Agricultural holdings — Mortgage of holding — Whether tenancy purportedly created by landowner invalidated by section 423 of the Insolvency Act 1986
By a legal
charge dated April 18 1989 the first defendant charged his agricultural holding
to the plaintiff as security for a loan of £700,000. The first defendant fell
into arrears and the plaintiff gave a deadline of April 18 1992 for the arrears
to be cleared. By an agreement dated April 16 1992 the first defendant granted
his wife, the second defendant, a tenancy of the mortgaged property stated to
begin on that date and to continue until September 29 1992 and thereafter to
continue from year to year until determined by 12 months’ notice to quit. No
consent to this tenancy was sought or obtained from the plaintiff, as provided
for by the legal charge. Section 99 of the Law of Property Act 1925 confers
limited powers of leasing on a mortgagor which by para 12 of Schedule 14 to the
Agricultural Holdings Act 1986 cannot be contractually excluded. The value of
the mortgaged farm with vacant possession was £1m; its value subject to the
purported tenancy was less than £500,000. In the court below, the judge found
on the evidence that the tenancy agreement was entered into by the first
defendant for the purpose of prejudicing the interests of the plaintiff within
the meaning of section 423(3)(c) of the Insolvency Act 1986, but
dismissed the plaintiff’s claim for summary judgment under RSC Ord 14. The
plaintiff appealed, contending that by the grant of the tenancy agreement the
first defendant suffered a detriment, consisting of a substantial diminution in
the value of his freehold interest which fell to be considered for the purposes
of section 423(1)(c) of the Insolvency Act 1986, that the monetary value
of the obligations assumed by the second defendant under the tenancy agreement
was therefore significantly less than the value of the consideration provided
by the first defendant and that the second defendant obtained substantial
benefits. Accordingly, the transaction should be set aside as a transaction
defrauding the plaintiff.
of the Insolvency Act 1986 as including ‘a gift, agreement or arrangement’. The
tenancy gave the second defendant the three-fold benefits of safeguarding the
family home, enabling her to acquire and carry on the family farming business
and a surrender value. Further, the transaction, if effective, put the second
defendant in a ‘ransom’ position by which the plaintiff would have to negotiate
and possibly pay a high price to obtain vacant possession of the holding and
sell it for the purposes of enforcing its security. Notwithstanding that the
second defendant agreed to pay the best rent reasonably obtainable for the
tenancy and that she undertook the other tenants’ obligations imposed by the
tenancy agreement, the transaction gave benefits to the first defendant
significantly greater in value, in money or money’s worth than the value of the
consideration provided by her. Accordingly, the transaction was within section
423(1)(c). The fact that the tenancy agreement might or would have been
perfectly valid because the statutory power of leasing conferred by section 99
of the Law of Property Act 1925 cannot be excluded in relation to a mortgage of
agricultural land was irrelevant if the transaction could be set aside under
section 423 in the particular circumstances mentioned therein.
The following
cases are referred to in this report.
Bolton v Madden [1873] LR 9 QB 55
Lloyds
Bank Ltd v Marcan [1973] 1 WLR 339; [1973] 2
All ER 359; [1973] 1 WLR 1387; [1973] 3 All ER 754, CA
MC Bacon
Ltd, In re [1991] Ch 127; [1990] BCC 78
Menzies v National Bank of Kuwait [1994] BCC 119
This was an
appeal by the plaintiff, Agricultural Mortgage Corporation plc, from a decision
of Judge Weeks made in Bristol District Registry on March 3 1993, whereby he
failed to give final judgment in an application by the plaintiff under RSC Ord
14 in proceedings against the defendants, William Woodward and Deborah Jane
Woodward, to set aside a tenancy agreement and for payment of sums due under a
mortgage.
Gabriel Moss
QC (instructed by Bond Pearce, of Plymouth) appeared for the appellant;
Nicholas Dowding (instructed by Burges Salmon, of Bristol) represented the
respondents.
