In Hinton (Trustee in Bankruptcy) v Wotherspoon [2022] EWHC 2083 (Ch), the High Court has provided a useful steer to experts when providing valuation evidence in respect of unique properties that may have been sold at an undervalue.
The applicant was the trustee in bankruptcy of the respondent’s husband. In September 1992 the bankrupt purchased, in his sole name, Strand House, a property situated on the banks of the River Thames in Twickenham. In 1993 he married the respondent. The property became the matrimonial home.
In April 2001 the bankrupt transferred the property into the joint names of himself and the respondent. In 2008 they transferred the unencumbered legal title of the property into the respondent’s sole name. A side agreement was also executed which placed a restriction on the title that gave the bankrupt a lifetime contractual right to prevent dispositions.
In November 2013 the property was sold for £2m. The applicant alleged that the sale was at an undervalue and in doing so relied on an expert report which valued the property at £2.2m.
From 2009 onwards the bankrupt failed to pay his tax liabilities. Following a bankruptcy petition presented by HMRC in February 2014, the respondent’s husband was declared bankrupt in June 2014.
The applicant trustee brought claims under sections 339 and 423 the Insolvency Act 1986. The trustee alleged that at the date the property was sold the bankrupt continued to have a beneficial interest arising from the restriction. Accordingly, he relinquished his interest in the property to the respondent on sale for nil consideration, which amounted to a transfer at an undervalue in breach of section 339. The applicant further argued that the respondent held the bankrupt’s overreached share of the proceeds of sale on trust for the bankrupt and was required to account for same to the bankrupt’s estate. Yet further, the sale itself was at an undervalue.
Alternatively, the applicant also argued that the 2008 transfer was entered into with the purpose of putting assets beyond the reach of the bankrupt’s creditors or otherwise of prejudicing their interests such that a claim under section 423 arose.
The High Court rejected the claims brought pursuant to section 339. The 2008 transfer was a transaction at an undervalue, but it was made more than five years before the respondent’s husband was declared bankrupt. Further, section 339 did not apply to the restriction. The bankrupt’s consent to the disposition of the property in 2013 fell outside the definition of a “transaction” for the purposes of section 423.
The section 423 claim also failed. There was insufficient objective evidence to conclude that at the time of the 2008 transfer the bankrupt would not have been in a position to meet any of his tax liabilities or that HMRC would become a creditor because of the financial difficulties he found himself in. There was also insufficient evidence to conclude that the purported transfer was made for a prohibited purpose at the relevant time.
In respect of the valuation evidence, the High Court was critical of the applicant’s expert’s approach to the valuation of the property. The expert had provided valuation evidence in accordance with the RICS Red Book. The court found that the expert should have looked beyond a Red Book valuation for such a unique property. Additionally, there was no evidence that the expert had considered the state of the Twickenham property market at the material time. The court found that the property was sold in 2013 at market price.
Further, the court also rejected the expert’s valuation of the restriction arising from the side agreement. The expert had based her valuation on the proposition that the rights conferred by the restriction placed the bankrupt in the same position as a sole owner and, therefore, its value should be the same as the value of the freehold. This was incorrect. The value of the right to prevent a disposition was the ransom value; namely, the price payable to obtain its release.
Elizabeth Dwomoh is a barrister at Lamb Chambers
