Insolvency – Transaction at undervalue – Ancillary relief – First respondent entering trust deed and consent order to dispose of ancillary relief proceedings by fourth respondent wife – First respondent being made bankrupt – Applicant trustee in bankruptcy challenging transactions – Whether charges over property void as shams or representing preferences – Whether trust deed and consent order being transaction at undervalue – Claim dismissed
In 2006, the first respondent purchased a property known as Priors Croft, Cryfield Grange Road, Gibbett Hill, Coventry for £976,000. A charge was granted in favour of Northern Rock plc to secure borrowings of £700,000 to fund the purchase. The first respondent married the fourth respondent and they moved into the property. They had two daughters, the fifth and sixth respondents. In January 2010, the first respondent charged the property in favour of his father, the second respondent, as security for a loan of £506,000 stated to be for five years from October 2006 with interest at base rate. In April, the first respondent agreed to charge the property in favour of his sister, the third respondent. The agreement referred to the third respondent lending the first respondent £70,000 for five years from the date of the agreement (subject to extension at the third respondent’s discretion) with fixed interest of £30,000.
In August 2010, the fourth respondent left the property with her two children and a divorce petition was issued. The parties subsequently entered into a trust deed and consent order. In January 2011, a district judge made an order, pursuant to Part II of the Matrimonial Causes Act 1973, which provided for the first respondent to place his beneficial interest in the property in trust for the fifth and sixth respondents. The property was not to be sold until the fourth respondent remarried or died or one of the children attained the age of 21. In the event of an earlier sale, the net proceeds after redemption of the mortgages would be invested in a substitute property on the same trusts. The first respondent also undertook to pay the mortgage on the property until the fourth respondent’s death, remarriage or further order. The fourth respondent moved back into the property, a decree absolute was subsequently granted and she was paid a lump sum as provided for in the consent order. Up until September, when the first respondent was made bankrupt, the fourth defendant also received monthly child maintenance payments.
The applicant trustee in bankruptcy challenged the charges and the linked transaction of the trust deed and the consent order. He contended that the charges were void as shams or represented preferences within the meaning of section 340 of the Insolvency Act 1986. The applicant also contended that the trust deed and consent order should be set aside as constituting a transaction defrauding creditors under section 423 of the 1986 Act, or a transaction at an undervalue for the purposes of section 339.
Held: The application was dismissed.
(1) In all the circumstances, the applicant had sufficiently proved his case in respect of the January charge. On balance, the charge had been intended to give the impression that the second respondent had lent his son £506,000 and was being granted security for that debt when both parties had, in fact, been aware that the first respondent had not been lent any money so that there had been no indebtedness to secure. Accordingly, the January charge was a sham and a nullity: Snook v London and West Riding Investments Ltd [1967] 2 QB 786 and Hitch v Stone (Inspector of Taxes) [2001] STC 214 considered.
(2) There was no justification for concluding that the April charge was a sham. Even assuming that the interest payable under that charge was generous to the third respondent and that she could not have hoped to recover either principal or interest in the absence of security, the court could not infer that the parties did not intend to create the rights and obligations to which the April charge purportedly gave rise. Furthermore, a creditor who took security for a contemporaneous or subsequent advance did not obtain a preference, since the diminution in assets created by the security was matched by the influence of new funds. The payment, transfer or other act under attack had to relate to a past indebtedness, for to the extent that the creditor gave new value, he gained no advantage. The applicant had not proved that the April charge was a preference.
(3) Giving up a claim for ancillary relief under Part II of the 1973 Act constituted consideration within the meaning of section 339 of the 1986 Act. An order disposing of such a claim would not, therefore, be open to challenge under section 339(3)(a). Nor, normally, would it be possible to attack such an order under s 339(3)(c). The value of the claim for ancillary relief would generally be taken to have an equivalent to the value of the money and property required to be paid and transferred under the order. Nonetheless, a trustee in bankruptcy might be able to set aside an order made under Part II of the 1973 Act if he could show a vitiating factor. The paradigm case in which such an order could be set aside would be one involving collusion between the spouses but the court was likely to be slow to set aside an order under the 1973 Act in the absence of collusion: Re Kumar (a bankrupt) [1993] 1 WLR 224, Re Jones (a bankrupt) [2008] BPIR 1051, Hill v Haines [2007] PLSCS 253; [2008] Ch 412 and Sharland v Sharland [2015] 3 WLR 1070 considered.
In the present case, the trust deed and the consent order would not be set aside under either section 339 or 423 of the 1986 Act. On the evidence, they were not the product of collusion between the first and second respondents. It was significant that the undertaking referred to the first respondent paying until the petitioner’s death, remarriage or further order. That made sense if the draftsman had had recurring payments in mind. What the second respondent and the children were to receive pursuant to the trust deed and consent order was, on the face of it, far from overly generous. The debts with which the property was said to be encumbered appeared to have exhausted any equity in it. Moreover, the obligations to make ongoing payments would be of little or no value if the first respondent became. It made no difference that the January charge had been found to be a sham. The present case did not appear to be one of those exceptional cases in which a non-collusive order under the 1973 Act should be set aside as a transaction at an undervalue.
John de Waal QC (instructed by Wright Hassall LLP, of Warwick) appeared for the applicant; Avtar Khangure QC (instructed by Barker Gooch & Swailes, of Enfield) appeared for the fourth to sixth respondents; The first to third respondents did not appear and were not represented.
Eileen O’Grady, barrister
Click here to read a transcript of Sands (as trustee in bankruptcy) v Singh and others
