Corporate Laws II
Fraudulent Preference and Voluntary Transfers
Submitted By: Arvind Srinivas 1555, IV Year, Year, NLSIU, Bangalore
Date of Submission: 8 th September 2011
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I. Introduction
Companies, whether in financial difficulties or otherwise, are frequently either pressured or tempted to treat one or more creditors or class of creditors in a more favorable or preferential way to the treatment afforded to the general body of creditors. The company's directors may have loaned capital to the company and will wish to see their capital repaid. Major creditors will will also also be keen keen to ensu ensure re that that the the comp compan any y trad trades es with within in agre agreed ed credi creditt limi limits. ts. The temptation may be to do this at the expense of discharging debts due to other creditors. They may also be tempted to have payments made to themselves in reduction, for example, of loans they have made to the company. Major creditors may also become aware of the company's financial difficulties and be reluctant relucta nt to continue to trade with the company unless they are dealt with on a certain basis.1
The The compan company's y's general general body body of credito creditors rs may, may, howeve however, r, be blissfu blissfully lly unawar unawaree of the company's financial position and might continue to trade with, and grant credit to, the company not knowing that their exposure is increasing while the exposure of preferred creditors is being reduced or maintained at a certain level. Protection is given to these small creditors by declaring transactions void for fraudulent preference as when a company goes into insolvency, the assets of the company are to be distributed to all creditors on a pro rata basis.2
It can be thus stated that the underlying principle for the offence of fraudulent preference is that it is “unjust “unjust to permit a party, on the eve of insolvency, to make a voluntary disposition of his property in favour of a particular creditor, leaving the mere husk to the rest, and therefore, that a transfer made at such a period, and under such circumstances, as evidently shown that it was made in contemplation of bankruptcy and in order to favor a particular creditor, should be void ”. ”.3
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R Weisberg, “Commercial Morality, the Merchant Character, and the History of the Voidable Preference”, Stanford Law Review , 1986 Id. De Tastet Tastet v. v. Carroll (1813) 1 Stark 88.
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What of a situation in which the company is perfectly solvent but is going into winding up? In such a situation the rule of avoidance of voluntary transfer applies. Voluntary transfer means any transaction that is aimed to defraud the creditors or the members of the company when the company is going into winding up. Thus the reasoning behind making voluntary transfer an offence is similar to that underlying the offence of fraudulent preference. This research paper aims to study these concepts in detail.4
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A Ramaiya, Guide to the Indian Companies Act ( 15th edn., Nagpur: Wadhwa, 2001), 3719
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II. Fraudulent Preference
2.1 Introduction to Fraudulent Preference The concept of fraudulent preference is dealt with by s.531 of the Act, The phrase “fraudulent preference” originates from the law of insolvency. The emergence of preference law was closely tied to the concept of fraud, no doubt because early English bankruptcy law regarded bankrupts as fraudulent. 5 As is evident from the expression and its origin, this aspect of law states that when a person is incapable of paying his debts, then any transfer of property or payment made in favor of one creditor, with a view to giving that creditor preference over other creditors is regarded as fraudulent6. As per s. 531, for a transaction to be held invalid thus, the transaction should have taken place within three months before the company is deemed insolvent and within six months before the commencement of winding up proceedings against the company.7
Thus the ingredients of fraudulent preference under s. 531 are as follows: 8 •
there should be transfer of property or payment in favor of one creditor
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the transaction must be within three months prior to the company being declared insolvent
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the transaction must be within six months before winding up proceedings are initiated against the company
2.2 Insolvency laws as the Justification for Fraudulent Preference In India there are two laws that deal with insolvency. They are the Provincial Insolvency Act 1920 and the Presidency Towns Insolvency Act, 1909. Acts of insolvency as laid down by these Acts include instances, among other things, wherein the debtor makes any transaction which would be void as a fraudulent preference if he were to be adjudged an insolvent 9 The 5
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JC McCoid, “Bankruptcy, Preferences, and Efficiency: An Expression of Doubt”, Virginia Law Review, 1981, 249. S. 531 Indian Companies Act, 1956. See Annexure See Barclays Bank v. Homan, (1993) BCLC 680 Ch D for discussion on jurisdiction. It was held that when a subsidiary of a London company was sold in the U.S., while the court had jurisdiction to grant an injunction to restrain a party from pursuing proceedings in a foreign jurisdiction, the court should only do so where the foreign proceedings were vexatious or oppressive as between the parties. Supra note 6. S. 6 of Provincial Insolvency Act, 1920, S. 107 Presidency Towns Insolvency Act, 1909. See Annexure
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Acts also specify the instances in which the creditor can submit an insolvency petition. These are10: •
If the debt owed is more than Rs. 500
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If the debt is a liquidated sum payable at that point or in the future
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If the act of insolvency, on the basis of which the petition is presented, took place within three months before the filing of the petition
When the insolvency laws are examined in the light of corporate insolvency and fraudulent preference, a problem arises from the fact that the Acts specify that no insolvency petition shall be presented against any corporation or against any association or company registered under any enactment for the time being in force. How then can fraudulent preference be attributed to a company when no insolvency petition can be filed against the company?
This problem is solved by the wording of s.531 of the Companies Act which says that if a person in the same situation as the company is in, would be deemed to be insolvent, then the company itself can be said to be insolvent and thus fraudulent preference can be made out against that company. The second way in which the section in the Insolvency Acts is circumvented is through s. 531(2). This section states that the filing of a petition for winding up or the passing of a resolution for voluntary winding up itself shall be deemed to correspond to the act of insolvency in the case of an individual 11.