Giving the
first judgment at the invitation of Neill LJ, SIR CHRISTOPHER SLADE said: With the leave of the judge,
the plaintiff in these proceedings, Agricultural Mortgage Corporation plc,
appeals from an order of Judge Weeks made in Bristol District Registry on March
3 1993. He had before him an application by the plaintiff under RSC Ord 14 for
final judgment in the proceedings: (1) against both defendants setting aside a
tenancy agreement dated April 16 1992 made between the first defendant, Mr
Woodward, and the second defendant, his wife, Mrs Woodward; and (2) against the
first defendant for payment of all sums due under a mortgage by way of legal
charge made on April 18 1989 between the first defendant and the plaintiff. The
judge dismissed the summons as regards the second defendant and ordered her to
serve a defence within 14 days. He gave the plaintiff liberty to restore the
summons as regards the first defendant for hearing by the district judge.
The issue
raised on this appeal is whether the tenancy purportedly created by the first
defendant in favour of his wife was a transaction caught by section 423 of the
Insolvency Act 1986 (‘the 1986 Act’). The relevant facts are not in dispute and
I can take them largely from the judgment in the court below.
The first
defendant is a farmer who owns a farm in Warwickshire. He borrowed £700,000
from the plaintiff. By the legal charge dated April 18 1989 he charged his farm
to the plaintiff to secure repayment of the loan and interest. Before this
charge was executed, the plaintiff obtained the second defendant’s signature to
a document dated March 7 1989 in which she stated:
I agree to
the mortgage being granted on the clear understanding that (the plaintiff) can
exercise its rights in priority to any rights I may have in the property.
The first
defendant soon fell into arrears. Eventually, at a meeting on January 14 1992,
the plaintiff gave him a deadline of April 18 1992 for the arrears to be
cleared. It confirmed the deadline in a letter of January 16 1992 and in
subsequent discussions. The first defendant did not clear the arrears. By April
18 1992 the total arrears of capital and interest were about £850,000. The
first defendant had other creditors who were also pressing him to repay
substantial debts to them. The first defendant represented to the plaintiff
that he would clear the arrears by selling property, but all he did for this
purpose was to sell one small part of the land and make a small payment.
Shortly before
the deadline expired (if the document is correctly dated), the two defendants
signed a tenancy agreement dated April 16 1992 by which the first defendant
granted the second defendant a tenancy of the mortgaged property stated to
begin on April 16 1992 and to continue until September 29 1992 and thereafter
to continue from year to year until determined by 12 months’ notice to quit. No
consent to this tenancy was sought or obtained from the plaintiff, as provided
for by the legal charge. However, it is common ground that this absence of
consent is remedied by section 99 of the Law of Property Act 1925, which
confers limited powers of leasing on a mortgagor and that para 12 of Schedule
14 to the Agricultural Holdings Act 1986 makes it impossible to contract out of
those powers in regard to agricultural land.
If the tenancy
were valid and binding on the plaintiff, the consequences for the plaintiff
would be serious because, on the undisputed evidence, the value of the
mortgaged farm with vacant possession is over £1m, whereas its value, subject
to the tenancy, is less than £500,000, that is to say far below the debt owing
to the plaintiff. The plaintiff would thus be left without security for a
substantial part of the debt owed to it.
In May 1992
the plaintiff issued a writ against both defendants, which was followed by a
statement of claim served on July 17 1992 and subsequently amended on September
18 1992. The plaintiff then issued a summons under RSC Ord 14 seeking the
relief which has been summarised at the start of this judgment.
At the hearing
before Judge Weeks, the first defendant, who has not appeared before this
court, was not represented, but the second defendant appeared by counsel. The
plaintiff’s counsel, having accepted that there were triable issues in relation
to a number of the other grounds upon which the relief was sought in the
statement of claim, based the plaintiff’s claim to summary judgment on two
grounds only. The first was based on the acknowledgment dated March 7 1989
signed by the first defendant. The judge, in my view, clearly rightly rejected
this point, holding that the words in the document ‘any rights I may have in
the property’ referred only to then existing rights of the second defendant in
the property and not to future rights which she might acquire thereafter. This
part of his decision is not challenged on this appeal.
