Asset Adjustment
Cases
Grant v. Aston Ltd
103 I.L.T.R. 39
A company was the lessee of certain premises under a lease containing a full repairing covenant. By reason of the fact that the premises were in a dilapidated condition this covenant was onerous and would be costly to comply with. A resolution to liquidate was passed in July, 1967 but liberty to disclaim under the provisions of the Companies Act, 1963, was not sought until December of that year. Held by Kenny J., 1, that the liquidator should have liberty to disclaim the lease. 2. he should, however, pay the rent under the lease from the date of the commencement of the liquidation until the date of the order of the Court. 3. the lessors should have liberty to prove in the liquidation for damages for breach of covenant. 4. a vesting order should be made vesting the premises in the lessors. 5. the liquidator should pay the lessor’s costs.
In re Madeley Homecare Limited
[1983] N.I. 1
A company, Madeley Homecare Limited, held premises under a 15 year lease. There was annexed to the lease a guarantee by which, in consideration of the lease, two guarantors agreed to pay all losses arising from the company’s failure to perform the covenants of the lease. On 26th January, 1982, the company resolved that it be wound up because of its liabilities. A liquidator was appointed and the company was found to be insolvent. The liquidator applied under section 291 of the Companies Act (Northern Ireland) 1960 for liberty to disclaim the lease on the ground that it was unprofitable. The lessor, opposing the application, submitted that such a disclaimer would determine the lease and free the guarantors from further liability, leaving him to his proof in liquidation for any injury he might incur, under section 291 (9). Held, refusing the application, that (i) the test to be applied in such an application is to balance the advantages and disadvantages of the disclaimer to be gained by the liquidator in the liquidation of the assets and by persons affected by the disclaimer; (ii) the applicant had failed to discharge the onus of showing that disclaiming would be the more advantageous course for him as liquidator: prima facie the assets available to the liquidator would be less at risk from claims by the guarantor if disclaimer were refused than from claims by the lessor if disclaimer were allowed; (iii) a disclaimer should not be allowed where it would destroy the lessor’s claims against a solvent guarantor; (iv) it is well established that a company’s lease does not by law vest in its liquidator and that he will incur no personal liability under it unless he clearly takes steps to assume a liability; (v) there is no reason why the liquidator should not bring the winding-up to an orderly conclusion even if leave to disclaim is refused. In re Katherine et Cie Ltd [1932] 1 Ch. 70 applied.
Tempany v. Royal Liver Trustees Ltd., In re Farm Machinery Distributors Ltd
[1984] ILRM 273I
n 1976 the respondent granted to Massey Ferguson (Eire) Ltd. a 35-year lease of factory premises at Naas Road, Dublin. Massey Ferguson Holdings Ltd., a third party to the lease, guaranteed to the respondent the due payment of the rent and the performance of the usual leasehold covenants. In 1979 the T.M.G. Group acquired the issued share capital of Massey Ferguson (Eire) Ltd. (which was then re-named Farm Machinery Distributors Ltd.) and agreed to assume liability for the guarantee given to the respondent by Massey Ferguson Holdings Ltd. In January, 1983, Farm Machinery Distributors Ltd. went into voluntary liquidation and the applicant in these proceedings was appointed liquidator. The applicant discovered that the lease of the Naas Road property represented a liability of some £1,250,000, the rent being above the going rate, a schedule of dilapidations having been served, and there being no prospect of assigning the lessee’s interest other than at a “reverse premium.” The applicant accordingly sought, pursuant to section 290 of the Companies Act, to disclaim the lease as onerous. The disclaimer was opposed by the respondent, and the court also entertained submissions from the two parties liable under the guarantee. It fell to the court to consider the position of the latter and to decide whether a disclaimer would put an end to the liability of the guarantors. Held by Keane J., granting the applicant leave to disclaim the lease, 1, that the court’s exclusive concern was with the interests of parties involved in the liquidation, but the court would consider the rights of third parties where that was necessary in order to release a company from liability. 2. That, in connection with leases, the release of an original lessee or surety was not necessary for the purpose of releasing a company from liability. 3. That, in the instant case, disclaimer of the onerous lease would facilitate the liquidation and be in the general interest. 4. That the rights inter se of the respondent, Massey Ferguson Holdings Ltd. and the T.M.G. Group would not be affected by the disclaimer. 5. That the respondent was entitled to receive rent from the applicant from the date of his appointment as liquidator until that of his notice of disclaimer.
Hindcastle Ltd v Barbara Attenborough Associates Ltd
[1996] BCC 636, [1996] 1 EGLR 94, [1996] BPIR 595, [1996] 15 EG 103, [1996] UKHL 19, [1996] NPC 28, [1996] 1 All ER 737, [1996] EG 32, [1996] 2 WLR 262, [1997] AC 70, [1996] 2 BCLC 234
LORD KEITH OF KINKEL
My Lords,
For the reasons given in the speech to be delivered by my noble and learned friend Lord Nicholls of Birkenhead, which I have read in draft and with which I agree, I would dismiss this appeal.
LORD GRIFFITHS
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nicholls of Birkenhead, for the reasons he gives I would dismiss this appeal.
LORD BROWNE-WILKINSON
My Lords,
For the reasons given in the speech of my noble and learned friend Lord Nicholls of Birkenhead I too would dismiss this appeal.
LORD LLOYD OF BERWICK
My Lords,
I agree that the appeal should be dismissed for the reasons to be given by my noble and learned friend, Lord Nicholls of Birkenhead. I add a short speech of my own only because I have found the case to be one of some difficulty.
At an early stage of me hearing I formed the view that Hill v. East and West India Dock Co, (1884) 9 App. Cas. 448, and Stacey v. Hill [1901] 1 Q.B. 660, could not well stand together, despite Sir Robert Megarry V.-C.’s attempt to reconcile the decisions in Warnford Investments Ltd. v. Duckworth [1979] Ch, 127, and Millett L.J.’s further attempt at reconciliation, on rather different grounds, in the court below. If the decisions cannot be reconciled, the question becomes which of the two decisions should be preferred,
For much of the hearing I was attracted by Mr. Oliver’s argument that the reasoning in Stacey v. Hill was the more convincing. The key feature of that decision, as Mr. Simon Goldblatt Q.C. pointed out in his remarkable extempore judgment at first instance, is that both A. L. Smith M.R. and Cotton L.J. regarded the case as being concluded by the passage which the former quoted from the judgment of Lindley L.J. in In Re Finley; Ex parte Clothworkers’ Co. (1888) 21 Q.B.D. 475, 485:
“Now the operation of those clauses in the simple case of a lease is not very difficult to ascertain. If there is nothing more than a lease, and the lessee becomes bankrupt, the disclaimer determines his interest in the lease under subsection 2. He gets rid of all his liabilities, and he loses all his rights by virtue of the disclaimer. There is no need of any provision for vesting the property in the landlord, but the natural and legal effect of subsection 2 is that me reversion will become accelerated.”
A. L. Smith M.R. put the point as follows in Stacey v. Hill [1901] 1 Q.B. 660, 664:
“In other words, the effect of the subsection is that in such a case the lease is put an end to altogether as between the lessor and the bankrupt lessee, the intention being that the bankrupt shall be altogether free from any obligation arising under or in relation to it; and, consequently, no other person being interested in the lease, it ceases to exist. As the lease is determined, no rent can, subsequently to the disclaimer, become due under it: the reversion on the term is in effect accelerated; and the lessor gets back his property, and can let it to another tenant for ought I know, at a higher rent.”
A.L. Smith M.R. then went on to consider the position of a guarantor for the original lessee. He gave two reasons for rejecting the argument that the guarantor remained liable, even though no more rent could fall due from the bankrupt lessee. The first depended on the need to release the bankrupt from liability to indemnify the guarantor. I do not find that ground convincing for the reasons to be given by my noble and learned friend. Lord Nicholls. But the second ground was a straightforward application of the ordinary law of principal and surety. If the lease has ceased to exist, to use the language of A. L. Smith M.R., how could the surety be liable for rent which has not yet fallen due? A surety is normally only liable for the defaults of the principal debtor. But the lessee cannot make default after disclaimer, for he is no longer liable to pay the rent. The lease has come to an end by operation of law.
Collins L.J. said, at p. 666:
“I think that what the Legislature intended in such a case as this was that the lease should be determined by the disclaimer as between the lessor and the lessee, and therefore incidentally as regards the surety, with the result mat the bankrupt lessee is discharged and incidentally the surety also …”
A little later he said:
“If disclaimer under the present law operates in the language of Lindley L.J. to ‘accelerate the reversion, the condition of the surety’s liability in this case must necessarily fail …”
Perhaps the clearest exposition of the point is to be found in the short judgment of Romer L.J. at p. 667. He regarded the release of the guarantor as “necessary for the purpose of releasing the bankrupt” because that is the inevitable result in law of bringing the lease to an end. If the lease has ceased to exist as between lessor and lessee, it cannot be treated as if it continued to exist for the purpose of making the surety liable. So to hold would be to impose on the surety a different kind of liability.
“For the defendant has agreed to be liable as surety for the payment of rent by a lessee under a lease: and yet the appellant seeks to make him liable to pay money, though there is no rent payable, no lease, and no person in the position of lessee.”
The next step in Mr. Oliver’s argument was that if the surety for the original lessee is released by a disclaimer on the part of the original lessee’s trustee in bankruptcy, the same must apply where the lease has been assigned, and it is the assignee who has become bankrupt. If the assignee’s trustee in bankruptcy disclaims the lease, it ceases to exist just as surely as if it is disclaimed by the trustee in bankruptcy of the original lessee; and if the lease has ceased to exist, the assignee’s guarantor must necessarily also be released under the ordinary law of principal and surety, since to hold him liable would be to impose on him a different kind of liability.
Mr. Oliver accepted that it would be possible to devise a form of guarantee under which the surety would undertake an independent liability in the event of disclaimer. Clause 5(2) in the licence dated 22 April 1987 is just such a provision. But it is clear from the language of clause 5(2) that the parties contemplated such independent liability as arising under a new lease on the same terms as the old, which was to take effect on the date of the disclaimer, and was to be delivered to the lessor after execution by the surety. It is difficult to see how a new lease could be brought into existence unless the old lease has ceased to exist.
Finally, Mr. Oliver returned to consider the position of the original lessee, where it is the assignee’s trustee in bankruptcy who disclaims. Mr. Oliver argued that the original lessee’s position must be the same as that of the surety of the bankrupt assignee. If the lease has ceased to exist, it must have ceased to exist for all purposes. The original lessee cannot be liable for rent if there is no lease. By the same token, the original lessee’s guarantor, and the guarantor of any intermediate assignee would also be released.
If Mr. Oliver’s argument be correct, it would follow that Hill v. East and West India Dock Co. 9 App. Cas. 448 was wrongly decided. Alternatively, Mr. Oliver sought to distinguish Hill v. East and West India Dock Co. on the ground that section 23 of the Bankruptcy Act 1869 (32 & 33 Vict. c. 71) is in very different terms from section 55 of the Bankruptcy Act 1883 (46 & 47 Vict. c. 52), as the Court of Appeal in Stacey v. Hill [1901] 1 Q.B. 660 were at pains to emphasise.
It will be apparent from this inadequate account of Mr. Oliver’s argument that it all depends on his underlying proposition that disclaimer has a dual effect. It determines the rights, interests and liabilities of the bankrupt tenant. But it also determines the leasehold estate, not only in the case of the original lessee’s, bankruptcy, but alternately any subsequent assignee becomes bankrupt. The question is thus whether this dual effect is indeed the consequence of section 178(4) of the Insolvency Act 1986. In order to answer this question it helps to go back to the language of the Act of 1869.
Section 23 of the Act of 1869 provided:
“When any property of the bankrupt acquired by the trustee under this Act consists of land of any tenure burdened with onerous covenants . . . the trustee . . . may . . . disclaim such property, and upon the execution of such disclaimer the property disclaimed shall … if the same is a lease be deemed to have been surrendered on the same date . . . .”