Why is fraudulent preference applicable only to insolvent companies? The answer lies in the two pieces of insolvency legislation. These Acts say that on the making of an order of adjudication, the whole of the property of the insolvent s hall vest in the Court or in a receiver and shall become divisible among the creditors. The assets of the insolvent company are, thus, to be distributed to all creditors, on a pro rata basis, and not to one creditor alone through fraudulent preference.12
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S. 9 of Provincial Insolvency Act, 1920, S.12 Presidency Towns Insolvency Act, 1909. See Annexure S. 531(1) and S. 531(2). See Annexure See Note, “Preferential Transfers and the Value of the Insolvent Firm”, vol. 87, Yale L.J. (1978), 1449
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2.3 Exception to the Rule of Fraudulent Preference When the company transfers some of its assets to a creditor to whom money is actually due, under the threat of litigation or the threat of attachment, the transaction will not be deemed to be fraudulent preference.13 For example in Official Liquidator v. Venkataraman 14, wherein three buses were transferred to a creditor, the Court held that this was not fraudulent preference as the transaction was brought about by pressure on the company and the company's management thought that it would be in the best interest of the company to pay off the debt to that particular creditor.
The exception to the rule of fraudulent preference facilitates the inference that the operative ingredient of fraudulent preference is the intention with which the impugned transaction was undertaken by the debtor company. 15
2.4 Intention to Prefer Whether a transaction is deemed to be fraudulent preference or not has been decided not on the basis of the result of the transaction but on the intention underlying the transaction. The reasoning behind this is the interpretation of the words 'with a view to giving him a preference'. The word view has been interpreted to mean intention. Based on the facts of the case the dominant intention of the debtor is determined.16
For example in F.L.E. Holdings Ltd. Re 17 , wherein a company deposited title deeds with a bank to secure overdraft facilities, but the charge was not registered, the transaction was held void for want of registration but was not deemed to be fraudulent preference. It was held that the dominant intention of the company was to not prefer the bank over other creditors but to maintain good relations with the bank in order to secure the status of the company as a going concern18. Thus where the intention of the company is to benefit itself and not prefer a
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When a compromise is reached between creditor and company, connivance and not merely transfer has to be shown by the official liquidator as held in Krishna Tulpule v. Monark Enterprises, (1992) 74 Comp Cas 89. Also see N.V. German, “Bankruptcy, Pressure as a Defence and Fraudulent Preferences”, vol. 8, Alta. L. Rev., 1970, p.154 Official Liquidator v. Venkataraman, (1966) 1 CompLJ 243 AP Sethna's Indian Company Law (JMJ Sethia ed., 11th edn., New Delhi: Modern Law Publishers, 2005), 4303 Id F.L.E. Holdings Ltd. Re, [1976] 1 WLR 1409
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creditor over other creditors, there is no fraudulent preference. Similarly in Wills v. Corfe19 it was held that when the court was trying to determine the existence of fraudulent preference, the court has to take into account the state of mind of the directors to see whether there was an overriding intention to prefer one creditor over others. 20
2.5 Liability of creditor fraudulently preferred In cases where the creditor making an advance evinces a promise from the company to execute a charge21 at his request, such a charge, even though for value, will be inferred to be fraudulent and and unenforceable, in the absence of other circumstances. In this instance, the purpose of the parties will be deemed to be to accord the creditor the right to be preferred at his request.
A presumption of preference is created when payment is made to directors even when the precarious position of the company's financial state is known22. Similarly when payment is made to director with a view to help them clear their loans and such payment is made shortly before the company stops trading, a presumption of preference is created.23
The recipient of a fraudulent preference automatically becomes a constructive trustee towards the company for the benefits that he has received and such being the case, is bound to return the same to the company 24. As far as directors are concerned, when a transfer is
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See Official Liquidator v. Ashok Kumar Dalmia And Ors ., (1999) 98 CompCas 269 Raj. In P. Vishwanathan v. Official Liquidator (1984) 56 Comp Cas 52 Delhi, it was held that when certain machinery was transferred in the ordinary course of business, there was no fraudulent preference. Also in Shaw Wallace (2001) 107 Comp Cas 30 Cal, it was held that a court ordered payment could not amount to fraudulent preference. Wills v. Corfe, 1998 2 BCLC 75 Ch Dr.. See Anon., “Winding up - fraudulent preference - company repaying directors' loans shortly before going into creditors' voluntary liquidation” , C.L. Pract. 1998, 5(10), 275-276. T.W. Cutts Re, (1956) All ER 537; Eric Holmes Ltd. Re , 2 All ER 333; Tansukharai v. Official Liquidator , AIR 1952 Mad 595. See Also A. Keirse, “Object and effect: the vexed question of intent in fraudulent preference cases”.C.L. Pract . 2005, 12(7), 182-185. The creditor is also bound to get the charge executed and registered in order to inform all other creditors of the fact that the company's assets are not free from encumbrances. Book Katz v. McNally, (1999) BCC 291 CA Pierson Ltd. Re, (1999) BCC 26 Ch D Clasper Group Services Ltd. Re , 1989 BCLC 143 Ch D.