The second and
main ground upon which the plaintiff based its case for summary judgment in the
court below was section 423 of the 1986 Act. This section is contained in Part
XVI of that Act, which is headed ‘Provisions Against Debt Avoidance (England
and Wales only)’ and, so far as material, provides:
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; 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.
(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 …
(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; …
Section 424
specifies those persons who may apply for an order under section 423. The
plaintiff is such a person.
By subsection
(3) the court, in the present case, is required to investigate the purpose of
the first defendant in entering into the tenancy agreement. As to the purpose
for which the tenancy agreement was entered into, the second defendant gave the
following evidence in an affidavit:
6. In order
to continue to produce an income for the family I needed to take over the
farming business and I clearly needed land and machinery and livestock to be
able to do so. The first defendant and I had heard from other farmers that it
was possible for a farmer to grant a tenancy even where there was a mortgage on
the property and after I had taken advice from my solicitors, the first
defendant and I agreed that I should take a tenancy over Sole End Farm and
should acquire the live and dead stock. I took the tenancy and, by an agreement
of the same date (‘the Sale and Purchase Agreement’) I purchased machinery
equipment and livestock from the first defendant at a price of £23,969 …
7. I was
aware of the fact that the action which I was taking would have the effect that
the plaintiff would be unable to sell the farm with vacant possession and,
indeed, my aim could not be achieved if that were not the case. Mr Drew is
correct when he says in paragraph 9 of his affidavit that there would be no
point in taking over the business unless I gained some security of tenure since
without security of tenure it would be inevitable that the plaintiff would
realise its security. It was therefore imperative that I took a tenancy over
the freehold land as well as acquiring the machinery and live and dead stock. I
will refer to this aspect in more detail below, but it is clear that in order
to achieve my aims, a fully protected tenancy with security of tenure which was
binding on the AMC as mortgagee was necessary. I was also aware of the fact
that the value of the farm to the plaintiff with a tenancy was significantly
less than without a tenancy. However, my understanding was that the first
defendant as mortgagor was entitled to grant such a tenancy and, as I have
said, I took it primarily in order to enable me to provide for my young family.
8. … It is
correct to say that I consider that the tenancy was granted for commercial
reasons to enable me to take over the farming business in my own right and for
my own benefit. Mr Drew says that he cannot see what commercial purpose was
served by the tenancy, but he concentrates on the position of the first
defendant. I accept that it was unlikely that the payments due under the Sale
and Purchase Agreement and the tenancy would be sufficient to enable the first
defendant to pay off his indebtedness, but the commercial purpose served was to
enable me to take over the farming business and to produce an income in the
likely event that the first defendant would cease to be able to do so.
On the
evidence before him, the judge inferred that the first defendant’s purposes in
entering into the tenancy agreement were (inter alia) to ensure that the
plaintiff did not get vacant possession of the property. Indeed, as the second
defendant had admitted, the tenancy was purposeless unless she obtained
security of tenure. In these circumstances, the judge found on the evidence
that the transaction was entered into by the first defendant for the purpose of
prejudicing the interests of the plaintiff, within section 423(3)(c) of
the 1986 Act. This finding has not been challenged on this appeal.
The principal
issue before the judge, as before this court, was whether the tenancy agreement
was a transaction ‘entered into at an undervalue’, falling within the
definition of such a transaction contained in section 423(1)(c) of the
1986 Act.
In this
context, some helpful guidance was to be found in the judgment of Millett J in In
re MC Bacon Ltd [1990] BCC 78. There he had to consider whether the
granting of a debenture by a company was a transaction entered into by the
company at an undervalue within section 238(4)(b) of the 1986 Act, which
reads:
the company
enters into a transaction with that person 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 the company.
Millett J said
(at p92);
To come within
that paragraph the transaction must be:
(1) entered
into by the company;
(2) for a
consideration;
(3) the value
of which measured in money or money’s worth;
(4) is
significantly less than the value;
(5) also
measured in money or money’s worth;
(6) of the
consideration provided by the company.