In Ex pane Walton: In re Levy (1881) 17 Ch. D. 746. Sir George Jessell M.R. held that the words “deemed to be surrendered” were to be given a narrow construction. He said, at p. 754:
“Therefore it seems to me that the section must be read as meaning that the property is to be disclaimed inter se, so as not to interfere with the rights of third parties, and only for the benefit of the bankrupt and his estate; so far, that is, as respect any rights and liabilities between the trustee and the person who is entitled to the benefit of those obligations which attach to the property; so far only as is necessary in order to relieve the bankrupt and his estate and the trustee from liability.
James L.J. said, at pp. 756-757:
“That being the sole object of the statute, it appears to me to be legitimate to say, that, when the statute says that a lease, which was never surrendered in fact (a true surrender requiring the consent of both parties, the one giving up and the other taking), is to be deemed to have been surrendered, it must be understood as saying so with the following qualification, which is absolutely necessary to prevent the most grievous injustice, and the most revolting absurdity, ‘shall, as between the lessor on the one hand, and the bankrupt, his trustee and estate, on the other hand, be deemed to have been surrendered.'”
James L.J. went on to ask, rhetorically, whether it could ever have been intended that the bankruptcy of the lessee should release the surety, the very question which, contrary to the clear implication of the question, was answered in favour of the surety in Stacey v. Hill.
In Hill v. East and West India Dock Co. 9 App. Cas. 448 it was argued that Ex parte Walton was wrongly decided, and was, indeed. inconsistent with an earlier decision in which James L.J. had said that the effect of the disclaimer was that the lease was to be deemed to have come to an end “for all purposes”: the term “was gone”. However, the House, by a majority, held that Ex parte Walton was correctly decided. Earl Cairns quoted extensively from the judgment of James L.J. Lord Blackburn held, at p. 459, that the narrow construction put upon the section by James L.J. was “more natural and more reasonable and more correct than the construction for which the appellant contends …”
Hill v. East and West India Dock Co. is thus clear authority of your Lordships’ House that, despite the “deemed surrender” of the lease by the assignee’s trustee in bankruptcy, the lease does not come to an end for all purposes. The original lessee’s liability survives, and so presumably does the liability of his surety. This would, I think, be almost enough to persuade me that Stacey v. Hill was wrongly decided, and ought to be overruled. But what carries the day to my mind is the intervention of the legislature between the date of the decision in Ex parte Walton and the decision of your Lordships’ House in Hill v. East and West India Dock Co. For the reference to the “deemed surrender” of the lease, – the phrase which caused all the difficulty in Hill v. East and West India Dock Co., and which does indeed lend some support to Mr. Oliver’s argument that the lease comes to an end for ail purposes, – is no longer to be found. Instead, section 55 of the Act of 1883 substitutes the narrow construction favoured by the Court of Appeal in Ex parte Walton; In re Levy 17 Ch. D. 746 and adopts language very similar to that used by Sir George Jessell M.R. in that case. In the light of that legislative history, I do not think it was open to the A.L. Smith M.R. in Stacey v. Hill [1901] 1 Q.B. 660 to disregard, as he did, the cases decided under the Act of 1855 on the ground that the language was very different. Since the legislature had, in effect, adopted the narrower construction favoured by the Court of Appeal in Ex parte Walton; In re Levy, and subsequently approved by the House in Hill v, East and West India Dock Co., 9 App. Cas. 448 the Court of Appeal in Stacey v. Hill ought to have held that the surety was not released. It follows that, for the same reasons, none of the three defendants were released in the present case. Despite Mr. Oliver’s persuasive argument to the contrary, I would dismiss the appeal.
LORD NICHOLLS OF BIRKENHEAD
My Lords,
This case arises out of the recession in the property market. It raises a much vexed question about the liability of a guarantor when the tenant becomes insolvent and the lease is disclaimed.
In times of recession the rent payable under a lease may exceed the current rental value of the property in the open market. The rental value of the property may have fallen since the lease was granted or the rent was reviewed. This is especially likely where the rent review is upwards only. So long as the tenant remains solvent, the fall in property values leaves the tenant out of pocket, not the landlord. The tenant is out of pocket by paying more for the property than its current worth.
The picture changes if the tenant gets into financial difficulty. If the insolvent tenant was the original tenant and there was no guarantor, there is nothing the landlord can do. He can forfeit the lease and recover his property, but the shortfall between the current rental value of the property and the rent reserved by the lease is a loss he has to bear. The loss resulting from the falling market will be his loss. He has a right to prove in the tenant’s insolvency, for however much or little that may yield.
The picture changes again if the landlord has protected himself against the risk of the tenant’s insolvency by requiring a guarantor to join in the lease. When the rent payable under the lease is higher than the rental value of the property at the time of the tenant’s default, the landlord’s financial interests may be better served by looking to the guarantor than by taking possession of the property and re-letting it. Similarly, if the impecunious tenant is not the original tenant but a person to whom the lease has been assigned the landlord may look to the original tenant for payment. When the lease was granted the original tenant covenanted with the landlord to pay the rent and to do so throughout the whole term of the lease. This included any increased rent payable under the rent review provisions. In these cases the loss falls on the guarantor or the original tenant, not the landlord.
Sometimes, in post-assignment cases, the landlord’s protection may be achieved at an unreasonably high price to others. The insolvency may occur many years after the lease was granted, long after the original tenant parted with his interest in the lease. He paid the rent until he left, and then took on the responsibility of other premises. A person of modest means is understandably shocked when out of the blue he receives a rent demand from the landlord of the property he once leased. Unlike the landlord, he had no control over the identity of assignees down the line. He had no opportunity to reject them as financially unsound. He is even more horrified when he discovers that the rent demanded exceeds the current rental value of the property.
Mounting public concern at this post-assignment state of affairs led to the enactment of the Landlord and Tenant (Covenants) Act 1995. In future, where a tenant lawfully assigns premises demised to him he will be released from the covenants falling to be complied with by the tenant of the premises.
However, the principal provisions of the new Act do not apply to tenancies granted before the Act came into force on 1 January 1996. So this amelioration of a tenant’s lot does not apply in the present case. In the present case the three defendants are the original tenant, a first assignee which entered into direct covenants with the landlord covering the rest of the term, and a guarantor for the first assignee. A subsequent assignee, Prest Limited, became insolvent. Because of the fall in property values, the lease had no value. It was unsaleable. The liquidator of Prest wished to have nothing to do with it. He disclaimed the lease as onerous property. The defendants are liable for non-payment of the rent and service and other charges unless the liquidator’s act in disclaiming the lease ended their liability. That depends upon the proper interpretation of the disclaimer provisions in the Insolvency Act 1986.
The lease and the proceedings
In 1983 the plaintiff, Hindcastle Ltd., leased second floor office premises at 297 Oxford Street in the west end of London to the first defendant. Barbara Attenborough Associates Limited. The lease was dated 20 October 1983 and was for 20 years. The initial rent was £13.626 per annum. with periodic rent reviews, upwards only.
In May 1987 the lease was assigned to the second defendant. CIT Developments Ltd. On that occasion, by a licence dated 22 April 1987 CIT covenanted with the landlord to pay the rent and perform the lessee’s covenants during the residue of the term. The third defendant, Mr. Patrick Whitten, was a director of CIT. He guaranteed performance of CIT’s obligations for a period of ten years from the date of the lease.
CIT was not tenant for very long. Two years later, in May 1989, CIT assigned the lease to Prest Ltd. Thereafter the rent was reviewed upwards to £37,500 per annum, nearly three times the amount of the original rent. The increase was backdated to Christmas Day 1988. None of the defendants took any part in the negotiations with the landlord. On 31 October 1992 Prest went into creditors1 voluntary liquidation, and on 8 December its liquidator gave notice of disclaimer of the lease. No one applied for a vesting order.
In 1993 the plaintiff landlord brought proceedings against all three defendants for unpaid rent and other money falling due both before and after the date of the disclaimer. On applications for summary judgment Mr. Simon Goldblatt Q.C., sitting as a deputy judge of the High Court, gave judgment for the plaintiff for just over £50,000. The original tenant, Barbara Attenborough, then went into compulsory liquidation and took no further part in the proceedings. The first assignee, CIT, went into creditors’ voluntary liquidation and its liquidator disclaimed CIT’s liability, if any, in respect of the lease. The Court of Appeal, comprising Sir Stephen Brown P, Rose and Millett LJJ., dismissed an appeal by CIT’s liquidator and Mr. Whitten. The court applied the decision in Hill v. East and West India Dock Co. (1884) 9 App. Cas. 448 and distinguished the decision in Stacey v. Hill [1901] 1 Q.B. 660. The tension between these decisions lies at the heart of this appeal.
The rights, interests and liabilities of a tenant
Before turning to the statute I should set the scene in one further respect. I must refer briefly to some basic propositions concerning the typical rights, interests and liabilities of a tenant in respect of property leased before the coming into force of the Act of 1995. A tenant is under a liability to the landlord to pay the rent and perform the tenant’s other covenants under the lease. This obligation arises by virtue of privity of contract, in the case of the original tenant. An assignee is under a similar liability so long as he holds the lease, by virtue of privity of estate. If the assignee enters into a direct covenant with the landlord his liability will also be by virtue of privity of contract, in the terms of his covenant. That was the position of CIT in the present case.
A tenant enjoys rights under a lease as well as being subject to liabilities. The landlord covenants that the tenant will enjoy the property free from disturbance. The landlord may undertake repairing obligations or obligations to provide services. The rights of a tenant under these covenants will be enforceable by him against the landlord, either by virtue of privity of contract, or privity of estate, or both.
Each of the liabilities of the tenant has a reverse side. A tenant is under a liability to the landlord to pay the rent. The reverse side is that the landlord has a right to be paid the rent. Similarly with the rights of a tenant: a tenant has a right to quiet enjoyment. The reverse side is that the landlord is under a liability to the tenant to afford quiet enjoyment.
A tenant may enjoy rights, and be subject to obligations, against other persons as well as the landlord. If he has sublet the property he will be entitled to rights and subject to liabilities vis-a-vis the subtenant. The reverse side of these rights and liabilities of the tenant as sub-lessor will be liabilities and rights of the subtenant.
A tenant may also owe obligations to persons who have no proprietary interest in the property. Under general principles of subrogation a tenant will be obliged to indemnify a person who has guaranteed payment of the rent. If a tenant is an assignee of the lease he will normally be under an obligation to the assignor to pay the rent and perform the tenant covenants in the lease, by virtue of the covenant implied by section 77(l)(c) of the Law of Property Act 1925. These liabilities of the tenant have, as their reverse side, a right enjoyed by the guarantor or assignor against the tenant.
Finally, a tenant has a proprietary interest in the property, namely the lease. This is a legal estate, of which the tenant is the owner. The landlord owns the reversion, expectant on the determination of that estate.
The statutory disclaimer provisions
Sections 178 to 182 of the Insolvency Act 1986 are a group of sections governing the disclaimer of onerous property by a liquidator of a company that is being wound up. Similar provisions, in sections 315 to 321, apply to trustees in bankruptcy. The differences between the two sets of provisions are not material for the purposes of this appeal. The ancestor of the disclaimer provisions in their present form is the Bankruptcy Act 1883, replaced subsequently by the Bankruptcy Act 1914. Disclaimer in corporate insolvencies was introduced in the Companies Act 1929. Again, and save as mentioned below, the differences between the Act of 1883 and its successors and the current statutory provisions are not material for present purposes.
Section 178(2) empowers a liquidator to disclaim any onerous property. Onerous property means any unprofitable contract, and any other property of the company which is unsaleable or not readily saleable or such that it may give rise to a liability to pay money or perform any other onerous act. Subsection (4) sets out the effect of a disclaimer. This is the crucial provision. It reads:
“A disclaimer under this section – (a) operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but (b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person.”
Subsection (6) spells out a further consequence of disclaimer:
“Any person sustaining loss or damage in consequence of the operation of a disclaimer under this section is deemed a creditor of the company to the extent of the loss or damage and accordingly may prove for the loss or damage in the winding up.”