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made in insolvent circumstances and the directors are unable to rebut the intention to prefer, then they are guilty of fraudulent preference. 25
S.532 and s.533 are also to be taken note of at this point. S.532 says that a transfer of all or any property by a company to a trust for the general benefit of its creditors is void. S.533 provides that if any property comprised in a charge or a mortgage is a benefit received by a fraudulently preferred creditor, then the creditor would be surety towards the security holder to the extent of the interest held by that security holder. 26 2.6 The U.K. Position S. 239 Insolvency Act 1986 deals with fraudulent preference 27. This section is very similar to the Indian s.531. It states that fraudulent preference occurs when a transaction is made or allowed to be made by the company in favor of a creditor or director with a view to pacing that creditor in a position of advantage over other creditors when the company goes into insolvent liquidation. S. 240 and S.241 of the Insolvency Act, 1986 discuss the applicability and remedies available respectively28. 2.7 Distinguishing Features of the U.K. Position One distinguishing feature of the UK law on fraudulent preference is that it states, explicitly, for the need for intention to prefer to be proved. This particular section emphasizes that there can be no fraudulent preference unless the desire of the company to place that particular creditor in a position of advantage is proved. The ruling in F.L.E. Holdings Ltd. Re 29 is represented here in statutory form.30
The second distinguishing feature of the UK position is the creation of a category of “connected persons”31. A person is deemed to be connected to the company if he or she is a director, shadow director, associate of directors or shadow directors or an associate of the companies. The term associate is further defined by the Act and includes relatives, persons in 25 26 27 28
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Transworld Trading Re, (1999) BPIR 628 Ch D S. 532, 533 of Indian Companies Act, 1956. See Annexure S. 239 Insolvency Act 1986. See Annexure See Generally JC McCoid, “Bankruptcy, Preferences, and Efficiency: An Expression of Doubt”, Virginia Law Review, 1981, 249. Supra note 14. Pennington's Company Law, (8th edn., London: Butterworths,2001), 47 S.249 of the Insolvency Act, 1986. See Annexure
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control of the company and could even be another company 32. The importance of this classification is that if the person, in whose favor, the transaction is made, falls within the category of connected persons, then there is a presumption that there has been fraudulent preference of that person over other creditors.33
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S.435 of the Insolvency Act, 1986. See Annexure V Finch, Corporate insolvency law: perspectives and principles , (Cambridge University Press, 2002, p.543
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III. Avoidance of Voluntary Transfers
3.1 Introduction to Avoidance of Voluntary Transfers S. 531-A of the Companies Act 1956 states that any transfer of property, whether movable or immovable, undertaken by the company within one year before the presentation of a winding up petition or the passing of a resolution for voluntary winding up, is void against the liquidator. 34
3.2 Exceptions to. s.531-A There are two instances in which a transfer as described above will not fall under the aegis of s.531-A. These are35: •
a transfer of property made in the ordinary course of the business of the company
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a transfer or delivery of property made in favor of a purchaser or encumbrancer in good faith and for valuable consideration.
3.3 Protection of Members of Company This section also seeks to protect members of the company from being defrauded in anticipation of winding up. In A Company Re 36 a false prospectus was issued and money so gathered was used to make payments to creditors. When a validation order was sought with respect to these payments, the court held that no such order could be issued when the payments were made at the cost of the members, even when the company was perfectly solvent and the winding up petition was presented on grounds of public interest.
3.4 Good Faith, Ordinary Course of Business and Adequate Consideration Section 531-A of the Act provides that any transfer of property or goods made by a company within one year before the presentation of a winding up petition against it will be void unless such transaction was in the ordinary course of business. In principle, the same tests as to 34 35 36
S. 531-A of the Companies Act 1956. See Annexure Id. A Company Re, (2000)1 BCLC 528 Ch D.
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intent as in Section 531 apply to a transaction challenged under Section 531A of the Act and the onus is on the official liquidator seeking to avoid the transaction to establish that the transfer was not made in the ordinary course of the company's business or that it was not made in good faith 37 or for valuable consideration. As to whether the transaction is made in good faith or for valuable consideration will depend on the facts of a given case. If there is no consideration or the consideration is inadequate, there may arise a presumption of want of good faith38. Even if there is adequate consideration, the official liquidator may attempt to establish that a valuable asset of the company was sought to be shielded against the claims of the company's creditors. The official liquidator's challenge would not hold if he cannot establish lack of bona fides on the part of the transferee. 39
3.5 The UK Position Originally s.625 of the U.K. Companies Act, 1985, similar to the Indian s. 531-A, laid down that any transfer aimed at defrauding members or creditors of the company within before two months of the petition for winding up is presented would be void. However ss.488-650 of the 1985 Act was repealed by the Insolvency Act of 1986. The 1986 Insolvency Act however does contain a section that is the equivalent of s.531-A of the Indian Companies Act, 1956. The provision in the Insolvency Act that is closest in intent to s.531-A is s.423. S.423(3) reflects the adequate consideration aspect of s.531-A40. As with s.239 of the Insolvency Act s.423 too stresses on the necessity of intention as an ingredient of the offense.
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Percept Advertising v. M. Ravindran , (2003) 114 Comp Cas 652 Sc. Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1986] 60 Comp Cas 77 (P & H) In Re: Prudential Capital Markets , (2008) 1 CompLJ 314 Cal S.423 Insolvency Act, 1986. See Annexure
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IV. Conclusion
The research paper set out to examine the concepts of fraudulent preference and voluntary trading and the impact they have on winding up. The first concept, i.e. of fraudulent preference, was found to apply only in cases where the company was deemed to be insolvent. Fraudulent preference itself traces its roots back to insolvency law. The justification for fraudulent preference was found to be the protection of all creditors of a company going into winding up. The connection with insolvency law lies in the fact that when a company is declared insolvent, the assets of the company are to be distributed to all creditors on a pro rata basis.
If a creditor of an insolvent company is placed in a position of advantage over the other creditors then a fraud is committed at two levels. Firstly the preferred creditor is unfairly benefitted and secondly the assets of the insolvent company are reduced which in turn reduces the amounts that would be payed back to the other creditors on a pro rata basis. Keeping this in mind, s. 531 of the Companies Act, 1956 stipulates that any transaction that unfairly benefits one creditor of an insolvent company that is going to be wound up will be deemed to be fraudulent and void. However, there has to be an intention to prefer and no coercion for the transaction to be void for fraudulent preference. To remedy the situation, the person who is fraudulently preferred is made liable to the extent of the benefit that he unfairly received.
Avoidance by voluntary transfer has a justification similar to that underlying fraudulent preference. It is broader in scope as there is no requirement for the company to be insolvent. S. 531-A of the Companies Act, 1956 aims to protect creditors and members from being defrauded in anticipation of winding up. The exceptions to this section are transactions taking place in the ordinary course of business and transactions carried out in good faith. The courts have also held that transactions for valuable consideration can be held to be outside the purview of avoidance of voluntary transfer. Whether the a case falls into one of the exceptions is based solely on the facts of the case.
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As far as the position of law in the United Kingdom is concerned, both fraudulent preference and voluntary transfer are dealt with in the Insolvency Act of 1986, even though there need not be an insolvent company for avoidance by voluntary transfer. The positions of law are similar to the ones contained in the Indian Companies Act, along with a few distinguishing features. With respect to fraudulent preference, intention is clearly stated to be an essential ingredient and there is also a distinction made between persons connected to the company and persons who are not.
