Husband and wife joint owners of property — Charge in favour of bank — Declaration of trust by husband of his share in property in favour of wife and children — Bank obtaining judgment against husband — Charging order sought on husband’s interest in property — Whether husband entitled to rely on declaration of trust as defence — High Court holding that declaration of trust was sham and transaction at undervalue
W and his wife purchased Honer House, Honer Lane, South Mundham, Chichester, West Sussex, in December 1981 and registered it in their joint names in January 1982. On February 7 1983 they executed a legal charge on the property to secure a house mortgage loan with the bank. Under the charge they covenanted not to dispose of their legal or equitable estate or interest in the property without the prior written consent of the bank. In 1987 W was contemplating setting up his own business. He entered into a trust arrangement with his wife giving his equity in the family home to her and their two daughters. The trust deed was entered into, but the bank was never informed. Meanwhile W continued to act as though he remained a joint equity owner of the property. W and his wife separated in 1989.
In July 1991 the bank obtained judgment by default against W for the sum of £63,134.50 plus costs. The bank then obtained a charging order nisi in respect of such sums and accruing interest on W’s interest in the property. W resisted the charging order becoming absolute relying on the declaration of trust. The bank contended that even if the declaration of trust was executed in June 1987, it was either void as a “sham” transaction or voidable by reason of section 423 of the Insolvency Act 1986 as a transaction to defraud creditors. The other defendants were his wife and older daughter.
Held The court was satisfied that the declaration of trust was both a sham and contrary to section 423.
1. On the facts W did not have any intention when he executed the trust deed of endowing his children with his interest in the property, which at the time was his only real asset. It was a safeguard to protect his family from long-term commercial risk should he set up his own company. As such the declaration of trust was not what it purported to be but a sham.
2. Under section 423 the question was whether the court was satisfied that the transaction was entered into by W for the purpose of putting assets beyond the reach of a person who might at some time make a claim against him. The purpose of so doing might not be the sole purpose or intention: see Re Butterworth, ex parte Russell (1882) 19 ChD 588.
3. Once the purpose of the transaction could be shown to be to put assets beyond the reach of future creditors, section 423 would apply. It was a question of proof of intention or purpose underlying the transaction.
4. Accordingly, the declaration of trust was entered into by W for the purpose of putting his interest in the property out of the reach of any future creditors who might make a claim with respect thereto and therefore could not be relied upon by W in view of section 423.
Shan Warnock-Smith (instructed by Bramsden & Childs, of Portsmouth) appeared for the plaintiff bank; the first defendant, W, appeared in person; Martin Farber (instructed by Fowler Holloway & Yates, of Brighton) appeared for the second and third defendants.
