Bankruptcy – Sale of property – Proceeds of sale – Appellant becoming bankrupt – Property vesting in trustee – Respondent purchasing property in sole name – Appellant undertaking to pay all expenses of property – Parties seeking to avoid bankruptcy rules – Appellant seeking proceeds of subsequent sale – Whether judge erring in striking out claim – Whether appellant having to rely upon illegality – Appeal dismissed
In 1977, the appellant purchased the freehold of a house, in which he lived, as the sole legal and beneficial owner. His brother, the respondent, also lived in the house from time to time. In 1993, the appellant was declared bankrupt and the property vested in his trustee in bankruptcy. The trustee accepted the respondent’s offer to purchase the property at a price that, after discharging the mortgage, would leave the trustee with £15,000. The respondent became the registered proprietor as from 1 March 1995. In 1996, the appellant was discharged from bankruptcy. He lived at the property until it was sold in 2005. The respondent lived in the property until around 2000.
In September 2005, the property was sold for £235,000. After the discharge of mortgages, the balance of the purchase price was paid to the respondent, who gave £115,000 to B to hold as his nominee. When B refused to repay the money, he issued proceedings for its return. B defended the claim on the basis that she was holding the sum for the appellant. She had already given the appellant £21,200 and had paid the balance into court, whereupon the claim against her was discontinued. The appellant was joined as a party and the action continued as a claim by the appellant against the respondent for a declaration that the proceeds of sale of the property were held by the respondent upon trust for him, and for an account of the proceeds and consequential relief.
The county court struck out the claim under CPR 3.4(2) on the ground that the statement of case disclosed no reasonable grounds for bringing the claim. The respondent denied any trust arrangement but submitted that if it existed it had been made for an illegal purpose, namely to evade the rules of bankruptcy, and so was unenforceable. The appellant appealed contending, inter alia, that there was an express trust in his favour on terms that he would be responsible for all expenses in respect of the property so that he did not need to rely upon any illegal purpose to establish his beneficial interest. Alternatively, the tainted motive was too remote to bar enforcement of the appellant’s interest.
Held: The appeal was dismissed.
The judge had correctly struck out the appellant’s claim. A claimant could enforce an equitable proprietary interest that had arisen under an agreement made for an illegal purpose provided that he did not need to plead or rely upon the illegality. Had the appellant made direct contributions to the purchase price, he could have relied upon them to establish a resulting trust in his favour. However, contributions to mortgage instalments were not the same as direct contributions. They might be intended to confer a beneficial interest on the payer but, equally, might be an advance to the mortgagor, entitling the payer to be subrogated pro tanto to the mortgagee’s rights, or as payments in lieu of rent: Tinsley v Milligan [1994] 1 AC 340 considered.
In order to establish that they were intended to confer a beneficial interest, payments had to be referable to an agreement or arrangement at the time of purchase that the payer should be responsible for the mortgage instalments either on terms that he should have a commensurate beneficial interest or in circumstances from which an intention could be inferred. Since the appellant had to rely upon the pleaded agreement or arrangement that he was to be the beneficial owner and was to pay the mortgage instalments, he could not avoid reliance upon its unlawful purpose. His interest was thereby rendered unenforceable: Collier v Collier [2002] EWCA Civ 1095 considered.
Far from being too remote, the illegal purpose was the essence of the agreement. The purpose of the alleged agreement, that the respondent would hold the property on trust for the appellant, was to deprive the trustee in bankruptcy of the opportunity to acquire the appellant’s interest in the property: Lowson v Coombes [1999] Ch 373 applied.
Christopher Maynard (instructed by Owen White & Catlin) appeared for the appellant; Miles Croally (instructed by Graham White & Co) appeared for the respondent.
Eileen O’Grady, barrister