In conclusion it can be safely stated that the offences of fraudulent preference and voluntary transfer, contained in s.531 and 531-A of the Companies Act, 1956, form an important tool to protect small and unsecured creditors of a company, whether solvent or insolvent.
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Bibliography III. Books
1) A Ramaiya, Guide to the Indian Companies Act ( 15th edn., Nagpur: Wadhwa, 2001), 3705 2) Pennington's Company Law, (8th edn., London: Butterworths,2001), 47. 3) Sethna's Indian Company Law (JMJ Sethia ed., 11th edn., New Delhi: Modern Law Publishers, 2005) 4301 4) V Finch, Corporate insolvency law: perspectives and principles, (Cambridge University Press, 2002), 543 II. Articles
1) Anon., “Winding up - fraudulent preference - company repaying directors' loans shortly before going into creditors' voluntary liquidation”, C.L. Pract. 1998, 5(10), 275-276. 2) A. Keirse, “Object and effect: the vexed question of intent in fraudulent preference cases”, C.L. Pract . 2005, 12(7), 182-185. 3) JC McCoid, “Bankruptcy, Preferences, and Efficiency: An Expression of Doubt”, Virginia Law Review, 1981, 249. 4) N.V. German, “Bankruptcy, Pressure as a Defence and Fraudulent Preferences”, vol. 8, Alta. L. Rev., 1970, p.154 5) Note, “Preferential Transfers and the Value of the Insolvent Firm”, vol. 87, Yale L.J. (1978), 1449 6) R Weisberg, “Commercial Morality, the Merchant Character, and the History of the Voidable Preference”, Stanford Law Review, 1986
III. Cases English Cases
1) A Company Re, (2000)1 BCLC 528 Ch D. 2) Barclays Bank v. Homan, (1993) BCLC 680 Ch D 3) Clasper Group Services Ltd. Re, 1989 BCLC 143 Ch D. 4) De Tastet v. Carroll (1813) 1 Stark 88. 5) Eric Holmes Ltd. Re, 2 All ER 333
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6) F.L.E. Holdings Ltd. Re, [1976] 1 WLR 1409 7) Katz v. McNally, (1999) BCC 291 CA 8) Pierson Ltd. Re, (1999) BCC 26 Ch D 9) T.W. Cutts Re, (1956) All ER 537 10) Transworld Trading Re, (1999) BPIR 628 Ch D; 11) Wills v. Corfe, 1998 2 BCLC 75 Ch Dr.
B) Indian Cases
1) Official Liquidator v. Ashok Kumar Dalmia And Ors., (1999) 98 Comp Cas 269 Raj 2) In Re: Prudential Capital Markets, (2008) 1 CompLJ 314 Cal 3) Monark Enterprises v. Kishan Tulpule [1992] 74 Comp Cas 89 (Bom), 4) Official Liquidator v. Venkataraman, (1966) 1 CompLJ 243 AP 5) Percept Advertising v. M. Ravindran, (2003) 114 Comp Cas 652 Sc. 6) Sunder Lal Jain v. Sandeep Paper Mills P. Ltd . [1986] 60 Comp Cas 77 (P & H), 7) Tansukharai v. Official Liquidator , AIR 1952 Mad 595.
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Annotated Bibliography I. Articles
1) Anon., “Winding up - fraudulent preference - company repaying directors' loans shortly before going into creditors' voluntary liquidation”, C.L. Pract. 1998, 5(10), 275-276. The article examines whether repayments of directors loans prior to voluntary liquidation are voidable preferences under s.239. To this end the article makes a detailed study of Wills v Corfe Joinery Ltd .
2) A. Keirse, “Object and effect: the vexed question of intent in fraudulent preference cases”, C.L. Pract . 2005, 12(7), 182-185. This article looks at the problems faced by the courts in Ireland and England in giving effect to pre-liquidation transactions that seek to prefer one creditor over another, given the evidential burden on the liquidator of proving the debtor's intention to make the preference. The article also compares the legislation concerning fraudulent preference transactions in the jurisdictions.
3) JC McCoid, “Bankruptcy, Preferences, and Efficiency: An Expression of Doubt”, Virginia Law Review, 1981, 249. This article examines the history of the law of fraudulent preference. The author debates on the possible methods in which the transaction that is impugned as bringing about fraudulent preference. In concluding the author claims that the goals of preference law are equality of distribution and maximization of estate value. Preference law is not fully effective in achieving these goals because individual creditors have an incentive to ignore or even to evade it. Its limited efficacy favors more knowledgeable creditors, and its operation creates substantial uncertainty costs
4) N.V. German, “Bankruptcy, Pressure as a Defence and Fraudulent Preferences”, vol. 8, Alta. L. Rev., 1970, p.154 The writer examines the presumption of preference and the manner of rebuttal in cases of
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pressure from creditors. He also examines what constitutes pressure and to this end examines a series of English legislations and case law.
5) Note, “Preferential Transfers and the Value of the Insolvent Firm”, vol. 87, Yale L.J. (1978), 1449 The article claims that preference law tries to impose equality on pre-insolvency behavior so that that behavior will not make the principle of equality in insolvency distribution meaningless. A stated companion goal is to maximize the estate from which equal distribution is to be made.
6) R Weisberg, “Commercial Morality, the Merchant Character, and the History of the Voidable Preference”, Stanford Law Review, 1986 The article puts forth a proposition that preference doctrine would seem to be a central part of insolvency law. It states that if the general purpose of insolvency law is to ensure a ratable distribution of the debtor's assets among the creditors, preference law would seem, by definition, to be a primary instrument for achieving that goal.
II. Cases A) English Cases
1) A Company Re, (2000)1 BCLC 528 Ch D. When money was collected from members and payment was made out of this money, for which a validation order was sought, it was held that even if the company was perfectly solvent and the winding up petition was only on public interest grounds, payment could nt be made at the cost of the members.