It requires a
comparison to be made between the value obtained by the company for the
transaction and the value of consideration provided by the company. Both values
must be measurable in money or money’s worth and both must be considered from
the company’s point of view.
In my
judgment, the applicant’s claim to characterise the granting of the bank’s
debenture as a transaction at an undervalue is misconceived. The mere creation
of a security over a company’s assets does not deplete them and does not come
within the paragraph. By charging its assets the company appropriates them to
meet the liabilities due to the secured creditor and adversely affects the
rights of other creditors in the event of insolvency. But it does not deplete
its assets or diminish their value. It retains the right to redeem and the
right to sell or remortgage the charged assets. All it loses is the ability to
apply the proceeds otherwise than in satisfaction of the secured debt. That is
not something capable of valuation in monetary terms and is not customarily
disposed of for value.
In the
present case the company did not suffer that loss by reason of the grant of the
debenture. Once the bank had demanded a debenture the company could not have
sold or charged its assets without applying the proceeds in reduction of the
overdraft; had it attempted to do so, the bank would at once have called in the
overdraft. By granting the debenture the company parted with nothing of value,
and the value of the consideration which it received in return was incapable of
being measured in money or money’s worth.
Mr Vos
submitted that the consideration which the company received was, with
hindsight, of no value. It merely gained time and with it the opportunity to
lose more money. But he could not and did not claim that the company ought to
have received a fee or other capital sum in return for the debenture. That
gives the game away. The applicant’s real complaint is not that the company
entered into the transaction at an undervalue but that it entered into it at
all.
An assessment
of the value in money or money’s worth of the consideration provided by each of
the respective parties to the transaction is thus of crucial importance. As to
this, section 99(6) of the Law of Property Act 1925, pursuant to which section
the tenancy, in the present case, was purportedly granted, provides:
Every such
lease shall reserve the best rent that can reasonably be obtained, regard being
had to the circumstances of the case, but without any fine being taken.
For the
purposes of the Ord 14 application before the judge, the plaintiff’s counsel
accepted that there was a triable issue as to whether the grant of the tenancy
was validly made in exercise of the powers of leasing contained in section 99.
The argument before the judge thus proceeded on the basis that the annual rent
of £37,250 reserved under the tenancy represented a full market rent, being the
best rent that could reasonably be obtained. Nevertheless, it was argued by the
plaintiff that the value of the consideration in money or money’s worth
received by the first defendant for the transaction was significantly less than
the value in money or money’s worth of the consideration provided by him. It
appears that the principal grounds for this argument were (in substance) that
by virtue of the transaction the first defendant suffered a detriment,
consisting of a substantial diminution in the value of his freehold interest in
the property, that this detriment fell to be treated as part of the
consideration provided by him for the purpose of section 423(1)(c) and
that, when it was so treated, the monetary value of the obligations assumed by
the second defendant under the tenancy agreement was shown to be significantly
less than the value of the consideration provided by the first defendant.
The judge
rejected this argument, saying:
I turn to the
question whether the jurisdiction opens under section 423(1)(c). This
requires that a transferor enters into a transaction with another the value of
the consideration for which is significantly less than the value provided by
himself. This requires a comparison between the consideration the first
defendant received in money or money’s worth compared with the consideration
provided by the first defendant. What one does not have to do is value the
detriment suffered by the first defendant as a result of the transaction. A
simple example of this which will be familiar in a fiscal context is a set of
chairs the aggregate value of which is greater than the value of each chair
added together. If a person sells one he may do so at market value and the
consideration which he receives is full value and will equal the consideration
provided by the vendor. The vendor would still have suffered a detriment
because he would have devalued his estate, because he would have only five
chairs left which would be worth less as individuals than as components of a
set. The fiscal legislation meets this by looking at the way the estate is
diminished.
I do not
think that the same approach has been adopted in the Insolvency Act. That Act
compares simply the consideration provided by the donor with the consideration
received, translated into money or money’s worth and compared with each other.
