while conversion of some assets can be taken into account, it is also necessary to consider the possibility of further debts falling due while assets are being converted. Accordingly, the period of consideration may span some days, weeks or months rather than a single point in time
- the test measures ability – not willingness. A person may be solvent, with debts owing and able to meet the debts, even though the person has elected not to
- a person can be able to pay by having recourse to third party borrowings, and
- a debt is not due and payable if an unsecured creditor is not making demand and does not intend to.
Each case needs to be assessed on its own merits having consideration to the principles noted. However, as the person who must prove ability to pay is the recipient of the gift (not the person who makes the gift) it is important that the recipient is in a position to do so.
Now that gift duty has been abolished and it is possible to make substantial gifts, prudence dictates the importance of retaining evidence of the donor’s ability to pay debts without reverting to any gifted property prior to making and accepting any substantial gift. Where the recipients are trustees of a trust, they would be wise to ensure that they retain any evidence as to solvency together with any deeds of gift or other documentation relating to the gift.
- Re Northridge Properties Limited (SC) Auckland M46/75, judgment of Richardson J, 13 December 1977
- Re Universal Management Limited (HC) (1981) NZCLC 98,238 at 98,246
- Taylor et al v Official Assignee in the Bankruptcy of the Property of Bronwyn Carol Taylor  NZCA 630