Section 423 of Insolvency Act 1986 — Charging order in favour of claimant — Sale of farm by mortgagee to wife of first defendant subject to tenancy held by first defendant’s company — Planned surrender of tenancy and sale of farm with vacant possession — Whether tenancy a sham — Whether first defendant entering into transaction at undervalue for purpose of placing assets beyond reach of claimant — Claim allowed
The first defendant owned a farm that was subject to a charge in favour of a mortgagee. The farm business was conducted by a limited company, which held an agricultural tenancy of the farmland and buildings. In 2000, judgment had been given against the first defendant in the sum of £650,654 in favour of the Intervention Board for Agricultural Produce (IBAP), of which the claimant was the successor. IBAP was granted a charging order over the farm to secure that debt. In 2001, a case of foot and mouth was diagnosed at the farm, which was declared to be an infected place and was subjected to a series of eradication measures by the claimant.
The first defendant subsequently arranged for the mortgage to sell the farm to the second defendant, who was the first defendant’s new wife, subject to the tenancy for £450,000. It was intended that the sale revenue would exceed IBAP’s charge, and that the mortgagee would take the proceeds of sale under its charge. The company would then surrender its tenancy to the second defendant, who could thereafter sell with vacant possession. The sale to the second defendant was completed, and she then entered into a contract to sell the farm for £1.03m.
The claimant brought proceedings seeking relief under section 423 of the Insolvency Act 1986. She contended that the first defendant had deliberately engineered a situation whereby the farm was transferred to the second defendant at a “subject to tenancy” valuation, with a view to realising its vacant possession value. It was argued that this constituted, within the meaning of section 423, a transaction at an undervalue entered into by the first defendant for the purpose of placing assets beyond the reach of a person making a claim against him. It was also submitted that the agricultural tenancy had become a sham by the time of the sale to the second defendant. The defendants counterclaimed, largely in trespass, for matters relating to the foot-and-mouth measures undertaken at the farm.
Held: The claim was allowed; the counterclaims were allowed in part.
1. A legal relationship that did not initially constitue a sham could subsequently become so if the parties had agreed to abandon that relationship but to maintain to the outside world the appearance of its continued existence. In the case of a tenancy, the reality of the abandonment could be established only by showing “on the facts” that an express or implied surrender of the tenancy had taken place. There had been no implied surrender on the facts of the present case: Wilson v Hannah Blumenthal [1983] 1 AC 854 and Ealing
Family Housing Association Ltd v McKenzie [2003] EWCA Civ 1602; [2004] HLR 21 considered.
2. A key issue in the present case was whether the sale by the mortgagee could be said to be a “transaction” arrangement into which the first defendant had “entered” within the extended meaning given to those words by section 436 of the 1986 Act. It was permissible, as a matter of statutory construction, to read “enter into a transaction” as “participate in an arrangement”. The arrangement in the present case, whereby the asset was transferred at an undervalue, was one between the defendants, under which the first defendant would introduce the second defendant as a potential purchaser subject to the tenancy, but with the former’s commitment in advance to procure a surrender of the tenancy if and when the mortgagee took the bait. The second defendant’s ability to purchase was dependent upon the existence of that prior commitment, since the finance for the purchase was premised on a subsequent sale with vacant possession, The fulfilment of that prior commitment was the means by which value in excess of the £450,000 paid by her would beeffectively gifted to her. There was no difficulty in saying that the first defendant had participated in that arrangement, since his ability to commit to, and to procure, a surrender was essential: In the matter of Neville Audley Brabon [2000] EGCS 38; [2000] PLSCS 49 distinguished. These findings were sufficient to conclude that the first defendant had participated in an arrangement whereby his assets were transferred to the second defendant at an undervalue with the relevant purpose under section 423. Although the arrangement had encompassed several transactions, it was possible to regard two or more linked transactions as one.
Sarah Lee and Paul Harris (instructed by the solicitor to DEFRA) appeared for the claimant; Stephen Jourdan and Edward Peters (instructed by Burges Salmon, of Bristol) appeared for the defendants.
Sally Dobson, barrister