A little
later, the judge, having quoted the passage from Millett J’s judgment in In re MC Bacon
Ltd [1990] BCC 78 cited above, said:
As I
understand that part of the judgment Millett J decided that there was no
consideration in money or money’s worth. The sentence which troubles me is
‘both values must be measurable in money or money’s worth and both must be
considered from the company’s point of view’.
I have to
consider a different section. I reach the firm conclusion (as I consider I am
bound to do on a question of law on Ord 14) that I should compare the
consideration provided by the donee with the consideration provided by the
donor, both in money or money’s worth, and that I am not directed to look at
incidental detrimental to the donor.
There is
evidence that the annual rent of £37,250 for the first year is equal to market value
and is the best rent reasonably obtainable. Taking the two considerations in
money or money’s worth they appear equal provided one disregards the incidental
detriment as a result of the loss of vacant possession. Therefore the tenancy
is not within section 423. I reach this conclusion with some regret because it
appears to me that this tenancy was designed to prejudice the interests of the
mortgagor and if I am right there is a lacuna in the insolvency provisions under which it is open to a debtor deliberately
to prejudice a creditor in circumstances which depreciate the value of his
assets but do not confer a corresponding advantage on the donee. This may not
be an unintentional lacuna; it may be unfair to subject a donee to a burden
where no gratuitous benefit has been conferred upon him. Be that as it may I
have reached a firm decision and dismiss the application.
The judge, as
he said, reached his decision with regret. If it was correct, the results are
surprising as well as disturbing. For, as he found, the very purpose of the
relevant transaction was to prejudice the interests of the plaintiff as
creditor-mortgagee by conferring on the second defendant a tenancy, which gave
her security of tenure and thereby procuring that the plaintiff could not get
vacant possession of the property for the purpose of enforcing its security.
Furthermore, its effect, if it was valid, was to deplete the value of the first
defendant’s assets available for his creditors, including the plaintiff, by
over £500,000. On similar facts the Court of Appeal in Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387 held that a lease of a dwelling-house and market
garden granted by a mortgagor-debtor pursuant to his statutory powers under
section 99 of the Law of Property Act 1925, but with the intent of depriving
the mortgagee bank of its ability to obtain vacant possession (see at p1390A),
because he
wanted to remain with his wife and family in their home and with the market
garden business
was a
transaction made with intent to defraud the bank within section 172 of the Law
of Property Act 1925; and that, since the wife knew of the intent, the lease
was voidable at the instance of the bank. Russell LJ (at p1391) made the
following comment:
The intention
of Mr Marcan is perfectly plain: the lease to his wife was designed expressly
to deprive the bank of the ability to obtain the vacant possession to which the
bank plainly attributed value, and to diminish to that extent the strength of
the bank’s position as creditor. To take that action at that juncture, in my
judgment, was, in the context of relationship of debtor and creditor, less than
honest: it was sharp practice, and not the less so because he was advised that
he had power to grant the lease. It was, in my judgment, a transaction made with
intent to defraud the bank within section 172, and would have been within the
Statute 13 Eliz I, c 5.
The relevant
transaction, in the present case, would plainly have fallen within section 172
of the Law of Property Act 1925. Section 423 of the 1986 Act, which was first
introduced as section 212 of the Insolvency Act 1985 and replaced section 172,
following the recommendations of the report of the review committee on
Insolvency Law and Practice (Cmnd 8558) (‘the Cork Report’), is one of a series
of provisions against debt avoidance and, as the heading to the section shows,
is intended to deal with ‘transactions defrauding creditors’. Prima facie it
seems most unlikely that the legislature would have intended a transaction of
the Lloyds Bank v Marcan type to escape the net of the section.
Nevertheless, the wording of section 423 is very different from that of the old
section 172 and, while having due regard to the purpose of the section, we must
apply that wording as we find it.
