Secured tenancy – Right to buy – Secured tenant purchasing property with bankrupt as joint tenant – Tenant intending bankrupt to have nominal interest only – Bankrupt accepting severance of joint tenancy and holding of 1% beneficial interest – Trustee in bankruptcy seeking order rectifying transaction at undervalue – Whether court having discretion to make no order at all – Application dismissed
The second defendant had occupied a house as a secured tenant since 1981. Following the death of the freeholder, she was offered the opportunity to purchase the freehold at a substantial discount because of her secured tenancy. The purchase was financed by a mortgage and the second defendant originally intended the property to be in her sole name. However, the mortgage company insisted that the mortgage be in joint names with the first defendant, with whom the second defendant had had a relationship since the early 1990s, although he had not moved into the house until 1998.
Soon after the purchase, the second defendant became aware of the effects of the joint tenancy. She gave the first defendant notice of severance, which stated that the property would thereafter be held by them as tenants in common in unequal shares; she would hold 99% and the first defendant 1%. The first defendant signed a document acknowledging receipt of the notice and accepting the apportionment of the shares as stated.
The claimant was subsequently appointed as the first defendant’s trustee in bankruptcy and applied to the court, under section 339 of the Insolvency Act 1986, to set aside that transaction, contending that the transfer of all but 1% of the first defendant’s beneficial interest as a joint tenant to the second defendant was a transaction at an undervalue. He sought an order restoring the position to what it would have been had the transaction not been entered into.
Held: The application was dismissed.
Unless and until a document was rectified by an order of the court, it took effect as it stood. In the present case, in the absence of any claim for rectification, the requirements of section 339 had been made out and the transaction was at an undervalue under that section: Goodman v Gallant [1986] 2 WLR 236applied.
In the majority of cases where the conditions for the application of the section were satisfied, the court would make an order. However, the court had an overall discretion that was sufficiently wide not to make any order where, exceptionally, justice so required, which was not confined to extra-territorial considerations.
When it came to discretion, it was not right to view the severance notice and receipt in isolation, without regard to the purchase and transfer that had taken place only two months previously and with which they were connected. The freehold was purchased only because the second defendant had had the opportunity to acquire it upon the freeholder’s death as a result of her protected tenancy, which had nothing to do with the first defendant. The purchase of the property as joint tenants had unintentionally conferred a windfall on the first defendant. The subsequent severance notice and receipt removed that windfall and reduced the first defendant’s interest to a nominal interest: Re Paramount Airways Ltd (No 2) [1993] Ch 223 and Reid v Ramlort Ltd [2004] EWCA Civ 800 considered.
Accordingly, this was an exceptional case in which justice required that no order should be made.
Adrian Davies (instructed by Osmond & Osmond) appeared for the claimant; Joshua Winfield (instructed by Travers Smith) appeared for the defendants.
Eileen O’Grady, barrister