Where a liquidator has disclaimed property an application may be made to the court for an order vesting the disclaimed property in the applicant, or for an order for the delivery of the property to the applicant. Under section 181(2), an application may be made by:
“(a) any person who claims an interest in the disclaimed property, or (b) any person who is under any liability in respect of the disclaimed property, not being a liability discharged by the disclaimer.”
The court cannot make an order under (b) except where it would be just to do so for the purpose of compensating the person subject to the liability in respect of the disclaimer. The effect of such an order is to be taken into account in assessing, for the purposes of section 178(6), the extent of any loss or damage sustained by any person in consequence of the disclaimer.
If an under-lessee or mortgagee of leasehold property takes a vesting order he is, in short, required to stand in the shoes of the company. An under-lessee or mortgagee who declines to do so is excluded from all interest in the property. If there is no under-lessee or mortgagee willing to do so, the court may vest the company’s estate or interest in the property in “any person who is liable … to perform the lessee’s covenants in the lease,” and may do so freed and discharged from all estates and encumbrances created by the company: see section 182(3).
The fundamental purpose of these provisions is not in doubt. It is to facilitate the winding up of the insolvent’s affairs. There is a further purpose in personal insolvency cases. A bankrupt’s property vests automatically in his trustee. The disclaimer provisions operate to discharge the trustee in bankruptcy from all personal liability in respect of the property: see section 315(3)(b).
Equally clear is the essential scheme by which the statute seeks to achieve these purposes. Unprofitable contracts can be ended and property burdened with onerous obligations disowned. The company is to be freed from all liabilities in respect of the property. Conversely, and hardly surprisingly, the company is no longer to have any rights in respect of the property. The company could not fairly keep the property and yet be freed from its liabilities.
Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.
I turn next to consider the application of these provisions to the principal types of landlord and tenant situations. I do so initially without reference to the decided cases.
Disclaimer: (1) where only a landlord and tenant are involved
The simplest case is of a landlord and an insolvent tenant. No third parties are involved. Disclaimer operates to determine all the tenant’s obligations under the tenant’s covenants, and all his rights under the landlord’s covenants. In order to determine these rights and obligations it is necessary, in the nature of things, that the landlord’s obligations and rights, which are the reverse side of the tenant’s rights and obligations, must also be determined. If the tenant’s liabilities to the landlord are to be extinguished, of necessity so also must be the landlord’s rights against the tenant. The one cannot be achieved without the other.
Disclaimer also operates to determine the tenant’s interest in the property, namely the lease. Determination of a leasehold estate has the effect of accelerating the reversion expectant upon the determination of that estate. The leasehold estate ceases to exist. I can see no reason to question that this is the effect of disclaimer when the only parties involved are the landlord and the tenant.
Disclaimer: (2) where others have liabilities in respect of the lease
Thus far I have addressed the case where, apart from the insolvent tenant, the only person involved is the landlord. In such a case there is no scope for any rights or liabilities to be preserved by paragraph (b) of section 178(4). In order to achieve the statutory objective of releasing the insolvent from liability, it is necessary to determine all the rights of the landlord.
The matter stands differently where the landlord has the benefit of covenants from a guarantor. In this situation the liabilities of the insolvent tenant to the landlord are ended, but not so as to affect the obligations of the guarantor to the landlord. That is the effect of paragraph (b) of section 178(4). Similarly, where the insolvent tenant is an assignee and the landlord has the benefit of the covenants of the original tenant: the original tenant’s obligations to the landlord are not affected.
Also ended is the obligation of the insolvent tenant to indemnify the guarantor but, here again, not so as to affect the mutual rights and obligations of the landlord and the guarantor. Termination of the liabilities of the insolvent does not carry with it any legal necessity to determine the guarantor’s obligations to the landlord. The right of recourse of the guarantor against the insolvent can be effectually determined without, at the same time, releasing the guarantor from his liability to the landlord. His liability to the landlord can survive extinguishment of his right of recourse. Similar considerations apply to the liabilities of the original tenant where the insolvent tenant is an assignee.
I shall have to enlarge upon these points later when considering the decision in Stacey v. Hill [1901] 1 Q.B. 660. But there is a recondite point which must be faced and resolved here as part of the process of interpreting the sections as a whole. It concerns what happens to the lease in this tripartite situation. The point may be stated shortly. A lease either exists, or it does not. If disclaimer has the effect of ending the lease, no further rent can become due, and so the guarantor and original tenant cannot be called upon. It is a contradiction in terms for rent to accrue for a period after the lease has ended. If, however, disclaimer does not end the lease, so that rent continues to accrue, what happens to the lease, bearing in mind that the insolvent’s interest in the property has been ended? Possibilities are that the lease vests in the Crown as bona vacantia, or that it remains in being but without an owner, or that it remains vested in the tenant but in an emasculated form. Each of these possibilities raises its own problems.
The starting point for attempting to solve this puzzling conundrum is to note that the Act clearly envisages that a person may be liable to perform the tenant’s covenants even after the lease has been disclaimed. A vesting order may be made in favour of such a person: see section 182(3), and see also section 181(2)(b). The proper legal analysis has to be able to accommodate this conclusion. The search, therefore, is for an interpretation of the legislation which will enable this to be achieved as well as fulfilling the primary purpose of freeing the insolvent from all liability while, overall, doing the minimum violence to accepted property law principles.
If the problem is approached in this way, the best answer seems to be that the statute takes effect as a deeming provision so far as other persons’ preserved rights and obligations are concerned. A deeming provision is a commonplace statutory technique. The statute provides that a disclaimer operates to determine the interest of the tenant in the disclaimed property but not so as to affect the rights or Liabilities of any other person. Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants are to remain as though the lease had continued and not been determined. In this way the determination of the lease is not permitted to affect the rights or liabilities of other persons. Statute has so provided.
The vesting order provisions do not run counter to this analysis. If a vesting order is made, the court order operates by virtue of the statute to vest the lease in the person named on the terms fixed by the court. That the lease may have ceased to exist meanwhile is neither here nor there. If necessary, there will be a statutory re-creation.
If no vesting order is made and the landlord takes possession, the liabilities of other persons to pay the rent and perform the tenant’s covenants will come to an end as far as the future is concerned. If the landlord acts in this way, he is no longer merely the involuntary recipient of a disclaimed lease. By his own act of taking possession he has demonstrated that he regards the lease as ended for all purposes. His conduct is inconsistent with there being a continuing liability on others to perform the tenant covenants in the lease. He cannot have possession of the property and, at the same time, claim rent for the property from others.
The result is not without artificiality. Unless a vesting order is made, after disclaimer there will be no subsisting lease, and the property will be vacant and empty. But if the landlord enters upon his own property, he will thereby end all future claims against the original tenant and any guarantor, not just claims in respect of the shortfall between the lease rent and the current rental value of the property. It must be recognised, however, that awkwardness is inherent in the statutory operation: extinguishing (“determining”) the lease so far as the bankrupt is concerned, but leaving others’ rights and liabilities in respect of the same lease affected no more than necessary to achieve the primary purpose.
Disclaimer: (3) where other persons have an interest in the property
In both instances considered so far no person had acquired a proprietary interest under the lease before disclaimer. The third typical case is where a third party has acquired such an interest. The prime example is a subtenant. I can deal with this very shortly. In order to free the tenant from liability, it is necessary to extinguish the landlord’s rights against the tenant and also the subtenant’s rights against the tenant. The tenant’s interest in the property is determined, but not so as to affect the interest of the subtenant.
Determination of the subtenant’s interest in the property is not necessary to free the tenant from liability. Hence the subtenant’s interest continues. No deeming is necessary to produce this result. Here the deeming relates to the terms on which the subtenant’s proprietary interest continues. His interest continues unaffected by the determination of the tenant’s interest. Accordingly the subtenant holds his estate on the same terms, and subject to the same rights and obligations, as would be applicable if the tenant’s interest had continued. If he pays the rent and performs the tenant covenants in the disclaimed lease, the landlord cannot eject him. If he does not, the landlord can distrain upon his goods for the rent reserved by the disclaimed lease or bring forfeiture proceedings. In practice, matters are likely to be brought to a head by one of the parties making an application for a vesting order.
The earlier legislation and the authorities: before 1862
I turn next to the earlier legislation and the decided cases, with particular reference to the position of guarantors. Before 1869 the assignees of a bankrupt, who were the statutory predecessors of the trustee in bankruptcy, had to elect whether or not to accept a leasehold interest. The statute of 49 Geo 3, c.121, section 19, provided that if the assignees elected to accept the lease, “the bankrupt shall not be … be liable to pay the rent accruing due after such acceptance …” In Inglis v. Macdougal (1817) 1 J. B. Moore C. P. Rep. 196 the court held that, notwithstanding this discharge of the principal debtor, a surety remained liable. Lord Chief Justice Gibbs, said, at p. 198:
“The very object of taking sureties is to provide against the insolvency of the principal; and the object of the insolvent acts and statutes applying to bankrupts is to discharge debtors and bankrupts from obligations, but not to disturb the claims of creditors on other persons, as sureties, from the failure of such debtors or bankrupts.”
In Tuck v. Fyson (1829) 6 Bing. 321 the same approach was adopted to the language of the later Act of 6 Geo 4, c. 16, section 75.
From 1869 to 1883
The Bankruptcy Act 1869 (32 & 33 Vict. c. 71) introduced machinery enabling the trustee, for the first time, to disclaim leases and other onerous property. Section 23 stated the consequences of disclaimer. If the property disclaimed was a contract, it was deemed to be determined. If the property was a lease, it was “deemed to have been surrendered”. If the property comprised shares in a company, they were deemed to be forfeited. Any person “interested in any disclaimed property” could apply to the court for an order for delivery up of the property.
From an early date The court robustly declined to give effect to the literal construction of these words. On ordinary principles, if a lease is surrendered no further rent is payable. But in Smyth v. North (1872) L.R. 7 Ex. 242 the Court of Exchequer held that section 23 affected only the relationship of the bankrupt and the lessor, and not third parries. So where the bankrupt was the assignee of a lease, disclaimer did not affect the liability of the original tenant.
The Court of Appeal took the same view in Ex parte Walton; In re Levy (1881) 17 Ch. D. 746. Sir George Jessell M. R., at p. 753, considered the results of a literal construction of the section would be so monstrous that such a construction must be considered absurd. He stated, at p. 754:
“. . . the section must be read as meaning that the property is to be disclaimed inter se, so as not to interfere with the rights of third parties, and only for the benefit of the bankrupt and his estate; so far, that is, as respects any rights and liabilities in relation to it as between the trustee and the person who is entitled to the benefit of those obligations which attach to the property; so far only as is necessary in order to relieve the bankrupt and his estate and the trustee from liability.” (emphasis added)
The words I have emphasised may well be the source of the express provision to the same effect included in all the disclaimer legislation from 18S3 onwards. The precise words in section 55(2) of the Bankruptcy Act 1883 were “… but shall not, except so far as is necessary for the purpose of releasing the bankrupt and his property and the trustee from liability, affect the rights or liabilities of any other person.”
James L.J. adverted to the position of a surety of a disclaimed lease. He posed a question, at pp. 755-756, in terms which made plain his unstated answer:
“Take the case of a lease with a surety for the payment of rent. Could it ever have been intended that the bankruptcy of the lessee was to release the surety?”
This question had to be answered in Harding v. Preece (1882) 9 Q.B.D. 281. The Queen’s Bench Divisional Court held that both the original tenant and the surety for a bankrupt assignee of a lease remained liable for the rent of the lease after it had been disclaimed.
In Hill v. East and West India Dock Co. (1884) 9 App. Cas. 448 your Lordships’ House considered section 23. The assignee of a lease had become bankrupt and his trustee had disclaimed the lease. Your Lordships decided that the original tenant remained liable for rent notwithstanding the deemed surrender of the lease. Lord Bramwell disagreed vigorously. He adhered to the dissenting opinion he had expressed in Smyth v. North L.R. 7 Ex. 272.