As his first
principal submission, for the plaintiff on this appeal, Mr Gabriel Moss QC
submitted that the judge plainly erred in law in holding that, in the
application of section 423(1)(c) detriment to the first defendant was
irrelevant. As he pointed out, it is elementary law that detriment to the
promisor is capable of constituting consideration for a contract: see for
example Bolton v Madden [1873] LR 9 QB 55. Millett J, he
submitted, in the passage from his judgment In re MC Bacon quoted above,
had held that: (i) an under value was created where the transaction depleted
the debtor’s assets or diminished their value; and (ii) both items of
consideration had to be considered from the point of view of the debtor trying
to prejudice his creditors. This judgment, it was contended, made it clear that
detriment to the debtor’s estate is a crucial factor which can be taken into
account, and Judge Weeks erred in declining to follow that judgment in applying
section 423(1)(c) merely because it dealt with a different section:
section 238. His decision, it was suggested, ignored the mischief with which
section 423 was intended to deal. Mr Moss referred us to (inter alia)
para 1215 of the Cork Report, which recommended that section 172 of the Law of
Property Act 1925 be re-enacted in an amended form so as to make it clear (inter
alia)
that the
necessary intent is an intent on the part of the debtor to defeat, hinder,
delay or defraud creditors or to put assets belonging to the debtor beyond
their reach …
and
that the
section applies to any disposition made with the necessary intent, even if
supported by valuable consideration where that does not consist of full
consideration in money or money’s worth received by the debtor.
In the present
case, the first defendant incurred a very substantial detriment under the
transaction, since the value of his freehold interest in the farm was
diminished by more than £500,000. This detriment, it was submitted, was part of
the ‘consideration provided by himself’ for the purpose of applying section
423(1) and its value far exceeded the value of the consideration given by the
second defendant in entering into the obligations imposed by the tenancy
agreement.
The relevant
passage from Millett J’s judgment In re MC Bacon was approved by the
Court of Appeal in Menzies v National Bank of Kuwait [1994] BCC
119 which held that on the facts of that case his analysis of section 238(4)(b)
applied mutatis mutandis to section 423(1)(c) of the 1986 Act:
see at pp128–129 per Balcombe LJ, with whose judgment Butler-Sloss LJ
agreed. I would therefore agree that the grounds on which Judge Weeks regarded
Millett J’s analysis of the law in the In re MC Bacon case as
inapplicable in the present case were not valid grounds. Furthermore, it is
true that one of the grounds upon which Millett J reached his decision In re
MC Bacon was that the creation of the debenture in that case did not
deplete the company’s assets or diminish their value.
However, I do
not read his judgment as specifically supporting the converse proposition,
namely that, if the debenture had depleted the company’s assets or
diminished their value, the detriment to the company would have by itself have
sufficed to bring the transaction within section 238(4)(b). As is pointed
out in Chitty on Contracts (26th ed) para 154, in the context of
contractual relations usually detriment and benefit are merely the same thing
looked at from different points of view. The present case, however, is not the
usual case. As Mr Nicholas Dowding pointed out on behalf of the second
defendant, under the transaction she did not receive the £500,000 diminution in
value suffered by the first defendant. Even accepting that, following the
guidance given by Millet J, one must look at the transaction from the debtor’s
point of view, there is, in Mr Dowding’s submission, no warrant for treating
the detriment suffered by the first defendant as part of the consideration
provided by him unless that detriment was in truth part of the bargain
entered into by him with his wife. Consideration, in his submission, is
what you get or give for a bargain; it would be wholly artificial and incorrect
to regard the diminution in value of the freehold as something for which the
second defendant had bargained and thus as forming part of the consideration
provided by the first defendant. This diminution in value was merely an
incidental result of the transaction.
I see some
force in the argument that mere detriment to the person entering into the
relevant transaction, unaccompanied by a corresponding benefit to the other
party, cannot properly be treated as part of the consideration provided by such
person for the purpose of applying section 423(1)(c) unless the
incurring of the detriment is actually part of the bargain, as opposed to being
merely an incidental result of the transaction. However, I have some doubts as
to whether this is what Parliament would have intended and would prefer to
leave this question open for decision in another case. For I am of the clear opinion
that Mr Moss is correct in his second main submission on this appeal.
