Concealment of Assets in Bankruptcy and Assets Exempted for Disclosure

Concealment of Assets in Bankruptcy

Introduction 

A businessman's business is basically his baby; the decision of going through the process of bankruptcy is probably the most difficult decision that a company has to make throughout its lifetime. Everyone involved in the procedure, be it, the debtors or creditors are losers herein, in the sense that, the debtors sell all their assets to pay off creditors, but this sale of assets would not be profitable to any of them since they would be sold at the market price or lower. 

Self-interest and greed for more is a part of human nature. Especially in cases of bankruptcy, many debtors resort to deception in terms of assets, so as to prevent paying the creditors in full and retaining as much as possible with themselves. This deception can cause more harm than benefit to the debtor. False statements and concealment of assets violate the sanctity of law and amount to fraud and misrepresentation, against which a creditor can initiate judicial action. 

Over the years, companies that go out of business have come up with some really creative ways of hiding their assets ranging from; transferring assets to another account only to be slyly retrieved after the conclusion of bankruptcy proceedings to selling off assets or property with the possibility of being reclaimed thereafter. 

It is a basic presumption in bankruptcy law that the debtor makes full disclosure of all assets and liabilities. Failure to do so can land him into a complex web of civil and criminal litigation.

Case Laws 

To understand the concept of concealment, we can rely on certain precedents:

In Burchinal v. United States, 342 F.2d 982, 985 (10th Cir.), cert. denied, 382 U.S. 843 (1965), the court held that concealment does not merely require secrecy in terms of physically hiding property; it includes all acts that done that may amount to defrauding the creditors, trustee or the custodian of the property. 

Further, in United States v. Moss, 562 F.2d 155, 160 (2d Cir.), cert. denied, 435 U.S. 914 (1978) it was held that, an important element of concealment of property is the intention of the debtor. If acts were done in contemplation of bankruptcy or with the intention to defeat the provisions of the bankruptcy code. 

With respect to the offense of concealment, we may cite, Sultan v. United States, 249 F.2d 385, 386 (5th Cir. 1957) wherein it was held that the offence of bankruptcy is a continuing offense and deal with the conduct of the debtor before and after the concealment of property. 

Assets Exempted from Disclosure 

An application for bankruptcy can be made by the debtor himself, one or more creditors, the public prosecutor, or suo motu by the courts own motion. 

In a bankruptcy proceeding, creditors are mostly paid out of company assets; however, if the company assets fail to satisfy the requirements of debt, assets may also be taken out of the debtors' personal estate.

However, the debtor does not necessarily have to turn everything over to the creditors, as there are some assets that are exempted from the whole procedure. Such as:

1. Reasonably necessary, clothing, furniture, household appliances;
2. Vehicles and jewelry, up to a certain value;
3. Portions of unpaid wages; and
4. Public benefits such as welfare, unemployment compensation and pension.

However, on the other hand, property like, family heirlooms, expensive motor vehicles, cash, bank accounts, shares and bonds etc. are liable to be ceased. 

Methods of Concealment 

A debtor is said to have concealed their assets if they satisfy any of the following criteria:

1. Willful concealment of any property, owned and operated under the name of the corporate debtor;
2. Removing, fraudulently, from the list of assets, any such details of the property that should have been a part thereof;
3. Making any false entries in the books of accounts relating to the property of the debtor or his corporate affairs;
4. Willful creation of any security interest over property that would serve fruitful to the debtor, other than in the ordinary course of business;
5. Securely transferred or disposed of any property before commencement of bankruptcy proceedings;
6. Creating fake documents that diminish the value of assets; or
7. Lying about ownership of any valuable property.

How can an administrator discover a discrepancy?

Well, one might think that they have successfully concealed your assets. However, such concealment cannot escape the due diligence of an expert administrator or trustee. The trustee looks into each and every minute detail of a company that has applied for bankruptcy; they require the concerned debtor to submit all documents such as, statement of assets, statements of lawsuits, all assets and liabilities and copies of income tax returns etc. This exercise of the trustee is to test the truthfulness of the debtor. The trustee also evaluates all the liabilities against the creditors, which means that the trustee takes a look at all the statements of the creditors to estimate the value that is owed to each creditor. To further confirm that nothing is being concealed the administrator or trustee may:

1. Review documents that reflect personal and company debts;
2. They may further conduct a search of public records, along with a search of assets; and
3. They may also conduct a detailed search of all bank records and tax returns to look for any discrepancies, like transfer of a large amount of funds before the commencement of bankruptcy proceedings.

