Validity of transactions — Agricultural tenancies and option to purchase farmlands — Negotiations for joint business venture — Transactions to keep assets out of hands of creditors — Whether improper purpose invalidating transactions — Test of “public conscience” — Whether resulting trust on failure of joint venture — Judgment for the plaintiff
R was the owner of 764 acres of agricultural land in Cornwall and also tenant of 42 acres owned by his mother. He entered into a series of transactions with the defendants including the sale of all his agricultural plant at half-value; an option to purchase the freehold land for about half its known price value; a rent-free tenancy of the freehold land and a subtenancy on the same terms of the 42 acres, with his mother’s consent. Pending the exercise of the option, the defendants progressively had taken possession of most of the land, so that R was deprived of the right of possession and the income the land would have generated. He contended that he had entered into these transactions with the defendants with a view to entering into a joint business venture of cattle-embryo transplants to be carried out in farm buildings on his land.
At the time the financial position of R was desperate. At first instance, Millett J found that the main purpose of the transactions was intended to protect R’s land and equipment from his creditors so as to make them available for the joint venture even if he became bankrupt. When the plans for a joint venture were eventually abandoned, R sought the return of his land. The defendants argued that since the purpose of the transaction was to defeat R’s creditors, it was unenforceable in equity as a resulting trust. Millett J found in favour of R and held that he was entitled to have the land back under a resulting trust: [1991] EGCS 19. The defendants appealed.
Held The appeal was dismissed.
1. The question of the effect of improper purpose on proprietary rights had recently been considered in the case of Tinsley v Mulligan (July 30 1991). In applying the balance between the adverse consequences of granting relief against the adverse consequences of refusing relief, the court used the “public conscience test” ie whether the grant of relief would affront the public conscience or shock the ordinary citizen. The court held by a majority that the equitable balance was in favour of allowing the defendant to enforce her beneficial interest in the property in Tinsley despite the improper purpose of the arrangement. Leave to appeal to the House of Lords had been granted. The present case required a similar balancing exercise to be carried out.
2. However, there were important differences between Tinsley and the present case. In Tinsley there was no question of failure of the main purpose of the arrangement. In the present case, when the tenancies were granted, the joint venture agreement was under negotiation and expected to come into effect. The tenancies were temporary receptacles until the land could be made available to the joint venture. There was no evidence that any creditor had been prejudiced or frustrated by reason of the grant of the tenancies; nor was there any evidence that R ever represented to the outside world that he had divested himself of the assets.
3. The judgment of Millett J in favour of R was correct. If a flexible approach were adopted, the equitable balance was in favour of R being entitled to the land. The most that could be said against the plaintiff was that his intention in effecting the transactions was to take the property out of the creditor’s reach and it was accepted that although that object was not achieved, such conduct ought to be discouraged. On the other hand, the defendants were well aware of the motive for the transactions for which they had given no consideration. The plaintiff’s case relied on a resulting trust and not on the enforcement of an improper arrangement. On balance, it was evident that it would be an affront to the public conscience if the plaintiff were to lose.
Hubert Picarda (instructed by Woollcombe & Yonge, of Plymouth) appeared for the appellants; and Ulick Staunton (instructed by Burges Salmon, of Bristol) appeared for the respondent.