2) Barclays Bank v. Homan, (1993) BCLC 680 Ch D In this case there was a discussion on jurisdiction. It was held that when a subsidiary of a London company was sold in the U.S., while the court had jurisdiction to grant an injunction
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to restrain a party from pursuing proceedings in a foreign jurisdiction, the court should only do so where the foreign proceedings were vexatious or oppressive as between the parties.
3) Clasper Group Services Ltd. Re, 1989 BCLC 143 Ch D.
A company paid a sum of £2,000 to the son of its owner and managing director. The son had been employed by the company but was dismissed a month before the company went into liquidation.
As he had not
received the requisite notice of his dismissal he was a creditor of the company albeit for a relatively small sum. The owner's son lodged the company funds to his bank account, and immediately withdrew a sum of £3,000.
That latter sum was lent to another company acquired by his
father. The ultimate purpose of the payment of £2,000 to the owner's son was the provision of that sum to the owner's new company. It was held that the payment in question was a fraudulent preference of the owner's son
4) De Tastet v. Carroll (1813) 1 Stark 88. In this case it was held that it was unjust to permit a party, on the eve of insolvency, to make a voluntary disposition of his property in favour of a particular creditor, leaving the mere husk to the rest, and therefore, that a transfer made at such a period, and under such circumstances, as evidently shown that it was made in contemplation of bankruptcy and in order to favor a particular creditor, should be void.
5) Eric Holmes Ltd. Re, 2 All ER 333 In this case it was held that where a Creditor making an advance takes from the Debtor a promise to execute the charge at the request of the Creditor, the court will, in the absence of any other circumstances, readily infer that the purpose of the parties, i.e. the Debtor as well as the Creditor, was to give the Creditor the right to be preferred on request. Further, such an arrangement, although for value, is fraudulent and unenforceable, and when the Debtor in performance of its promise in fact creates a charge at the request of the Creditor, the court again, in the absence of any other circumstances, will readily infer that the intention of the Debtor is to prefer the Creditor.
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6) F.L.E. Holdings Ltd. Re, [1976] 1 WLR 1409 It was held that where the mortgage was given under the honest belief that it would be in the interests of the company to do so and that the company would be able to get further advances from the same creditor by showing good faith, it was held that no fraudulent preference was involved. It was stated that what matters is the motive and if it is found that the company intended to give an improper advantage to one creditor, in the light of all the facts and circumstances disclosed, the transaction will be set aside.
7) Katz v. McNally, (1999) BCC 291 CA The group of companies went into administration in 1990 with a deficit in excess of GBP 8 million. The administration orders were replaced by winding up orders and liquidators were appointed who argued that the payments made to two directors we re preferential payments. It was held that the presumption as to the intention behind payments to connected persons under the Insolvency Act 1986 had not been rebutted, so that the two directors were liable to repay the sums they had received.
8) Pierson Ltd. Re, (1999) BCC 26 Ch D Brian D Pierson (Contractors) Ltd built and maintained golf courses. It fell into difficulty after contracting parties failed to pay on two projects. It went into insolvent liquidation in January 1996. The liquidator, amongst others, applied for a contribution for wrongful trading for the period after June 1994. The court considered whether at that point in time the directors ought to have realised that there was no reasonable prospect of avoiding insolvent liquidation.
9) T.W. Cutts Re, (1956) All ER 537 It was stated that if a debtor, knowing himself to be insolvent and knowing, also, that bankruptcy is imminent, deliberately elects to pay his oldest friend or closest relative, and to leave his other creditors unpaid or with little chance of being paid, it is irrelevant, to determining his state of mind, that he made the selection because of the love he bore his friend or relative or because of his hopes for general, but unspecified favors from them in the future.
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10) Transworld Trading Re, (1999) BPIR 628 Ch D; Where a security was provided to a creditor at a time when the company was in insolvent circumstances and the directors were unable to rebut their desire to prefer, they were held to be guilty of fraudulent preferences.
11) Wills v. Corfe, 1998 2 BCLC 75 Ch Dr. Here, directors were payed in order to clear their loans to the company and it was held that this amounted to fraudulent preference. It was also held that when the court was trying to determine the existence of fraudulent preference, the court has to take into account the state of mind of the directors to see whether there was an overriding intention to prefer one creditor over others Indian Cases
1) Official Liquidator v. Ashok Kumar Dalmia And Ors ., (1999) 98 Comp Cas 269 Raj The facts of the case were that Company Petition No. 4 of 1991 was filed on March 13, 1991, for winding up of Ashoka Oil Products Pvt. Ltd. It was alleged that the properties of the company were being transferred fraudulently to defraud the creditors. It was held that if the company is on the verge of closure then no preference can be given to one creditor vis-avis others. The provisions of Sections 531 and 531A are meant to protect the rights of other creditors so that if the company in liquidation makes the sale, the proceeds may be proportionately distributed. It was seen whether favor had been given to respondents and if the object of executing sale deed was tainted with the element of fraud, dishonesty or preference
2) In Re: Prudential Capital Markets, (2008) 1 Comp LJ 314 Cal The facts of the case are that Company Petition No. 4 of 1991 was filed on March 13, 1991, for winding up of Ashoka Oil Products Pvt. Ltd. It was alleged that the properties of the company were being transferred fraudulently to defraud the creditors. It was held that the provisions of Sections 531 and 531A are meant to protect the rights of other creditors so that if the company in liquidation makes the sale, the proceeds may be proportionately
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distributed. When the action of the directors cannot be considered to be bona fide or in good faith or in the ordinary course of business, the intention to give preference to a few of the creditors to the exclusion of others is proved and to be considered fraudulent.
3) Monark Enterprises v. Kishan Tulpule [1992] 74 Comp Cas 89 (Bom), Here a resolution not being passed by board of directors, but the company accepting the consideration and implementing the transaction, failure to pass resolution was held not to vitiate the transaction. The question with regard to Section 531 was considered and it was observed that unless a transaction of transfer of a company's property amounts to a fraudulent preference under the bankruptcy law or insolvency law and it is entered into within a period of six months prior to commencement of winding up of the company, the transaction in question cannot be treated as void under Section 531(1). The burden of proving that the impugned transaction was not entered into in the ordinary course of business or in good faith and for valuable consideration would be on the official liquidator or creditors impugning the transaction.