He was oppressed by the injustice of a construction of the Act which meant that the original tenant had to continue paying rent and yet never be able to benefit from the property. The original tenant could not apply for possession under the statute because, no longer having a proprietary interest, he ceased to be “interested” in the property.
After 1883
When your Lordships’ House heard the appeal in Hill v. East and West India Dock Co., the Act of 1883 had already received the Royal Assent. At the beginning of his speech Earl Cairns described the new statute as much more explicit. He said, at p. 453, that the question raised by the appeal was therefore not one which could very well occur again. And it is to be noted, in passing, that the injustice which so troubled Lord Bramwell under the earlier legislation did not arise under the new disclaimer provisions. Under the Act of 1883 applications for vesting orders were not confined to persons having a proprietary interest. Under the Act of 1883 and all subsequent Acts, such an application might be made by a person who was under any liability in respect of the disclaimed property which was not discharged by the Act.
It is now over a century since the disclaimer provisions in their present form were first enacted. In that time reported decisions on the legislation have been few. I mention the leading cases. In In re Finley; Ex parte Clothworkers’ Co. (1888) 21 Q.B.D. 475 the Court of Appeal held that the landlord of a disclaimed lease which had been mortgaged by the bankrupt was entitled to apply for an order vesting the lease in the mortgagee. The court comprised Lord Esher M.R., Lindley and Bowen L.JJ. Delivering the judgment of the court, Lindley L.J. analysed the effect of the Act in similar terms to those set out above in my categories (1) and (3).
A case in category (2), concerning the liability of a guarantor, came before the Court of Appeal, comprising A. L. Smith M.R., Collins and Romer L.JJ., in Stacey v. Hill [1901] I Q.B. 660. The defendant had guaranteed payment of the rent by the tenant. The tenant became bankrupt and his trustee disclaimed the lease. The landlord did not resume possession. The court held that the guarantor was not liable for rent after the lease was disclaimed. I shall examine the reasoning of this decision below.
In recent years the most common circumstance in which landlords insist on guarantors is when the tenant is a company. The directors are required to assume personal liability in case the company defaults. It was not until 1929 that liquidators of companies were given power to disclaim onerous property. Under the Companies Act 1929 the liquidator required the leave of the court in all cases before he could disclaim. In 1932 Maugham J, in In re Katherine et Cie Ltd. [1932] 1 Ch. 70, used this as a means of circumventing the decision in Stacey v. Hill. Disclaimer would have caused loss to the landlord, because it would have released the guarantor. So the judge refused to permit the liquidator to disclaim. Thereafter, as noted by Millett L.J. in the present case ([1995] Q.B. 95.100). the court normally refused leave to disclaim where this would prejudice the lessor by discharging the surety from liability. This practice continued until the Act of 1986 brought corporate insolvency into line with personal insolvency regarding leave to disclaim. Now the landlord generally has no opportunity to object.
Finally, in Warnford Investments Ltd v. Duckworth [1979] Ch. 127 Sir Robert Megarry V.-C. held that the original tenant remained liable after the liquidator of an insolvent assignee disclaimed the lease. He applied the decision in Hill v. East and West India Dock Co. 9 App. Cas. 448 and distinguished Stacey v. Hill [1901] 1 Q.B. 660.
The decision in Stacey v. Hill
Four different grounds have been put forward in support of the decision in Stacey v. Hill. None is satisfactory. The first, and broadest, ground is that on disclaimer the lease determines and no rent can subsequently become due under it. This is the first ground of the decision of A. L. Smith M.R. and Collins L.J.; see [1901] 1 Q.B. 660, 664-665. If well founded, this ground would apply also to an original tenant. He would be discharged where an assignee becomes insolvent and the lease is disclaimed. That, indeed, was the primary argument of Mr. Oliver Q.C. before your Lordships’ House. Mr. Oliver submitted there is no logical distinction between the position of the original tenant and the position of a guarantor. The Warnford Investments case was wrongly decided. Stacey v. Hill is to be preferred to Hill v. East and West India Dock Co.
I agree that such differences as there are between an original tenant and a guarantor are not material on this point. Post-disclaimer, both are liable or neither. I also agree that either the Act of 1883 left the existing law clarified but unchanged, in which case both the original tenant and the guarantor remained liable notwithstanding disclaimer, or the Act changed the law and relieved original tenants and guarantors alike from liability post-disclaimer.
Where I am unable to agree is that the reasoning in Stacey v. Hill on this point is to be preferred. The difficulty I have is that this reasoning flies in the face of the plain language of the statute. The reasoning fails to give effect to paragraph (b) of section 178(4) and its evident purpose. The Act of 1883 made explicit what Hill v. East and West India Dock Co. held was implicit in the Act of 1869.
It must be recognised that underlying the Victorian decisions was a rigorous belief in the sanctity of contracts freely entered into. A century later there is more recognition of inequality of bargaining power, especially where consumers are involved. But the fact remains that Parliament incorporated the judicial interpretation of the Act of 1S69 into the Act of 1883. in terms which have been continued by Parliament to this day, most recently in 1986.
The second line of reasoning advanced in support of the decision in Stacey v. Hill [1901] 1 Q.B. 660 prays in aid the principle that the release of a debtor discharges his guarantor. Collins L.J. said, at p. 666, that “the liabilities of a surety are in law dependent upon those of (he principal debtor . . . “. As a general proposition this is true. But, here again, the conclusion sought to be drawn fails to take account of the saving words in paragraph (b) of subsection (4). Disclaimer operates to determine the insolvent’s liabilities under the lease, but subject to a qualification: not so as to affect the rights or liabilities of other persons. Parliament has provided that the general rule shall not apply. The release of the insolvent debtor is not to discharge a surety from his liabilities to the lessor.
The third ground is that the exception built into paragraph (b) applies in the case of a guarantor. This was relied upon by A. L. Smith M.R. and Romer L.J. In order to release the insolvent from all his liabilities in respect of the lease, it is necessary to release the guarantor from his obligations to the landlord. As already explained, I am unable to agree. In order to release the insolvent it is sufficient to extinguish the insolvent’s liability to indemnify the guarantor. It is not necessary to go further, and release the guarantor from his liability to the lessor.
The fourth ground calls for fuller treatment. This ground was touched upon by Romer L.J., and developed more fully by Millett L.J. in the present case. I can summarise the reasoning as follows. Unlike an original tenant, who undertook liabilities without any right of recourse against anyone at that time, a guarantor’s right to be indemnified by the principal debtor is inherent in the relationship between them. His right of indemnity arose at the moment of creation of the guarantee liability, and is to be regarded as inseparable from it. Millett L.J. [1995] Q.B. 95, 105 said:
“It would . . . require very clear statutory language to deprive a surety of his right to indemnity while leaving his liability unimpaired. No such language is to be found in subsection (4)(b).”
Romer L.J. [1901] 1 Q.B. 660, 667 said:
“The section does not operate so as to cast upon third persons liabilities different in kind from what they were under before disclaimer.”
The law, more specifically equity, has traditionally shown a tender regard for guarantors. The law has gone to great lengths to see that guarantors are not called upon to discharge burdens different from those they originally undertook. There are some who believe that on occasions the law has gone too far, attaching more importance to form than substance. In the present context it is essential to have in mind that the fundamental purpose of an ordinary guarantee of another’s debt is that the risk of the principal debtor’s insolvency shall fall on the guarantor and not the creditor. If the debtor is unable to pay his debt when it becomes due. his bankruptcy does not release the guarantor. The discharge of a bankrupt releases him from all his bankruptcy debts, but this does not release a guarantor for the bankrupt: see section 281(1),(7) of the Act of 1986. The very object of giving and taking a guarantee would be defeated if the position were otherwise. So the guarantor remains liable to the creditor. The guarantor has a right of proof, for whatever that may be worth, as a creditor of the debtor’s estate.
The disclaimer machinery in the insolvency statutes achieves the same result in the case of guarantees of leases. The guarantor remains liable to the landlord. The guarantor loses his right to an indemnity from the insolvent tenant, but in place the statute gives him a right to prove as a creditor of the insolvent tenant’s estate. Thus there is no question of the guarantor’s right to an indemnity being confiscated. After disclaimer the guarantor’s position is no different from the position of any unsecured guarantor of a debtor who becomes insolvent. Had there been no disclaimer the guarantor’s right of indemnity would have led only to a right to prove against the insolvent’s estate. The disclaimer provisions do not change this. The Act leaves the loss consequent upon the tenant’s bankruptcy where the parties to the guarantee intended. In addition, the guarantor can take steps to obtain some return from the property by applying to the court for a vesting order, if necessary seeking an extension of time for this purpose. Or he may now be entitled to an overriding lease under section 19 of the Landlord and Tenant (Convenants) Act 1995, despite subsection (7). Section 19 is one of the few sections in the Act of 1995 which applies to existing leases.
The way ahead
There are three possible courses open to your Lordships. One is to depart from Hill v. East and West India Dock Co. and to decide that disclaimer discharges the original tenant and the guarantor. The second course is to overrule Stacey v. Hill and hold that disclaimer does not affect the obligations of original tenant or guarantor. The third course is to leave the two decisions standing side by side. I have given my reasons for rejecting the first course. The choice lies between the second and third courses.
This is the difficult part of the appeal. The decision in Stacey v. Hill is unsatisfactory. It has been much criticised. In W. H. Smith Ltd. v, Wyndram Investments Ltd. [1994] 2 B.C.L.C 571, 576, Judge Paul Baker Q.C., sitting as a Judge of the High Court, observed that the decision has failed to win universal acceptance. It has not been followed in Ireland: see Maurice Tempany v. Royal Liver Trustees Ltd. [1984] B.C.L.C. 568. In the textbooks it has been doubted or embraced with a marked lack of fervour: see, for instance, Rowlatt on Principal and Surety, 4th ed, (1982), pp. 173-174: Gower’s Modern Company Law, 4th ed, (1979). p. 737. note 69: Buckley on the Companies Acts, 14th ed, (1981), vol. 1. pp. 753-754: and Williams and Muir Hunter on Bankruptcy, 19th ed, (1979), pp. 388-389. 394.
However, although criticised and distinguished and circumvented, the decision has stood as a decision of the Court of Appeal for over 90 years. This is a long time. The decision has been acted upon frequently after leases have been disclaimed. The disclaimer provisions have been re-enacted on several occasions, from the Bankruptcy Act 1914 to the Act of 1986, but Parliament has not intervened.
These are important considerations, but they should be seen in perspective. Disclaimer is an intermittent rather than a constant problem, associated with periods of recession when leases are unsaleable.
A further important factor is that it would not be right for your Lordships’ House to overrule Stacey v. Hill if this would expose guarantors to more extensive liabilities than they reasonably anticipated when signingtheir guarantees. Prospective overruling is not yet a principle known in English law.
I do not believe that overruling Stacey v. Hill would have this consequence. I am not persuaded that people have been entering into guarantees in the expectation they will not be liable in the very circumstance at which the guarantee is primarily aimed: the insolvency of the person whose obligations are being guaranteed. Professionally drawn guarantees habitually include express provision protecting landlords if the lease is disclaimed. Those unversed in the finer points of bankruptcy law will not have had Stacey v. Hill in mind when undertaking their obligations. They would expect to have to pay the rent if the tenant, the principal debtor, became bankrupt.
Ultimately what has persuaded me and dispelled any lingering hesitation is the frankly absurd results produced if Stacey v. Hill and Hill v. East and West India Dock Co. were left standing uneasily side by side. First, in practical terms, an original tenant guarantees that me tenants for the time being will perform their obligations. There is no practical justification for distinguishing his position from that of a formal guarantor.
Secondly, the present case is illustrative of the tortuous distinctions which would follow. According to Stacey v. Hill, a surety’s liability is discharged when the principal debtor’s obligation to indemnify him is determined by disclaimer of the lease. But this reasoning would not operate to release Mr. Whitten in the present case. He guaranteed the obligations of CIT, not Prest. The right of indemnity which then arose was against CIT. That right, which is the all-important right according to Stacey v. Hill, was not determined when the lease was disclaimed by the liquidator of Prest. The disclaimer operated to determine Mr. Whitten’s right of indemnity against Prest, but that right arose after he had given the guarantee. Determination of a right of indemnity arising later does not bring down the guarantee, because it is not an inherent part of the guarantee. So the end result, on this footing, would be that disclaimer operates to discharge a guarantee if the disclaimer is in the insolvency of the principal debtor, but not if the disclaimer is in the insolvency of an assignee.