This
submission focused attention not so much on the detriment to the first
defendant as on the benefit to the second defendant conferred by the
transaction. ‘Transaction’, it was pointed out, is a wide word, defined by
section 436 as including ‘a gift, agreement or arrangement’. The tenancy, if
effective, gave her the three-fold benefits of safeguarding the family home,
enabling her to acquire and carry on the family farming business, and a
surrender value. Furthermore, and most significantly, the transaction, if
effective, placed her vis-á-vis the plaintiff in what Mr Moss described
as a ‘ransom’ position. If the tenancy was effective, the plaintiff would have
had to negotiate with and no doubt pay a high price to her before it could
obtain vacant possession of the farm and sell it for the purpose of enforcing
its security and repaying the debt owed to it by the first defendant. Thus, it
was submitted, the transaction plainly conferred, and was intended to confer,
on her significant enhanced benefits beyond the rights granted by the tenancy
agreement itself, for which enhanced benefits she did not pay.
Mr Dowding, in
answering these submissions, naturally relied strongly on the concession that
the annual rent of £37,250 reserved under the tenancy represented a full market
rent, being the best rent that could reasonably be obtained. A proper
assessment of the market rent of property will, in his submission, always take
account of the existence of a potential purchaser, such as the second defendant
in the present case; the only relevance of the presence of a potential special
purchaser is that it may inflate the market value. It is not enough for the
plaintiff to assert that, because of the second defendant’s special position,
she might or would have been willing to pay a higher rent than any other
tenant. In Mr Dowding’s submission, to bring the case within section 423(1)(c),
the plaintiff would have to show that the annual rent of £37,250 was significantly
less than the market rent and
plaintiff are, he contended, irrelevant. They would all have been available to
any person who took a tenancy of the farm. Any such tenant could have acquired
the farming business and lived in the farmhouse. Any such tenant would have
acquired the benefit of the surrender value. All these potential advantages
were part and parcel of the factors which would be reflected in the assessment of
the market rent, which, together with the other obligations entered into by the
second defendant under the tenancy agreement, constituted full consideration
for the benefits conferred on her.
Persuasively
though these submissions were advanced, I am not persuaded by them. In applying
section 423(1)(c) to the facts of the present case, one must look at the
transaction as a whole; the tenancy agreement cannot be considered in blinkers.
Due weight must be given (inter alia) to the facts, not only that the agreement
was entered into by the first defendant with his wife for the purposes outlined
above but also that the land in question was mortgaged and that the wife,
through the grant of the tenancy, would be placed in the ‘ransom’ position
described above. Accepting that she agreed to pay for her yearly tenancy, a
rent which was the best rent reasonably obtainable for that tenancy viewed in
isolation, and that she undertook the other tenant’s obligations imposed by the
tenancy agreement, it seems to me nevertheless clear that, when the
transactions are viewed as a whole, the benefits which the first defendant
thereby conferred on her were significantly greater in value, far greater
in value, in money or money’s worth, than the value of the consideration provided
by her. To hold otherwise would seem to me to fly in the face of reality and
commonsense. No further evidence was, in my judgment, required to establish
that the transaction was one falling within section 423(1)(c); the
agreed facts speak for themselves. On the facts of this case, the substantial
detriment incurred by the first defendant under the transaction was largely
matched by a substantial benefit conferred on the second defendant beyond the
rights specifically conferred on her by the tenancy agreement.
As a long-stop
argument Mr Dowding pointed out that the effect of para 12 of Schedule 14 to
the Agricultural Holdings Act 1986 is that the statutory power of leasing
conferred by section 99 of the Law of Property Act 1925 cannot be excluded in
relation to a mortgage of agricultural land; the policy of that Act is
therefore to allow farmers who have mortgaged their farms to grant tenancies
binding the mortgagee even where they have expressly agreed not to do so. He
submitted that, accordingly, section 423 of the 1986 Act can have no
application to a tenancy to which the last-mentioned provisions apply. A
similar argument was advanced in Lloyds Bank v Marcan (supra)
and rejected: see at p1390D–E per Russell LJ. I, for my part, would
unhesitatingly reject it in the present case. The whole object of section 423
is to enable the setting aside, in the particular circumstances mentioned in
the section, of transactions which would otherwise be valid. The fact that in
the present case the tenancy agreement might or would have been perfectly valid
but for section 423 is neither here nor there.