4) Official Liquidator v. Venkataraman, (1966) 1 CompLJ 243 AP Three buses were transferred to a creditor, the Court held that this was not fraudulent preference as the transaction was brought about by pressure on the company and the company's management thought that it would be in the best interest of the company to pay off the debt to that particular creditor.
5) Percept Advertising v. M. Ravindran, (2003) 114 Comp Cas 652 Sc. The first respondent was an Administrator of a company under winding up proceedings before the Company Judge had filed Company Application NO. 260/02 in Company Petition No. 130 of 1990 seeking a direction to the petitioner herein to hand over keys of certain properties which according to the administrator, belonged to the company under winding up. The petitioner herein in the said application contended that it is the bona fide purchaser for valuable consideration of the property in question hence application of the administrator should not be allowed. It was held that the onus is on the official liquidator seeking to avoid the transaction to establish that the transfer was not made in the ordinary course of the company's business or that it was not made in good faith.
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6) Sunder Lal Jain v. Sandeep Paper Mills P. Ltd . [1986] 60 Comp Cas 77 (P & H), The case of the petitioner was that he was a creditor of Haryana Rubber Industries (P.) Ltd. , against which the petition for winding up was presented on August 21, 1980. It was ordered to be wound up on March 5, 1981. Mr. Gian Singh was its chairman who died in 1979. The company, after his death, stopped functioning in January, 1979. R.K. Grover, respondent No. 2, in collusion with the State Bank of India, respondent No. 3, sold a boiler known as Lancashire boiler of the company having a market price of more than five lakh rupees for a paltry amount of Rs. 85,000 to Sandeep Paper Mills Pvt. Ltd., respondent No. 1, on February 15, 1980. It was alleged that the transfer was not in the ordinary course of business of the company and that it was not bona fide and for valuable consideration. It was observed that an application for annulment of a transfer under Section 531A can be allowed on proof either that there was no consideration for the transaction or that the consideration was so inadequate as to raise the presumption of want of good faith.
7) Tansukharai v. Official Liquidator , AIR 1952 Mad 595. This was an application to vary the order of the Official Liquidator of the Andhra Paper Mills Co., Ltd., disallowing the claim of the applicant to have a charge over the movable assets of the company for a certain sum. The liquidator admitted that the amount claimed was due, but he disallowed the claim to rank as secured creditor on the ground that the document creating, the security was not registered with the Assistant Registrar of Joint Stock Companies, Cocanada. It was held that the mere fact that the money was paid within three months prior to the presentation of the petition for winding up is not by itself sufficient to avoid the transfer or payment as invalid under Section 231.
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Annexure Relevant Sections I. Indian Companies Act, 1956 A) S.531 Fraudulent preference
(1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly:
Provided that, in relation to things made, taken or done before the commencement of this Act, this sub-section shall have effect with the substitution, for the reference to six months, of a reference to three months.
(2) For the purposes of sub-section (1), the presentation of a petition for winding up in the case of a winding up by the Tribunal, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual.
B) S.531A. Avoidance of voluntary transfer.
Any transfer of property movable or immovable, or any delivery of goods, made by a company, not being a transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by the Tribunal or the passing of a resolution for voluntary winding up of the company, shall be void against the liquidator.
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C) S.532. Transfers for benefit of all creditors to be void
Any transfer or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void.
D) S.533 Liabilities and rights of certain fraudulently preferred persons
(1) Where, in the case of a company which is being wound up, anything made, taken or done after the commencement of this Act is invalid under section 531 as a fraudulent preference of a person interested in property mortgaged or charged to secure the company’s debt, then (without prejudice to any rights or liabilities arising apart from this provisions), the person preferred shall be subject to the same liabilities, and shall have the same rights, as if he had undertaken to be personally liable as surety for the debt, to the extent of the mortgage or charge on the property or the value of his interest, whichever is less.
(2) The value of the said person’s interest shall be determined as at the date of the transaction constituting the fraudulent preference, and shall be determined as if the interest were free of all encumbrances other than those to which the mortgage or charge for the company’s debt was then subject.
(3) On any application made to the Tribunal with respect to any payment on the ground that the payment was a fraudulent preference of a surety or guarantor, the Court shall have jurisdiction to determine any questions with respect to the payment arising between the person to whom the payment was made and the surety or guarantor and to grant relief in respect thereof, notwithstanding that it is not necessary so to do for the purposes of the winding up, and for that purpose may give leave to bring in the surety or guarantor as a third party as in the case of a suit for the recovery of the sum paid. This sub-section shall apply, with the necessary modifications, in relation to transactions other than the payment of money as it applies in relation to payments of money.
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II. Provincial Insolvency Act, 1920
A) S.641 Acts of insolvency
(1) A debtor commits an act of insolvency in each of the following cases, namely: (a) if, in India or elsewhere, he makes a transfer of all or substantially all his property to a third person for the benefit of his creditors generally; (b) if, in India or elsewhere, he makes a transfer of his property or of any part thereof with intent to defeat or delay his creditors; (c) if, in India or elsewhere, he makes any transfer of his property, or of any part thereof, which would, under this or any other enactment for the time being in force, be void as a fraudulent preference if he were adjudged an insolvent; (d) if, with intent to defeat or delay his creditors, (i) he departs or remains out of the territories to which this Act extends, (ii) he departs from his dwelling- house or usual place of business or otherwise absents himself, (iii) he secludes himself so as to deprive his creditors of the means of communicating with him; (e) if any of his property has been sold in execution of the decree of any Court for the payment of money; (f) if he petitions to be adjudged an insolvent under the provisions of this Act; (g) if he gives notice to any of his creditors that he has suspended, or that he is about to suspend, payment of his debts; or (h) if he is imprisoned in execution of the decree of any Court for the payment of money.