This would make no sort of legal or commercial sense. This would mean that directors who guarantee their company’s obligations would not be liable if their own company became insolvent whilst tenant, but they would be liable if an assignee from their company encountered financial difficulties whilst tenant. Mr. Whitten, as guarantor of CIT’s obligations, remains liable to the landlord. According to Stacey v, Hill, had he been a guarantor of Prest’s liabilities, the disclaimer would have released him. What sort of a law would this be?
In the present case the liquidator of CIT disclaimed CIT’s liabilities under the lease after the rents and other amounts had fallen due. The consequences of this disclaimer had it preceded the accrual of the liabilities were not explored in argument. But the possibility of a disclaimer by a non-tenant affecting the guarantor’s position underlines the curious distinctions and evident anomalies arising if Stacey v. Hill and Hill v. East and West India Dock Co. were left standing together.
At the outset I drew attention to the practical mischiefs which can arise when former tenants are held liable for defaults by subsequent assignees. These mischiefs do not assist the appellants. Stacey v. Hill does not have the effect of striking down liabilities by reason of the acts of assignees over whose identity a guarantor has no control. Stacey v. Hill has the paradoxical effect of discharging the guarantee in a circumstance at which it was primarily aimed and when there are no such mischiefs, but of not discharging the guarantee in a more remote circumstance where the mischiefs following assignments may arise.
I am unable to accept that this is, or should be, the state of the law. It would lack any rational or practical basis. It would defy coherent explanation. It would defeat the parties’ intentions. I would overrule Stacey v. Hill.
Conclusion
There remains one last point. The appellants contended that on the particular wording of the licence of 22 April 1987 neither CIT nor Mr. Whitten were liable once the lease had been disclaimed. CIT’s obligation was to pay rent “during the residue of the term created by the Lease”, and Mr. Whitten’s guarantee was to run “during the continuance of the Lease”. Under clause 5(2) Mr. Whitten could be required to take up a new lease in certain circumstances following a disclaimer. The submission was that the parties had contracted on the footing that on disclaimer the lease would end for all purposes, and that the quoted words should be construed accordingly. I cannot accept this. The put option in clause 5(2) was exercisable after disclaimer or other event brought an end to the lease “so far as concerns the lessee for the time.” This wording provides no support for the view that the parties thought that disclaimer would end the lease so far as CIT and Mr. Whitten were concerned. I would dismiss this appeal.
Rose v. Greer.
[1945] IR 503
Overend J. OVEREND J. :
This is an action brought by the plaintiff as widow and administratrix of the late Waldron Rose, and also as a creditor of his estate, seeking to set aside an assignment, dated 7th May, 1941, whereby her late husband assigned to the defendant, Mrs. Greer, a policy for £1,000 on his life with the Sun Life of Canada, of which Company he had been Dublin Manager.
The prayer of the claim alleges two grounds of invalidity:
1, that the assignment is fraudulent and void within 10 Car. I, Sess. III c. 3, s. 10; and
2, that the assignment is void as being for an immoral consideration and contrary to public policy.
Mr. J. McCarthy in opening, relied on the fact that there was “no consideration,” since the £460 stated “to be now paid” was not in fact paid. But in this case I have no doubt the defendant could not bring herself within the saving of s. 14 of the Act, so that the absence of consideration would only be a factor to be taken into account in coming to a conclusion whether the deed was fraudulent within the meaning of the statute. Want of consideration is not pleaded, and the assignment was by deed under seal.
The statement of claim also alleges an agreement with the deceased that the policy should enure for her benefit and that she contributed to its upkeep. No evidence was given in support of this plea, for the plaintiff only suggested that in 1927 she agreed to accept a reduced housekeeping allowance to enable her husband to pay premiums on policies then existing. The policy in question was not effected till January, 1929, but if such an agreement could be proved, I fail to see that it could affect the case.
As to the plea that the assignment was contrary to public policy, Mr. J. McCarthy in opening, stated that he could not prove that the deceased and the defendant cohabited.
If he could, it would make no difference, for the facts in evidence negative the idea that the assignment could have been executed in contemplation of future cohabitation. There is thus only one question left for me to deal with, viz., whether the assignment is fraudulent and void within the statute.
Plaintiff says that in 1921 she was living in her own flat in London and had a post as a teacher of domestic economy when she met the deceasedhe was then an insurance agent in the employment of the Sun Life of Canada. He had divorced his wife and obtained damages. The deceased and plaintiff were married in 1923. She retained her post as a teacher for the time being. In 1925 the deceased was sent to open an office in Dublin, the plaintiff gave up her post about a year later, and the deceased took a house at Vergemount, Clonskea, where she says, they lived happily till 1934. The deceased became acquainted with the defendant about 1933, and in 1934, the plaintiff says, she had cause to complain of the deceased’s attentions to the defendant and neglect of her. In spite of her protests the association continued.
On the 25th May, 1936, the plaintiff wrote to the defendant as follows:
“I have learned of the intimate association you have with my husband, and the effect of it is that you completely deprive me of his company. At the moment I am not thinking of an action for enticement, but I have enough evidence to take this course unless this association ceases immediately.”
And on the 26th she received a somewhat remarkable reply:
“Your letter received this morning was, to put it mildly, surprising, surely it is a matter to be taken up with your husband, not me.”
It is noticeable there is no denial of the “intimate association”and the plaintiff might well think the gauntlet was flung down, and that the defendant was telling her to keep her husband if she could, and that the defendant did not intend to lift a finger to help her.
The plaintiff replied:
“I have your letter of the 26th inst. I had hoped that you would have broken the association which I object to, I even still have this hope and that I may not be driven to take action for the wrong that is being done to me, and even now again ask your assurance that you will refuse to see my husband, or permit him, or ask him, to visit your house.”
This would be quite irrelevant were it not that the plaintiff said that about this time the deceased told her he was in financial difficulty and asked for a loan of the plaintiff’s securities to deposit in the Bank. She refused, and on cross-examination admitted that she might have added “Why don’t you ask Mrs. Greer?” or words to that effect. I would attach little importance to such a retort when relations were so strained. There is no evidence that deceased did ask defendant at this time, or indeed till much later.
In August, 1936, the deceased left his house and never returned to the plaintiff. In October, 1937, the plaintiff filed a petition for restitution of conjugal rights against the deceased, and at the same time issued a plenary summons against the defendant claiming damages for enticement of her husband(Mr. Law, whose firm acted for the deceased and the defendant, has told me that throughout the two proceedings were treated as one, and that the deceased paid his costs).
All the plaintiff’s charges were denied.
About January, 1938, the plaintiff sought an order for payment of alimony pendente lite and the deceased was ordered to pay £25 per month.
In February, 1938, the deceased asked the defendant for the loan of securities to deposit in the Bank. He said he wanted £500 for expenses of legal proceedings. The defendant said she was not well off, but in the end reluctantly consented. The deceased saw Mr. Craig, Manager of the Northern Bank, Grafton Street, who wished to see the defendant. She and deceased went in together. Mr. Craig said it would be more satisfactoryI assume he meant to the Bank if the defendant opened an account in her own name and deposited her securities for the overdraft. The deceased said he would pay the interest on the loan. This was agreed to, the account opened, the securities desposited, and the defendant on the 8th February, 1938, gave the deceased a cheque for £300 which he cashedit would seem across the countergetting a draft for the amount; later, on the 2nd May, 1938, the defendant gave deceased a cheque for £100, and on 21st June, another cheque for £100, which he seems to have cashed in the same way. The defendant thus became indebted to the Bank for £500. The petition and action were listed for hearing on the same day, but a settlement was arrived at, the deceased was to enter into a deed of covenant to pay the plaintiff £300 per annum free of income tax, to pay £250 as therein, and there were certain other provisions, and Mr. Law says he arranged with the plaintiff’s solicitor that the action be dismissed without costs, and it was understood that Mr. Law would send the plaintiff’s solicitors a cheque for £100 towards his costs. This he did on the 22nd June. Mr. Law says it was not the defendant’s cheque of the 21st June, and not his own cheque, but he believes a cheque of the deceased’s drawn in favour of Mr. Charles. He has no means of saying with absolute certainty. The defendant says she never heard of this payment till she heard of it in this Court. It is difficult to believe that Mr. Law could have acted without the defendant’s full authority and I do not accept this statement. The plaintiff as administratrix of the deceased was entitled to ask the National Bank for particulars of the deceased’s account and to know whether he paid this sum to Mr. Charles, if her advisers so desired. Mr. Law was being paid by the deceased, and may well have taken his instructions from him, as he said both proceedings were treated as one, but I have no doubt the defendant knew of the settlement and the terms of it.
The defendant says she thought the deceased had got her into this mess and she thought he should get her out of it. Whatever view others may take as to who was primarily responsible, especially having regard to the defendant’s letter of 26th May, 1936, there is some evidence, that the deceased intended to make himself responsible for the costs of both proceedings:First of all, his suggestion to the defendant was the same as he made years before to the plaintiff, viz., to lend him the securities so that he might raise the money, making himself the borrower. Then there is the document referred to as an I.O.U., which has been criticised as being untrue because it acknowledges £500 as due and repayable. It is undated, and whether it was inaccurate would depend on the day when it was written.
On 30th of September, 1938, the deceased made his will. After reciting that his son and his second wife, the plaintiff, were amply provided for, he leaves the residue to the defendant as a token of esteem, and appoints her sole executrix. Attention has been directed to the fact that there is no mention of a debt of £500. The defendant says he told her the residue should be sufficient to cover her. She says the will was dictated to deceased’s secretary and she drove him to friends in Monkstown who witnessed its execution. It has been admitted to probate at the instance of the plaintiff who sought administration with the will annexed. In 1939 the defendant moved to Dundrum, and henceforward the deceased lived in her house as a paying guest. She denies that he did so previously.
Whatever doubt there may be in this case, one fact is proved beyond doubt, viz., that the defendant raised and paid £500 to the deceased and rendered herself liable to the Northern Bank for principal and interest. She says she believed that deceased paid about £50 on account of interest, and later, having been to the Bank, says she was told that he had paid £54 odd.
Her account from the Bank shows a substantial sum for interest unpaid, and she says the Bank wrote to her about the non-payment, and that worried her because the Bank required the dividends paid to them. She told Mr. Harris about it and a discussion took place with the deceased when Mr. Harris suggested the assignment as security. Mr. Harris says substantially the same, apparently Mr. Harris did not see to it himself, but mentioned the matter to a Mr. Byrne and the document was prepared by a Mr. Kennedy, solicitor, in a form which is not in accordance with facts. It was signed by the deceased and the defendant in presence of a neighbour. Defendant says she read it, but it did not convey much to her. It is dated the 7th May, 1941, and it seems pretty clear from the evidence available that at that time it was the deceased’s only asset, and was already assigned to the Insurance Company in respect of loans and premiums. I have little doubt that the deceased was on the verge of insolvency if not actually insolvent. This seems to be pretty clear from affidavits filed by him in the months of October and November following in an attempt to get a reduction in the amount payable to the plaintiff, treating the payment as alimony and not as money payable under the deed of covenant of 29th June, 1938. It is noteworthy that these affidavits never refer to the assignment of 7th May, 1941, though they refer to the Company’s charge: it is also remarkable that no notice was given to the Insurance Company till the 3rd March, 1942.
All these matters, however suspicious, are matters which are not relevant in the present case; I am only concerned to determine whether this deed is fraudulent and void within the statute. This is the sole remaining ground on which the assignment is challenged before me. There is no allegation of mistake, or undue influence, or fraud of any other kind than the statutory fraud.
