Question:
My father is in the wholesale trade. I work with him although the business is just his. He is in financial straits. He is owed money by several customers. He suggested getting postdated and blank cheques from them as a guarantee that they would pay up and giving the cheques to me “to be on the safe side.” Would the transfer of cheques to me from my father be valid later on if my father went bust ?
Answer:
The question deals with the law relating to business dealings/ transfer of rights/gifts made by someone who is later declared bankrupt. It is covered by the Bankruptcy Ordinance.
In relation to cheques given to guarantee a debt, reference to a Supreme Court case involving two brothers in the loan business is useful. One of them was declared bankrupt (after applying for this status himself). A few months later the other brother sued one of his bankrupt brother’s clients for a debt he owed – and had guaranteed by giving three blank cheques . The District Court held the transfer of cheques between the brothers was cancelled – hence the appeal by the non-bankrupt brother.
The Bankruptcy Ordinance regards the granting of existing or future rights deriving from a contract as an exception to the rule that these will be cancelled if the donor is subsequently declared bankrupt.
Rejecting the appeal, The Supreme Court said that the two brothers had run the business together and it was sufficient for the appellant to have known that his brother was in financial difficulties to eradicate the ‘good faith’ element. The appellant failed to bring evidence to show that the transfer of cheques was made in good faith, the court stressed.
To summarise, someone with knowledge of a donor’s financial problems who receives existing or future rights cannot rely on the defence of good faith if the latter is later declared bankrupt . The transfer will not be valid and can be cancelled. Thus, a son who receives cheques given to his father in the circumstances described above would probably not be able to rely on the ‘good faith’ defence to prevent the cancellation of the transfer. He would be very unlikely to succeed in proving that he did not know his father was in financial straits because of them being close family and working together.