(2) Without prejudice to the provisions of sub- section (1), a debtor commits an act of insolvency if a creditor, who has obtained a decree or order against him for the payment of money (being a decree or order which has become final and the execution whereof has not been stayed), has served on him a notice (hereafter in this section referred to as the insolvency notice) as provided in sub- section (3) and the debtor does not comply with that
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S.9 of the Presidency Towns Insolvency Act, 1909 is pari materia this section.
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notice within the period specified therein: Provided that where a debtor makes an application under sub- section (5) for setting aside an insolvency notice: (a) in a case where such application is allowed by the District Court, he shall not be deemed to have committed an act of insolvency under this sub- section; and (b) in a case where such application is rejected by the District Court, he shall be deemed to have committed an act of insolvency under this sub- section on the date of rejection of the application or the expiry of the period specified in the insolvency notice for its compliance, whichever is later: Provided further that no insolvency notice shall be served on a debtor residing, whether permanently or temporarily, outside India, unless the creditor obtains the leave of the District Court therefor.
B) S.842 Exemption of corporation, etc., from insolvency proceedings.
No insolvency petition shall be presented against any corporation or against any association or company registered under any enactment for the time being in force.
C) S.943 Conditions on which creditor may petition
(1) A creditor shall not be entitled to present an insolvency petition against a debtor unless-(a) the debt owing by the debtor to the creditor, or, if two or more creditors join in the petition, the aggregate amount of debts owing to such creditors, amounts to five hundred rupees, and (b) the debt is a liquidated sum payable either immediately or at some certain future time, and (c) the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition:
Provided that where the said period of three months referred to in clause (c) expires on a day when the Court is closed, the insolvency petition may be presented on the day on which the Court re- opens. 42 43
S.107 of the Presidency Towns Insolvency Act, 1909 is pari materia this section. S.12 of the Presidency Towns Insolvency Act, 1909 is pari materia this section.
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(2) If the petitioning creditor is a secured creditor, he shall in his petition either state that he is willing to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent, or give an estimate of the value of the security. In the latter case, he may be admitted as a petitioning creditor to the extent of the balance of the debt due to him after deducting the value so estimated in the same way as if he were an unsecured creditor.
D) S.2844 Effect of an order of adjudication
(1) On the making of an order of adjudication, the insolvent shall aid to the utmost of his power in the realisation of his property and the distribution of the proceeds among his creditors.
(2) On the making of an order of adjudication, the whole of the property of the insolvent shall vest in the Court or in a receiver as hereinafter provided, and shall become divisible among the creditors, and thereafter, except as provided by this Act, no creditor to whom the insolvent is indebted in respect of any debt provable under this Act shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceeding, except with the leave of the Court and on such terms as the Court may impose.
(3) For the purposes of sub- section (2), all goods being at the date of the presentation of the petition on which the order is made, in the possession, order or disposition of the insolvent in his trade or business, by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof, shall be deemed to be the property of the insolvent. 44
The corresponding section in the Presidency Towns Insolvency Act is s. 17. s.17. Effect of order of adjudication. On the making of an order of adjudication, the property of the insolvent wherever situate shall vest in the official assignee and shall become divisible among his creditors, and thereafter, except as directed by this Act, no creditor to whom the insolvent is indebted in respect of any debt provable in insolvency shall, during the pendency of the insolvency proceedings, have any remedy against the property of the insolvent in respect of the debt or shall commence any suit or other legal proceeding except with the leave of the Court and on such terms as the Court may impose: Provided that this section shall not affect the power of any secured creditor to realize or otherwise deal with his security in the same manner as he would have been entitled to realize or deal with it if this section had not been passed.
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(4) All property which is acquired by or devolves on the insolvent after the date of an order of adjudication and before his discharge shall forthwith vest in the Court or receiver, and the provisions of sub- section (2) shall apply in respect thereof.
(5) The property of the insolvent for the purposes of this section shall not include any property (not being books of account) which is exempted by the Code of Civil Procedure, 1908 (5 of 1908 ), or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree.
(6) Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it if this section had not been passed.
(7) An order of adjudication shall relate back to, and take effect from, the date of the presentation of the petition on which it is made.
III. Insolvency Act, 1986 A) S.423 Transactions defrauding creditors.
(1)This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if— (a)he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration; (b)he enters into a transaction with the other in consideration of marriage [F1or the formation of a civil partnership]; or (c)he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.
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(2)Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for— (a)restoring the position to what it would have been if the transaction had not been entered into, and (b)protecting the interests of persons who are victims of the transaction.
(3)In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose— (a)of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or (b)of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
(4)In this section “the court” means the High Court or— (a)if the person entering into the transaction is an individual, any other court which would have jurisdiction in relation to a bankruptcy petition relating to him; (b)if that person is a body capable of being wound up under Part IV or V of this Act, any other court having jurisdiction to wind it up.
(5)In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as “the debtor”.
B) S.239 Preferences (England and Wales).
(1)This section applies as does section 238.
(2)Where the company has at a relevant time (defined in the next section) given a preference to any person, the office-holder may apply to the court for an order under this section.
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(3)Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference.
(4)For the purposes of this section and section 241, a company gives a preference to a person if— (a)that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities, and (b)the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done
(5)The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b).
(6)A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5).
(7)The fact that something has been done in pursuance of the order of a court does not, without more, prevent the doing or suffering of that thing from constituting the giving of a preference.
C) S.240 “Relevant time” under ss. 238, 239.
(1)Subject to the next subsection, the time at which a company enters into a transaction at an undervalue or gives a preference is a relevant time if the transaction is entered into, or the preference given—
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(a)in the case of a transaction at an undervalue or of a preference which is given to a person who is connected with the company (otherwise than by r eason only of being its employee), at a time in the period of 2 years ending with the onset of insolvency (which expression is defined below), (b)in the case of a preference which is not such a transaction and is not so given, at a time in the period of 6 months ending with the onset of insolvency, (c)in either case, at a time between the making of an administration application in respect of the company and the making of an administration order on that application, and (d)in either case, at a time between the filing with the court of a copy of notice of intention to appoint an administrator under paragraph 14 or 22 of Schedule B1 and the making of an appointment under that paragraph.