Now, statutes must be construed as a whole. Turning to the statute, it is entitled “An Act against covenous and fraudulent conveyances.” The earlier portion deals with conveyances in fraud of purchasers, and commences as follows:”Forasmuch as not only the King’s most excellent Majesty but also divers of his Highnesse good and loving subjects, and bodies politique and corporate, after conveyances obtained, or to be obtained, and purchases made, or to be made, of lands, tenements, leases, estates and hereditaments, for money or other good considerations, may have, incurre, and receive great losse and prejudice, by reason of fraudulent and covenous conveyances, estates, gifts, grants, charges and limitations of uses heretofore made or hereafter to be made, of, in, or out of lands, tenements, or hereditaments so purchased, or to be purchased; which said gifts, grants, charges, estates, uses and conveyances were, or hereafter shall be meant and intended by the parties that so make the same, to be fraudulent and covenous, of purpose and intent to deceive such as have purchased or shall purchase the same, or else by the secret intent of the parties, the same to be to their owne proper use, and at their free disposition, coloured nevertheless by a fained countenance and shew of words and sentences, as though the same were made bona fide for good causes, and upon just and lawful considerations.” This section then goes on to provide the remedy.
Section 10 uses somewhat similar words:
“And furthermore for the avoyding and abolishing of fained, covenous and fraudulent feoffments, gifts, grants, alienations, conveyances, bonds, suites, judgments and executions, as well of lands and tenements, as of goods and chattels more commonly used and practised in these daies then hath been seen or heard of heretofore; which feoffments, gifts, grants, alienations, bonds, suites, judgments and executions have been and are devised and contrived of malice, fraud, covin, collusion or guile, to the end, purpose and intent to delay, hinder or defraud creditors and others of their just and lawful actions, suits, debts, accompts, dammages, penalties, forfeitures, herriots, mortuaries and reliefs, not only to the lette or hindrance of the due course or execution of law and justice, but also to the overthrow of all true and plaine dealing, bargaining and chevisance between man and man, without which no common wealth or civil society can be maintained or continued.” The section then goes on to enact, where any conveyance is made for the intent and purpose mentioned, it shall be void.
I am of opinion that the class of fraud which is contemplated and against which the statute is directed is one in which the debtor attempts to defeat his creditors by bogus or colourable transactions under which the debtor retains a benefit to himself. This was decided 150 years ago in Holbird v.Anderson (1), and later again in Alton v. Harrison (2).
In his judgment in the latter case, Giffard L.J. says:”If the deed of mortgage and bill of sale was executed by Harrison honestly for the purpose of giving a security to the five creditors, and was not a contrivance resorted to for his own personal benefit, it is not void, but must have effect. . . . If the deed is bona fidethat is, if it is not a mere cloak for retaining a benefit to the grantorit is a good deed under the statute of Elizabeth.” The deed in that case was a mortgage which was made for the express purpose of defeating a writ of sequestration.
That decision came before the Court of Appeal in England in Glegg v. Bromley (1). Vaughan Williams L.J., in dealing with the authorities, quotes the passage which I have read from the judgment of Giffard L.J. in Alton v. Harrison (2). He then refers to the judgment of Parker J. in Wigan v. English and Scottish Life Assurance Association (3) and says:”In the early part of his decision, Parker J. affirms a proposition with which I should imagine everyone agreesthat is, that the mere existence of a debt is not good consideration in itself. One expects the assignment to be connected with some benefit or advantage which accrues to the assignor. Parker J. then proceeds to consider whether in that case there was good consideration or not. He says this:’It appears to me to be reasonably clear that the mere existence of a debt from A to B is not sufficient valuable consideration for the giving of a security from A to B to secure that debt.’ I may say that I entirely agree with that proposition. He goes on: ‘If such a security is given, it may of course be given upon some express agreement to give time for the payment of the debt, or to give consideration for the security in some other way, or, if there be no express agreement, the law may very readily imply an agreement to give time’. The judgment of Parker J. was to a large extent founded upon Alliance Bank v. Broom (4) where it was held by Kindersley V.C. that the forbearance of the Bank to enforce payment of the existing debt in consequence of the agreement to hypothecate certain warrants for the delivery of the goods mentioned in the letter made by the plaintiff bank constituted consideration, because it was to be inferred that ‘if on the application for security being made, the defendant had refused to give any security at all, the consequence certainly would have been that the creditor would have demanded payment of the debt, and have taken steps to enforce it.’. . . The Vice-Chancellor seems to base his judgment on the fact that the circumstances necessarily involved ‘the benefit to the debtor of a certain amount of forbearance which he would not have derived if he had not’ written the letter of September 19th, in answer to the plaintiff’s request for security of the debt due on loan account.”
Vaughan William L.J. then goes on to state that Alliance Bank v. Broom (1) was affirmed by the House of Lords in Fullerton v. Provincial Bank of Ireland (2) and he quotes the following passage from the speech of Lord Macnaghten:”My Lords, this point seems to me to be settled by authority. In such a case as this it is not necessary that there should be an arrangement for forbearance for any definite or particular time. It is quite enough if you can infer from the surrounding circumstances that there was an implied request for forbearance for a time, and that forbearance for a reasonable time was in fact extended to the person who asked for it. That proposition seems to me to be established by the case of Alliance Bank v. Broom (1) to which my noble and learned friend, Lord Lindsey, referred yesterday, and other cases, among which I may mention Oldershaw v. King (3),with the observations on that case and on the case of Alliance Bank v. Broom (1) by Bowen L.J. in Miles v. New Zealand Alford Estate Co. (4), and I may add that the proposition seems to be good sense.” Vaughan Williams L.J. then proceeds to say: “From all those cases I infer not only that there must be good consideration, but you ought to arrive at the conclusion that the act done, when it is done, was done in pursuance of the agreement made upon the assignment of the security.” The learned Lord Justice then goes on to give what might have been his own view were it not for the authoritative explanation of Alliance Bank v.Broom (1) given in the case of Fullerton v. Provincial Bank of Ireland (2). He says:”I should have doubted whether Kindersley V.C. did mean to say that it was essential to the good consideration in those cases that you should infer in any way that the agreement to give the security was a part of that which was contracted for. I should have thought, speaking for myself, that his words tolerably plainly showed that he meant to include even a case where you could not say that it was originally contracted for at all, but where the assignor in fact took some benefit or other, not necessarily a benefit contracted for by the contract, but actually took a benefit, and that was a sufficient addition to make it a good consideration.” And later on in his judgment he says:”Finally, I may say that I have taken it for granted throughout my judgment that mere preference of one creditor over another does not bring the case within the statute 13 Eliz. c. 5, even though the parties may have been minded to defeat a particular creditor.”
Fletcher Moulton L.J. in dealing with the meaning of 13 Eliz. c. 5, says:”The covenous assignments referred to in the 13 Elizabeth are mock assignments whereby in some form or other the assignor reserves some benefit to himself, but an out and out assignment by way of charge to secure an actual existing creditor is not within the class of assignments which are affected by that statute.”
Parker J. in his judgment refers to his own decision in Wigan v. English & Scottish Life Assurance Association (1)and then says:”I think that where a creditor asks for and obtains a security for an existing debt the inference is that, but for obtaining the security, he would have taken action which he forbears to take on the strength of the security, and I cannot think that this inference is rebutted by the fact that he reason why he asks for the further security is his desire to obtain a benefit for himself at the expense of another creditor who may shortly be in a position to take the subject-matter of the proposed security in execution.” Later on in his judgment the learned Lord Justice says:”The only remaining point is, I think, that which was argued under the statute of 13 Eliz. c. 5. Now the scheme of that statute is this: by it all conveyances and assignments made with intent to hinder and delay creditors are rendered void against all creditors hindered or delayed by their operation. There is, however, a proviso for the protection of a purchaser for good consideration without notice of the illegal intention. In the authorities which deal with the statute it is not always clear whether the Judges are dealing with the operative part of the Act or with the proviso. The illegal intent under the operative part is a question of fact for the jury or the Judge sitting as a jury. On the one hand the want of consideration for the conveyance or assignment is a material fact in considering whether there was any illegal intent, but it is not conclusive that there existed any such intent. In the same way consideration was by no means conclusive that there was no illegal intent. . . . Now in the present case it is really quite unnecessary to consider the proviso, for everyone is agreed, and I think it is quite clear on the evidence, that if there was any fraudulent intention, the mortgagee had notice of it. The question therefore is really a question which reduces itself to this: Does a debtor who gives his creditor security with the intention of preferring him to other creditors or another creditor, and consequently defeating or delaying such other creditors or creditor, have an illegal intention within the meaning of the statute? In my opinion it is well settled that he has not, and as far as I can gather no distinction has ever been drawn in the cases between a preference given for fresh security and a preference given without any fresh security.”
In this case if any question turned on intention I would hold that the defendant had notice, but there is nothing to suggest the retention of any benefit to the deceased. The assignmentpurports to be an out and out assignmentthere could be nothing in the nature of a resulting trust, accordingly the assignment is not fraudulent or void within the statute. I was asked to hold the parties bound by an estoppel, but an estoppel must be mutual, and if I did so, the plaintiff would be equally estopped from denying that £460 was paid by the defendant and received by the deceased. Since the Judicature Act it is always possible to prove the true consideration and whether the money was in fact paid.
Again, in this case I am not troubled by any implied promise of forbearance, I have no doubt there was valuable consideration. The defendant daily incurred a fresh liability to the Bank for interest which was equivalent to a further advance to the deceased and she now owes the Bank £656 16s. 7d., and further interest to date of payment from 30th June, 1944. This is clearly a valuable consideration.
One other point I should perhaps mention lest it be thought to have been overlooked. The defendant has proved payment to the deceased of £500, there is no evidence that it was anything but a loan, there is evidence of the defendant, of the I.O.U., of the payment of interest by the deceased, that it was a loan, and there is no scrap of evidence from the deceased’s banking account, paid cheques, or-otherwise that any part of it was repaid.
Accordingly I must dismiss the action with costs, and direct payment out of the sum in Court to the defendant.
Bryce v. Fleming & Gilvarry.
[1930] IR 376
Meredith J.
This is an appeal against the judgment of Circuit Court Judge Power, by which an assignment, dated the 9th March, 1928, whereby certain lands of Ballybroney and Balladallagh, in the County of Mayo, were assigned by the defendant, Thomas Fleming, to the defendant, Mary Gilvarry, was declared void as against the plaintiff and all other the creditors of the defendant, Thomas Fleming, and was ordered to be delivered up to be cancelled.
The declaration and order purported to be made under the Irish statute, 10 Chas. 1, Sess. 2, c. 3, against covinous or fraudulent conveyances, which corresponds to the English statute, 13 Eliz. c. 5. The assignment was an out-and-out assignment. There was no reservation of any kind, express or secret, in favour of the vendor, Thomas Fleming, and the price was determined as the result of genuine bargaining, and reflected simply the estimate which the parties placed on the value of the lands. The assignment was, therefore, unquestionably for good consideration, and bona fide. But at the time it was made Patrick Bryce, the plaintiff, had obtained judgment against the defendant, Thomas Fleming, for necessaries supplied to his wife, and, as Fleming had unsuccessfully appealed against this judgment, the plaintiff was a creditor of Fleming to a considerable amountapparently nearly half the value of the lands assigned. The learned Judge was satisfied that Fleming’s intention in selling the lands was to divest himself of the only property on which the plaintiff, Bryce, could levy execution, and that, accordingly, the assignment came within sect. 10 of the statute. He further refused to believe the evidence of the defendant, Mary Gilvarry, that she had no notice of the fraudulent nature of the transaction. Accordingly, he held that the assignment to her was not protected by sect. 14, which contains a proviso in favour of bona fide conveyances for good consideration without notice, and so he declared the deed void as against the creditors. of Thomas Fleming. The order further directed the assignment to be delivered up to be cancelled. That, of course, was a mistake; for it is quite clear that sect. 10 only makes an assignment which is fraudulent against creditors void as against them, and that in the present case Mary Gilvarry is in any event entitled to the benefit of her purchase, subject to the claim of the plaintiff. The proper form of order is set out in Bott v.Smith (1).
