Insolvency – Transfer of property – Transaction at undervalue – Claimants investing in fund promoted by first defendant – Claimants becoming judgment creditors of first defendant – First defendant transferring assets to second defendant – Whether consideration being given for property transactions – Whether two properties being transferred improperly – Whether transfer of third property giving effect to prior agreement – Whether transfers being effected to protect first defendant and daughter rather than defeat creditors – Whether court should exercise discretion – Application granted in part
The first defendant operated a business promoting an investment fund which purported to focus on complex cross-border litigation in emerging markets. The claimants were investors in the fund. The claimants had serious concerns about the fund’s management and the whereabouts of its money. The first defendant agreed to buy out their interests for around $2 million but reneged on the agreement. The claimants commenced proceedings against him. The claimants obtained a worldwide freezing order against the first defendant and became his judgment creditors.
There were significant transfers of assets from the first to the second defendant, including a number of properties in Windsor and Budleigh Salterton, substantial amounts of cash and the sale of various cars. The second defendant was married to the first defendant, although they were separated. The claimants made an application under section 423 of the Insolvency Act 1986. They alleged that, among other things, all the transfers had been at an undervalue because there was no consideration for them and they had been made to put the assets beyond the reach of the first defendant’s creditors. Accordingly, they contended that the assets or their value should be transferred into the first defendant’s name to enable the claimants to execute their judgment against him; alternatively, they should simply be transferred to the claimants.
The second defendant argued that consideration had been given for the property transactions in particular, as they had been made pursuant to a prior informal, separation agreement in return for the second defendant agreeing not to issue divorce proceedings or claim financial relief. She and the first defendant had agreed that two of the properties should be in her sole name and their eventual transfer into her name had only given effect to that agreement. In any event, the two properties had been owned by Panamanian foundations, so there had been no actual transfer of assets to her from the first defendant. Further, a third property had been intended from the outset to be in her name only and the later transfer to that effect had only given effect to that agreement. Even if there was no consideration, the transfers had been effected in order to protect the first defendant and their daughter and not to defeat creditors. Even if the court had jurisdiction to make an order, it should not do so, having regard to the role of the second defendant and her personal circumstances.
Held: The application was granted in part.
(1) On the evidence, any informal agreement or promise about the transfer of properties into the second defendant’s sole name was long gone and redundant by the time of the transfers and there was no independent evidence to suggest otherwise. Nor was there evidence of demands from the second defendant that, unless the transfer was made, she would serve the divorce petition or revive her claim for financial relief. In the circumstances, the transfer of the properties into the second defendant’s sole name had been at an undervalue as required by section 423 of the 1986 Act: Papanicola v Fagan [2008] EWHC 3348 (Ch) distinguished.
(2) Notwithstanding the existence and formal nature of the Panamanian foundations, the beneficial owners of the two properties were the first and second defendants. Accordingly, upon transfer of them and their legal title into the sole name of the second defendant and without any reservation to the first defendant of any beneficial interest, the first defendant had transferred or brought about the transfer of his beneficial interest therein to her. There was no reason, without evidence to the contrary, not to put his beneficial interest at 50%.
(3) In the light of the evidence, there was no reason to suppose that the first and second defendants were not each beneficially entitled to 50% of the third property as joint legal owners initially. The transfer of the first defendant’s 50% interest in the third property to the second defendant was clearly at an undervalue. The court rejected any suggestion of consideration being provided because of an earlier agreement between them. A real and substantial purpose of the first defendant was plainly to put the third property beyond creditors. There were very visible and pressing creditors in the form of the claimants at least. The evidence made clear the linkage between the first defendant’s own financial circumstances and the transfer. Therefore, subject to relief and discretion, the section 423 claim had been made out.
(4) There was no reliable evidence from the defendants to suggest that the purpose of the property transfer had not at least included in a real way an intention to put those properties beyond the reach of actual or likely creditors or those likely to make a claim against the first defendant, whether the claimants or otherwise. The statutory purpose had been established and the claimants were entitled to relief under section 423.
(5) On the question of discretion, while the second defendant might not have been actually complicit, she must have known what had been going on as regards the first defendant’s financial position and she had participated in the transfer of the third property after she became aware of the proceedings. She had not always been frank with the court. The claimants had lost a good deal of money, which could not be written off, and there was no prospect of full recovery against the first defendant. Further, on the second defendant’s evidence, the first defendant had other assets in other parts of the world. She had the chance to make some recovery in the divorce proceedings. Accordingly, the court would grant the relief sought in respect of the section 423 claims, subject only to making provision for the daughter who had been an innocent victim.
Daniel Saoul (instructed by Charles Fussell & Co LLP) appeared for the claimants; Asa Jack Tolson (instructed by Benchmark Solicitors) appeared for the second defendant.
Eileen O’Grady, barrister
Click here to read a transcript of Bataillon and another v Shone and another