(2)Where a company enters into a transaction at an undervalue or gives a preference at a time mentioned in subsection (1)(a) or (b), that time is not a relevant time for the purposes of section 238 or 239 unless the company— (a)is at that time unable to pay its debts within the meaning of section 123 in Chapter VI of Part IV, or (b)becomes unable to pay its debts within the meaning of that section in consequence of the transaction or preference; but the requirements of this subsection are presumed to be satisfied, unless the contrary is shown, in relation to any transaction at an undervalue which is entered into by a company with a person who is connected with the company.
(3)For the purposes of subsection (1), the onset of insolvency is: (a)in a case where section 238 or 239 applies by reason of an administrator of a company being appointed by administration order, the date on which the administration application is made, (b)in a case where section 238 or 239 applies by reason of an administrator of a company being appointed under paragraph 14 or 22 of Schedule B1 following filing with the court of a copy of a notice of intention to appoint under that paragraph, the date on which the copy of the notice is filed,
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(c)in a case where section 238 or 239 applies by reason of an administrator of a company being appointed otherwise than as mentioned in paragraph (a) or (b), the date on which the appointment takes effect, (d)in a case where section 238 or 239 applies by reason of a company going into liquidation either following conversion of administration into winding up by virtue of Article 37 of the EC Regulation or at the time when the appointment of an administrator ceases to have effect, the date on which the company entered administration (or, if relevant, the date on which the application for the administration order was made or a copy of the notice of intention to appoint was filed), and (e)in a case where section 238 or 239 applies by reason of a company going into liquidation at any other time, the date of the commencement of the winding up.
D) S.241. Orders under s. 238, 239.
(1) Without prejudice to the generality of sections orders under 238(3) and 239(3), an order under either of those sections with respect to a transaction or preference entered into or given by a company may (subject to the next subsection)(a) require any property transferred as part of the transaction, or in connection with the giving of the preference, to be vested in the company, (b) require any property to be so vested if it represents in any person's hands the application either of the proceeds of sale of property so transferred or of money so transferred, (c) release or discharge (in whole or in part) any security given by the company, (d) require any person to pay, in respect of benefits received by him from the company, such sums to the office- holder as the court may direct, (e) provide for any surety or guarantor whose obligations to any person were released or discharged (in whole or in part) under the transaction, or by the giving of the preference, to be under such new or revived obligations to that person as the court thinks appropriate, (f) provide for security to be provided for the discharge of any obligation imposed by or arising under the order, for such an obligation to be charged on any property and for the security or charge to have the same priority as a security or charge released or discharged (in whole or in part) under the transaction or by the giving of the preference, and
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(g) provide for the extent to which any person whose property is vested by the order in the company, or on whom obligations are imposed by the order, is to be able to prove in the winding up of the company for debts or other liabilities which arose from, or were released or discharged (in whole or in part) under or by, the transaction or the giving of the preference.
(2) An order under section 238 or 239 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the company in question entered into the transaction or (as the case may be) the person to whom the preference was given ; but such an order(a) shall not prejudice any interest in property which was acquired from a person other than the company and was acquired in good faith, for value and without notice of the relevant circumstances, or prejudice any interest deriving from such an interest, and (b) shall not require a person who received a benefit from the transaction or preference in good faith, for value and without notice of the relevant circumstances to pay a sum to the office holder, except where that person was a party to the transaction or the payment is to be in respect of a preference given to that person at a time when he was a creditor of the, company.
(3) For the purposes of this section the relevant circumstances, in relation to a transaction or preference, are(a) the circumstances by virtue of which an order under section 238 or (as the case may be) 239 could be made in respect of the transaction or preference if the company were to go into liquidation, or an administration order were made in relation to the company, within a particular period after the transaction is entered into or the preference given, and (b) if that period has expired, the fact that the company has gone into liquidation or that such an order has been made.
(4) The provisions of sections 238 to 241 apply without prejudice to the availability of any other remedy, even in relation to a transaction or preference which the company had no power to enter into or give.
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E) S.249 “Connected” with a company.
For the purposes of any provision in this Group of Parts, a person is connected with a company if— (a) he is a director or shadow director of the company or an associate of such a director or shadow director, or (b) he is an associate of the company, and “associate” has the meaning given by section 435 in Part XVIII of this Act.
F) S.435 Meaning of “associate”.
(1) For the purposes of this Act any question whether a person is an associate of another person is to be determined in accordance with the following provisions of this section (any provision that a person is an associate of another person being taken to mean that they are associates of each other).
(2)A person is an associate of an individual if that person is— (a)the individual’s husband or wife or civil partner, (b)a relative of— (i)the individual, or (ii)the individual’s husband or wife or civil partner, or (c)the husband or wife or civil partner of a relative of— (i)the individual, or (ii)the individual’s husband or wife or civil partner.
(3)A person is an associate of any person with whom he is in partnership, and of the husband or wife or civil partner or a relative of any individual with whom he is in partnership; and a Scottish firm is an associate of any person who is a member of the firm.
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(4)A person is an associate of any person whom he employs or by whom he is employed.
(5)A person in his capacity as trustee of a trust other than— (a)a trust arising under any of the second Group of Parts or the M1Bankruptcy (Scotland) Act 1985, or (b)a pension scheme or an employees’ share scheme , is an associate of another person if the beneficiaries of the trust include, or the terms of the trust confer a power that may be exercised for the benefit of, that other person or an associate of that other person.
(6)A company is an associate of another company— (a)if the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other, or (b)if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate.
(7)A company is an associate of another person if that person has control of it or if that person and persons who are his associates together have control of it.
(8)For the purposes of this section a person is a relative of an individual if he is that individual’s brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant, treating— (a)any relationship of the half blood as a relationship of the whole blood and the stepchild or adopted child of any person as his child, and (b)an illegitimate child as the legitimate child of his mother and reputed father; and references in this section to a husband or wife include a former husband or wife and a reputed husband or wife and references to a civil partner include a former civil partner and a reputed civil partner.
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