The circumstances under which a bona fide conveyance for valuable consideration might yet be fraudulent within sect. 10 are indicated in a passage in the judgment of Palles C.B. in In re Moroney (2). Dealing with the case of a bona fide sale for value, he says that if “the intent were not only to sell the property, but forthwith to abscond with the proceeds, so as in effect to withdraw the property from the fund available for the creditors without providing an equivalent, I should entertain no doubt that in such a case there would be an intention to defraud creditors, which, if the purchaser had notice of, would avoid the sale.” As a matter of fact, the point that a conveyance might be within sect. 10, or, rather, the corresponding English section, though for valuable consideration, had been well settled as far back as the time of Lord Mansfield, who states the position with great clearness in his judgment in Cadogan v.Kennett (3): “But if the transaction be not bona fide, the circumstance of its being done for a valuable consideration, will not alone take it out of the statute. I have known several cases where persons have given a fair and full price for goods, and where the possession was actually changed; yet being done for the purpose of defeating creditors, the transaction has been held fraudulent, and therefore void. One case was, where there had been a decree in the Court of Chancery, and a sequestration. A person with knowledge of the decree, bought the house and goods belonging to the defendant, and gave a full price for them. The Court said the purchase, being with a manifest view to defeat the creditor, was fraudulent; and therefore, notwithstanding a valuable consideration, void. So, if a man knows of a judgment and execution, and, with a view to defeat it, purchases the debtor’s goods, it is void: because the purpose is iniquitous. It is assisting one man to cheat another, which the law will never allow.” Later cases, where deeds for valuable consideration were held within the section, are referred to in Bott v. Smith (1); see also the more modern case of In re Johnson; Golden v. Gillam (4). The difficulties, however, in the way of a creditor who seeks to impugn a deed for valuable consideration are emphasised in Harman v. Richards (5). There Turner L.J. said: “A deed, though made for valuable consideration, may be affected by mala fides. But those who undertake to impeach for mala fides a deed which has been executed for valuable consideration, have, I think, a task of great difficulty to discharge.”
These authorities indicate under what circumstances a creditor’s claim under the statute will be good even against an assignee for valuable consideration. No such circumstances exist in the present case. If a man has lands, and can only pay his debts by selling his lands, the honest thing for him to do is to sell them. It is also the prudent thing to do; for if he sells them himself he will probably get a better price, and avoid unnecessary costs. Consequently, the mere fact that a man in such a position is selling his lands is no evidence whatever that his intention is to defeat his creditors rather than to obtain the wherewithal to pay his debts. Still more is it obvious that mere knowledge of such a simple fact is not a sufficient ground for imputing to a purchaser knowledge of a fraudulent intention on the part of his vendor. Voluntary assignments by a debtor stand on one footing. But once valuable consideration is given a new element enters into the case. As Fry J. says in In re Johnson; Golden v. Gillam (1), it is always “a material ingredient in considering the case, and for very obvious reasons: the fact that there is valuable consideration shows at once that there may be purposes in the transaction other than defeating or delaying creditors, and renders the case, therefore, of those who contest the deed more difficult.”
Now, unquestionably the only knowledge bearing on the question of Fleming’s intention that was brought home to the mind of Mary Gilvarry was the simple fact that Fleming probably could not satisfy the plaintiff’s claim without a sale of the lands. Further, Mary Gilvarry’s testimony was that she had no knowledge of or notice of any fraudulent intention on Fleming’s part. The learned Judge, however, took the view that the onus of proving absence of knowledge lay on Mary Gilvarry, and, as he did not regard her as a creditable witness, he rejected her testimony, and so he considered that she had failed to discharge the onus, with the result that he avoided the deed. In this way the task which Turner L.J. described as so difficult to discharge was performed with such ease that Mary Gilvarry most probably left the Court in a state of utter bewilderment at the extreme simplicity of the proceeding by which, despite her uncontradicted testimony, she was deprived of all benefit of her £200.
Now, on this appeal, we are pressed with the point that the defendant’s onus of proving that she had no notice cannot be discharged by her testimony if it is not to be believed, and that the question of the creditability of a witness is for the Judge of first instance. But, even assuming that the onus was on Mary Gilvarry of showing absence of notice, I am inclined to think that the onus was shifted once she swore that she had no notice, and that the learned Judge was not entitled to reject her testimony in the absence of any positive evidence whatever of anything from which knowledge should be imputed to her. This is not a case of conflict of testimony, and it is not like the case of the testimony of a claimant in support of a claim against the estate of a deceased. A number of authorities on the analogous case where absence of notice is averred to support the equitable plea of purchase for value without notice will be found collected in the note to Jones v. Thomas (1); see also Vane v. Vane (2), where Sir Wm. James L.J. (having stated that the plaintiff alleged in so many words that he never did know or suspect at the time anything of the alleged fraud) said:”That we must take to be true, unless we are enabled judicially to conclude from other statements of his in the bill that that allegation is false.” In general, “the defence of a purchase without notice is one which ought to be specifically alleged as well as proved by those who rely upon it”: per Thesiger L.J. in Attorney-General v. Biphosphated Guano Co. (3). The question, however, is one of some difficulty, as the learned Judge gave as his reason for disbelieving Mary Gilvarry that she denied having heard of the result of the unsuccessful appeal, heard in Dublin, in the action already referred to, taken by Bryce against Fleming, in respect of necessaries supplied to Mrs. Fleming. The learned Judge held that that was in itself an incredible statement, and so he said he would reject her evidence entirely.
If, however, the onus was on the plaintiff to prove that the defendant was aware of the intention of Thomas Fleming, then that onus could not be discharged by rejecting the evidence of the defendant that she had no knowledge. Hence, instead of examining the authorities as to the position if the defendant was to prove absence of notice, I prefer to turn to the question of whether, in the case of a purchase for valuable consideration, the onus is not on the creditor to prove that the purchaser was aware of his vendor’s fraudulent intent. The answer to that question must depend upon whether an innocent purchaser is saved by reason of his conveyance not originally coming within sect. 10 at all, or only by reason of his being protected by the proviso contained in sect. 14. It may be anticipated that it will not prove an altogether easy matter to clear up this question by reference to the authorities, as a certain amount of confusion in the older authorities is recognised in the observation of Parker J. in Glegg v. Bromley (4), that “There is, however, a proviso for the protection of a purchaser for good consideration without notice of the illegal intention. In the authorities which deal with the statute it is not always clear whether the Judges are dealing with the operative part of the Act or with the proviso.” An example of one of the many passages which Parker J. must have had in view is the following, in French v.French (5):”Mr. Gibbons had no knowledge of the state of Mr. French’s affairs, therefore the transaction, as far as he is concerned, ought not to be impeached.” Does Lord Cranworth mean that the transaction, as far as he is concerned, is not avoided under the operative section, or that his estate or interest is protected under the proviso? There is a similar difficulty in respect of the observation, already cited, of Palles C.B. in In re Moroney (1), for it is implied that if the purchaser had no notice the sale would not be avoided. Are we entitled to press the implication, that it is the sale itself that would not be avoided, as against a suggestion that it is only the estate or interest of the purchaser that would be protected? Numerous other instances might be cited of passages in which an expectation of a clear statement on the point is disappointed. It must be admitted, however, that, from Twyne’s Case (2) down, there are several passages in the authorities which assume, but without considering any alternative view, that it is the proviso which protects a purchaser for value without notice. But these obiter dicta cannot have very much weight, since it was not until Halifax Joint Stock Banking Co. v. Gledhill (3) that it was clearly decided that the proviso covered the case of a subsequent transfer; and, of course, if the proviso was not dealing with subsequent transactions it must have been dealing with the original transaction. Hence the assumption to which I have referred.
Turning to the wording of the operative section, it is obvious that the question whether or not it hits a bona fide purchaser for valuable consideration without notice must depend on whether the “intent” referred to in the section is solely the intent of the vendor in such a case or is the intent of the transaction as a whole, so as to make the intent of the purchaser material. Certainly, on the plain reading of the section itself, it is the latter view that would commend itself. But the authorities on which one most readily lights seem in favour of the formeras far as dicta go. Thus, in Nunn v. Wilsmore (4),Le Blanc J. says: “Whether or not a deed is to be considered as fraudulent with respect to creditors must depend on the motives of the party making the deed.” But it does not seem that deeds for valuable consideration were here in contemplation. The same may be said of the observations of Kindersley V.C. in Thompson v. Webster (5): “The principle now established is this:The language of the Act being, that any conveyance of property is void against creditors if it is made with intent to defeat, hinder, or delay creditors, the Court is to decide in each particular case whether, on all the circumstances, it can come to the conclusion that the intention of the settlor in making the settlement was to defeat, hinder, or delay his creditors.” But I have not found any passage in which the case of a purchase for valuable consideration is expressly considered, and in which the intention of the purchaser is treated as immaterial. But there is authority to the contrary. In Cadogan v. Kennett (1) Lord Mansfield, in the passage already cited, stresses throughout the intention of the purchase and of the purchaser. In the case where the creditor had obtained a decree, he says: “The Court said, the purchase”not the sale -“being with a manifest view to defeat the creditor, was fraudulent; and, therefore, notwithstanding a valuable consideration, void.” He uses similar language in the second instance which he gives:”So, if a man knows of a judgment and execution, and, with a view to defeat it, purchases the debtor’s goods, it is void: because the purpose is iniquitous.It is assisting one man to cheat another, which the law will never allow.” Cadogan v. Kennett (1) does not appear to have been cited in In re Johnson; Golden v. Gillam (2), but in that case Fry J. arrives independently at the same view as to the materiality of the purchaser’s intention. He says (3): “I therefore proceed to inquire, looking to all the circumstances of the case and at the nature of the instrument itself, whether I can or ought to infer an intent to defraud creditors in the parties to the deed. I say in the parties to the deed, because it appears to me to be plain that whatever fraudulent intent there may have been in the mind of Judith Johnson, it would not avoid the deed unless it was shown to have been concurred in by Alice, who became the purchaser under the deed. It has not been contended, and it could not be contended, that the mere fraudulent intent of the vendor could avoid the deed, if the purchaser were free from that fraud.” Accordingly, the action was dismissed, and it is clear that the learned Judge was relying on his interpretation of the operative section, not on the proviso. The case is, therefore, an authority for the proposition that where there is a bona fide purchase for valuable consideration the transaction cannot be impeached under the operative section unless the purchaser is shown to have been privy to the vendor’s intention. Hence this appeal must be allowed, since the onuslay on the plaintiff, and he certainly made no attempt to discharge it himself, and it certainly was not discharged by the learned trial Judge not accepting the defendant’s denial.
Although it would be sufficient for me to rely on the clear decision of Fry J. in the case to which I have referred, I should like to add that to my mind that decision is in accord with the plain reading of the sections. Once it is seen that at all events the primary object of sect. 14 was to protect a certain class of transferees under assignments subsequent to the original fraudulent conveyance, there is no incentive to construe sect. 10 in such a way that it will not already safeguard an original innocent purchaser. Similarly, if the purchase in such a case is not within sect. 10 there is no reason for not construing sect. 14 as dealing exclusively with subsequent transactions, and, in my opinion, sect. 14 does not deal with the original transaction at all, but only with subsequent transfers. First of all, it does not seem to me that sect. 14 is appropriately worded to meet the case of the original conveyance. For, if the original purchase is to be protected, then sect. 10 does not operate at all, and the provision should be that sect. 10 should not extend to, or be construed to, impeach the conveyance in such a case. The wording we should expect would be similar to that in sect. 4 of 27 Eliz. c. 4, viz.: “Provided also . . . that this Act . . . shall not extend or be construed to impeach, defeat, make void or frustrate any conveyance . . . made upon or for good consideration and bona fide,” &c. But sect. 14 does not exempt the fraudulent conveyance from the operation of sect. 10; in fact, it does not deal directly with any conveyance at all, but only with estates or interest conveyed in the manner stated. That is appropriate to a subsequent alienation, for what is alienated may only be a portion of the property originally conveyed or only a limited interest, and it is only such estate or interest that is protected in the ease provided for, while, subject to the protection afforded to the estate or interest in question, sect. 10 operates on the original conveyance. Broadly, the effect of sect. 10 is only to charge the estate conveyed by the original conveyance, but the charge does not affect a subsequent bona fide purchaser for good consideration without notice. The case of Halifax Joint Stock Banking Co. v. Gledhill (1) shows how appropriate sect. 14 is to a subsequent transfer, and sect. 4 of 27 Eliz. c. 4 shows how inappropriate it would be in the case of the original conveyance. Further, it may be said that the nature and circumstances of the original transaction and of a subsequent transfer generally stand on such a different footing that it seems unlikely that they would have been grouped together. Now that it has been definitely decided that the original purchase is not hit by sect. 10, and that subsequent purchases are dealt with by sect. 14, the way is clear, despite observations in the older authorities, to hold that sect. 14 only deals with subsequent transfers.