We have had
the benefit of excellent arguments from counsel on both sides. For the reasons
stated, I would allow the appeal and order that there be final judgment against
both the defendants setting aside the tenancy referred to in the statement of
claim. I reach this conclusion without regret because a contrary conclusion
would, in my view, subject the plaintiff to a substantial injustice.
SAVILLE LJ agreed
and did not add anything.
Also agreeing,
NEILL LJ said: This appeal should be allowed for the reasons set out in
the judgment of Sir Christopher Slade. I add a few words of my own only because
we are differing from the decision of the learned judge.
The central
question which arises in this case is whether the tenancy agreement dated April
16 1992 was a transaction which fell within section 423 of the Insolvency Act
1986. Sir Christopher Slade has already set out the material provisions of that
section and it is sufficient for me to confine my citation to that part of
section 423(1), which provides:
This section
relates to transactions entered into at an undervalue; and a person enters into
such a transaction with another person if —
…
(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.
The principal
submission put forward on behalf of the plaintiffs was that in calculating the
consideration provided by Mr Woodward one was entitled to take account of the
detriment which he suffered by reason of the reduction in the value of his
property consequent upon the grant of the tenancy. This reduction in value was
of the order of £500,000.
It is of
course true that a detriment suffered by one party to a contract is capable of
constituting good consideration. Like Sir Christopher Slade, however, I would
wish to leave over for another occasion any conclusion as to whether the
‘detriment’ suffered by Mr Woodward in the present case constituted
‘consideration provided by’ Mr Woodward for the purpose of section 423(1)(c).
Counsel for
the plaintiff, however, had a subsidiary argument which I found to be
unanswerable. I am not clear how far, if at all, this argument was advanced
before the judge, but the matter is raised in the notice of appeal and
explained more fully in the skeleton argument lodged on behalf of the
plaintiff.
This
alternative argument was to the effect that the agricultural tenancy granted to
Mrs Woodward had three intended consequences which were additional to any
benefit which she received from the tenancy itself:
(a) The
safeguarding of the family home;
(b) The
acquisition by Mrs Woodward of the farming business free from its previous
creditors;
(c) The
benefit of the surrender value of the tenancy, which was of particular
importance in view of the fact that the property was mortgaged.
It was argued
on behalf of Mrs Woodward, inter alia, that these suggested benefits
had already been taken into account in fixing the annual rent which, as was
accepted by the plaintiff, represented the full market rent. It was further
argued that the value of any of these additional benefits could not be
calculated ‘in money or money’s worth’ and, accordingly, could not be taken
into account for the purpose of section 423(1)(c).
I am quite
unconvinced by these arguments. The purpose of the grant of the tenancy
agreement was to ensure that the plaintiff did not get vacant possession of the
property and was for the purpose of prejudicing the interests of the plaintiff.
By the grant of the tenancy Mrs Woodward acquired the benefit of the surrender
value which placed her, as counsel for the plaintiff put it, in ‘a ransom
position’ in any future dealings with the mortgagee. On the facts of this case
it is unnecessary to attempt to calculate the value of the surrender value. In
view of the existence of the mortgage it must be a large sum and may approach
the value of the ‘detriment’ suffered by Mr Woodward. In the circumstances I
see no answer to the argument that, quite apart from any value which may be
attributed to the securing of the family home and the acquisition of a
debt-free business, the surrender value constituted ‘consideration provided by’
Mr Woodward, which was significantly greater than the payment made by Mrs
Woodward for the grant of the lease.
I, too, would
allow the appeal and order that there be final judgment against both the
defendants setting aside the tenancy agreement referred to in the statement of
claim.
Appeal
allowed.
