Action for repayment of sums due under mortgage — Tenancy granted by mortgagor to wife to ensure mortgagee did not get vacant possession — High Court granting wife leave to defend action to set aside tenancy — Appeal allowed
The first defendant was a farmer who borrowed £700,000 from the plaintiff. By a legal charge he charged his farm to the plaintiff. W soon fell into arrears. Shortly before the deadline to clear them expired W and his wife (the second defendant) signed a tenancy agreement by which W granted to his wife a tenancy of the property from year to year until determined by 12-months notice to quit. The annual rent was £37,250, which represented a full market rent. The plaintiff applied under Ord 14 of the Rules of the Supreme Court for final judgment: (1) against both defendants setting aside the tenancy agreement; and (2) against W for payment of all sums due under the mortgage. The judge dismissed the summons as regards the wife and ordered her to serve a defence within 14 days. The plaintiff appealed.
The central question was whether the tenancy agreement was a transaction which fell within section 423 of the Insolvency Act 1986, which provided that where a person entered into a transaction at an undervalue the court might make an order: (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 were victims of the transaction. Under section 423(1)(c) a person entered into such a transaction with another person if, “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”.
Held The appeal was allowed.
1. In applying section 423(1)(c) to the facts of the present case one had to look at the transaction as a whole; the tenancy agreement could not be considered in blinkers.
2. The agricultural tenancy granted to the wife had three intended consequences additional to any benefit which she received from the tenancy: (a) the safeguarding of the family home; (b) the acquisition by the wife of the farming business free from its previous creditors; and (c) the benefit of the tenancy surrender value, which was of particular importance given that the property was mortgaged.
3. The purpose of the tenancy 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 the wife acquired the benefit of the surrender value which placed her in a “ransom position” in any future dealings with the mortgagee. If the tenancy was effective the plaintiff would have to negotiate with and pay a high price to her before it could obtain vacant possession of the farm and sell it to enforce its security and repay the debt owed to it by W.
4. When the transactions were viewed as a whole, the benefits which W conferred thereby on his wife were significantly greater in value in money or money’s worth than the value of the consideration provided by her. To hold otherwise would fly in the face of reality and common sense.
Gabriel Moss QC (instructed by Bond Pearce, of Plymouth) appeared for the plaintiff; Nicholas Dowding (instructed by Burges Salmon, of Bristol) appeared for the second defendant; the first defendant did not appear and was not represented.