Consequences of Non-Disclosure 

1. Despite all attempts of a debtor to conceal his assets, if the administrator or trustee discovers assets that remained undisclosed, the administrator has the authority to reverse the order of discharge of debts, which means that, upon discovery of pending assets the debtor will still owe the creditor the debt that was attempted to be eliminated by the initiation of bankruptcy proceedings. 
2. The administrator further, even has the authority to revoke any discharge that has been obtained by the debtor, upon later discovery.  
3. Domestic bankruptcy laws provide for the imposition of damages, penalties or furtherance of civil and criminal action against any person who engages in the concealment of assets.

Unintentional Concealment of Assets 

There are dire consequences of hiding assets, like criminal and civil action. However, the law does not punish someone who has unintentionally forgotten or somehow had a reason to believe that such assets are not to be included in the list of assets being declared. The law affords an opportunity to them to, therefore, amend such an application.

In many jurisdictions, such as the US, unintentional concealment of assets can be amended by an application to the court regarding the changes and the reasons for such amendment. Such an application, however, is subject to the scrutiny of the court, and the court may then choose to accept or reject such an amendment. 

Applications can be amended for the following three reasons:

1. In case of a mistake;
2. Omissions; or
3. Change in circumstances.

In order to avoid any such problems in filing for bankruptcy, it is important for a company to engage a professional body that can facilitate the procedure and make sure that all the documents that are being submitted and passed on correctly to the concerned authority. 

Bankruptcy Laws in UAE

The laws related to bankruptcy are fairly new in the UAE, being enacted only in 2016 by Federal Decree Number 9 of 2016. Unlike other jurisdictions, these laws apply only to companies and not individuals. Moreover, these laws apply to companies that are partly or fully owned by the government, and companies established in the mainland. This law does not apply to companies established in the DIFC and ADGM free zones. 

The regulatory body responsible for the governance and enforcement of rules and regulations is the Committee of Financial Restructuring (CFR). This authority is also responsible for the administration of a register of insolvencies. 

Penalties under UAE Law

Article 197 of the Bankruptcy Law, lays down a penalty for the imprisonment of 5 years for any person who is found committing any such act that:

1. Conceals, destroys and alters any part of the books with the intention to defraud the creditors;
2. Engages in embezzlement of funds with the intention of causing harm to the creditors; or
3. Engages in acts that, show an increase in the persons' liabilities and reduces their assets with the intention to deceive.

Subsequently, Article 198 also imposes liability on a member of the board of directors and managers of the company for the abovementioned acts, with imprisonment of a term not exceeding five years and a fine of AED 1,000,000. 

Bankruptcy Laws in India 

Bankruptcy laws in India are governed by the Insolvency and Bankruptcy Code, 2016. This Code aims to consolidate laws relating to insolvency resolution of corporates, partnerships and individuals. The Code provides for maximization of assets and promotion of entrepreneurship. Further, the Code also provides for promotion of the interest of shareholders. The Code mainly deals with cases of civil nature, but there are certain provisions that can attract criminal action.  

The Code establishes the Insolvency and Bankruptcy Board of India that is responsible for regulating the entities registered under it; it also is responsible for overseeing insolvency proceedings. 

Penalties under the Code, are enumerated under Chapter VII. With respect to concealment of assets and intention to defraud creditors, the penalties are enumerated under Section 68- 73 of the Code. 

1. Section 68, punishment for concealment of property.
2. Section 69, punishment for transactions defrauding creditors.
3. Section 70, misconduct in the course of the corporate insolvency resolution process.
4. Section 71, falsifying books of the corporate debtor.
5. Section 72, wilful material omissions relating to corporate affairs.
6. Section 73, false representation to creditors.

The Code lays down that, any person who, with the intention to defraud the creditors, willfully conceals and property or any part thereof or destroys or mutilates any books to get rid of any evidence with regards to the existence of property shall be liable to a penalty under the Code. The penalties enumerated herein may take a civil or criminal route, depending on the gravity of the crime, ranging from imprisonment or fine or both. 

Conclusion 

In view of the aforementioned, the debtor should beware of the consequences and penalties attached to concealment of assets. The debtor must be mindful of the law in this respect because inadvertence thereof is not an excuse to be left scot-free. In law, there is a basic presumption that each and every person is aware of the law. Therefore, ignorance of the law is not an excuse. The insolvency and bankruptcy laws are the most stringent and adherence to them is in the best interest of those concerned. 

Failure to disclose assets is a landmine for the debtor, which poses a major risk to him every step of the way. On the other hand, it is a goldmine for the attorney for the opposite party, since non-disclosure makes for a very straight forward argument in any civil or criminal litigation.