The appeal must, therefore, be allowed, and the action dismissed with costs.
JOHNSTON J. :
I have considered very carefully the questions that were raised on this appeal, and I was prepared to set out at length the reasons which moved me to come to the conclusion that the appeal should be allowed, and the equity civil bill dismissed; but, having had the privilege of reading beforehand the judgment that has just been delivered, I feel that it would be a waste of public time to do more than state in a few words what my view is. I think that it is not necessary to go beyond the
Act of Parliament to see that the slender ease which the plaintiff has made is wholly unsustainable. The Act was designed to put a stop to all alienations of property “devised and contrived of malice, fraud, covin, collusion or guile, to the end, purpose and intent to delay, hinder or defraud creditors and others of their just and lawful” debts. Such alienations are deemed to be clearly and utterly void, but only “as against the person or persons, his or their heirs, successors, executors, administrators and assigns” whose debts shall thereby have been in any wise disturbed, hindered, delayed or defrauded. It seems to me that that provision is clear enough as it stands; but it is made even clearer by sect. 11a section which was not referred to in the course of the argumentwhich provides that “all and every, the parties” to such a fraudulent alienation who “shall wittingly put in ure, avow, maintain, defend or justify the same . . . as true, simple, and done, had or made bona fide and upon good consideration,” shall suffer the penalty therein set out. Then sect. 14 provides that the legislation shall not extend to any estate or interest which had been lawfully conveyedbona fide and for good consideration to any person who had at the time of such conveyance no notice or knowledge of the fraud. “A conveyance, therefore,” said Plumer V.C. in Copisv. Middleton (1), “cannot be invalidated by this Act if there has been a bona fide purchaser.”
A good many of the considerations that were addressed to us in this case were considerations that were relevant to the case of a voluntary conveyance rather than to one that admittedly was for valuable consideration
I think, as Turner V.C. said in Harman v. Richards (2), that”those who undertake to impeach for mala fides a deed which has been executed for valuable consideration have, I think, a task of great difficulty to discharge.”
While accepting the view of Judge Power that the whole of Mrs. Gilvarry’s evidence must be rejected as being untrue, and taking into account the fact that this was admittedly the case of a purchase for valuable consideration, I can find nothing in the evidence adduced on behalf of the plaintiff which even remotely suggests to my mind that she or her husband had any degree of knowledge of the fraud of which Fleming is alleged to have been guilty, or that the motive of her and her husband in purchasing this property was anything other than the desire to acquire the lands as a bona fide purchaser.
Twyne’s case
(1601) 3 Coke 80; (1601) 76 ER 809
Judgment
“ 1st. That this gift had the signs and marks of fraud, because the gift is general, without exception of his apparel, or any thing of necessity; for it is commonly said, quod dolus versatur in generalibus.
2nd. The donor continued in possession, and used them as his own; and by reason thereof he traded and trafficked with others, and defrauded and deceived them.
3rd. It was made in secret, et dona clandestina sunt semper suspiciosa.
4th. It was made pending the writ.
5th. Here was a trust between the parties, for the donor possessed all, and used them as his proper goods, and fraud is always apparelled and clad with a trust, and a trust is the cover of fraud.
6th. The deed contains, that the gift was made honestly, truly, and bona fide: et clausulæ inconsuet’ semper inducunt suspicionem.
”
It was further held that the gift may have been on good consideration, but could not be bona fide.
“ the intent of the Act was, that the consideration in such case should be valuable; for equity requires, that such gift, which defeats others, should be made on as high and good consideration as the things which are thereby defeated are… ”
See also
Re Gray’s Inn Construction Co Ltd
[1980] 1 WLR 711 i
Buckley LJ’s
“ It is a basic concept of our law governing the liquidation of insolvent estates, whether in bankruptcy or under the Companies Acts, that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent’s unsecured creditors as at that date. In bankruptcy this is achieved by the relation of the trustee’s title to the bankrupt’s assets back to the commencement of the bankruptcy. In a company’s compulsory winding up it is achieved by section 227. There may be occasions, however, when it would be beneficial, not only for the company but also for its unsecured creditors, that the company should be enabled to dispose of some of its property during the period after the petition has been presented but before a winding up order has been made. An obvious example is if the company has an opportunity by acting speedily to dispose of some piece of property at an exceptionally good price. Many applications for validation under the section relate to specific transactions of this kind or analogous kinds. It may sometimes be beneficial to the company and its creditors that the company should be enabled to complete a particular contract or project, or to continue to carry on its business generally in its ordinary course with a view to a sale of the business as a going concern. In any such case the court has power under section 227 of the Companies Act 1948 to validate the particular transaction, or the completion of the particular contract or project, or the continuance of the company’s business in its ordinary course, as the case may be. In considering whether to make a validating order the court must always, in my opinion, do its best to ensure that the interests of the unsecured creditors will not be prejudiced. Where the application relates to a specific transaction this may be susceptible of positive proof. In a case of completion of a contract or project the proof may perhaps be less positive but nevertheless be cogent enough to satisfy the court that in the interests of the creditors the company should be enabled to proceed, or at any rate that proceeding in the manner proposed would not prejudice them in any respect. The desirability of the company being enabled to carry on its business generally is likely to be more speculative and will be likely to depend on whether a sale of the business as a going concern will probably be more beneficial than a break-up realisation of the company’s assets. In each case, I think, the court must necessarily carry out a balancing exercise of the kind envisaged by Templeman J. in his judgment. Each case must depend upon its own particular facts.
Since the policy of the law is to procure so far as practicable rateable payments of the unsecured creditors’ claims, it is, in my opinion, clear that the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the unsecured creditors as a body. If, for example, it were in the interests of the creditors generally that the company’s business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition is presented but not yet paid for, the court might think fit in the exercise of its discretion to validate payment for those goods.
Where a third party proposes to enter into a transaction with a company which is liable to be invalidated under section 227 of the Companies Act 1948, the third party can decline to do so until the company has obtained a validating order, or it might itself seek a validating order, or it can enter into the transaction in anticipation of the court making a retroactive validating order at a later date. In the present case the bank adopted the last course. A third party who does that takes the risk of the court refusing to make the order.
It may not always be feasible, or desirable, that a validating order should be sought before the transaction in question is carried out. The parties may be unaware at the time when the transaction is entered into that a petition has been presented; or the need for speedy action may be such as to preclude an anticipatory application; or the beneficial character of the transaction may be so obvious that there is no real prospect of a liquidator seeking to set it aside, so that an application to the court would waste time, money and effort. But in any case in which the transaction is carried out without an anticipatory validating order the disponee is at risk of the court declining to validate the transaction. It follows, in my view, that the parties when entering into the transaction, if they are aware that it is liable to be invalidated by the section, should have in mind the sort of considerations which would influence the court’s decision. A disposition carried out in good faith in the ordinary course of business at a time when the parties are unaware that a petition has been presented may, it seems, normally be validated by the court (see In re Wiltshire Iron Co (1868) L.R. 3 Ch.App. 443 ; In re Neath Harbour Smelting and Rolling Works (1887) 56 L.T. 727 , 729; In re Liverpool Civil Service Association (1874) L.R. 9 Ch.App. 511 , 512) unless there is any ground for thinking that the transaction may involve an attempt to prefer the disponee, in which case the transaction would probably not be validated. In a number of cases reference has been made to the relevance of the policy of ensuring rateable distribution of the assets In re Civil Service and General Store Ltd (1888) 58 L.T. 220 ; In re Liverpool Civil Service Association, L.R. 9 Ch.App. 511 and In re J. Leslie Engineers Co. Ltd [1976] 1 W.L.R. 292 . In the last-mentioned case Oliver J. said, at p. 304:
“I think that in exercising discretion the court must keep in view the evident purpose of the section which, as Chitty J. said in In re Civil Service and General Store Ltd, 58 L.T. 220 , 221, is to ensure that the creditors are paid pari passu.”
But although that policy might disincline the court to ratify any transaction which involved preferring a pre-liquidation creditor, it has no relevance to a transaction which is entirely post-liquidation, as for instance a sale of an asset at its full market value after presentation of a petition. Such a transaction involves no dissipation of the company’s assets, for it does not reduce the value of those assets. It cannot harm the creditors and there would seem to be no reason why the court should not in the exercise of its discretion validate it. A fortiori, the court would be inclined to validate a transaction which would increase or has increased, the value of the company’s assets, or which would preserve, or has preserved, the value of the company’s assets from harm which would result from the company’s business being paralysed: In re Wiltshire Iron Co (1868) L.R. 3 Ch.App. 443 ; In re Park Ward & Co. Ltd [1926] Ch. 828 , where the business of the company was eventually sold as a going concern, presumably to the advantage of the creditors; In re Clifton Place Garage Ltd [1970] Ch. 477 . In In re A. I. Levy (Holdings) Ltd [1964] Ch. 19 the court validated a sale of a lease which was liable to forfeiture in the event of the tenant company being wound up, and also validated, as part of the transaction, payment out of the proceeds of sale of arrears of rent which had accrued before the presentation of the petition for the compulsory liquidation of the company. If that case was rightly decided, as I trust that it was, the court can in appropriate circumstances validate payment in full of an unsecured pre-liquidation debt which constitutes a necessary part of a transaction which as a whole is beneficial to the general body of unsecured creditors. But we have been referred to no case in which the court has validated payment in full of an unsecured pre-liquidation debt where there was no such special circumstance, and in my opinion it would not normally be right to do so, because such a payment would prefer the creditor whose debt is paid over the other creditors of equal degree.
”
Goff LJ and Sir David Cairns agreed.
Bank Of Ireland v Hollicourt (Contracts) Ltd
[2000] EWCA Civ 263 [2001] Ch 555, [2001] 2 WLR 290, [2000] EWCA Civ 263, [2001] 1 All ER 289, [2001] 1 All ER (Comm) 357
LORD JUSTICE MUMMERY:
1. This is the judgment of the court.
2. Introduction.
3. Section 127 of the Insolvency Act 1986 provides:
” In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up, is, unless the court otherwise orders, void.”
In the case of compulsory liquidation , the winding up of a company is deemed to commence at the time of the presentation of the petition: section 129 (2).
4. “Property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property: section 436 of the 1986 Act.
5. This appeal concerns the impact of section 127 in the context of payments made to creditors of Hollicourt (Contracts) Limited (the Company) after the presentation of a winding up petition. The payments were made by cheques drawn on the Company’s bank account with the Bank of Ireland (the Bank). The account was in credit at all material times.
6. The question is: does section 127 make the Bank, which continued to operate the account in accordance with the instructions of the Company, liable, on the application of the liquidator, to make restitution to the Company of the amounts of those cheques? Or does section 127 make only the payees of the cheques liable to make restitution to the Company?
7. The normal and prudent practice of banks, upon becoming aware of a winding up petition against a corporate customer, is to take prompt action. The bank freezes the company’s existing bank accounts, whether in credit or overdraft, as at the date of the presentation of the petition and insists that all subsequent dealings be on a new and separate account in respect of which a validation order may be obtained: see Paget’s Law of Banking (11th Ed) p. 207. The presentation of the petition usually comes to the notice of banks on publication of the advertisement of the petition.
8. According to the evidence in this case the Bank operates a manual system of checking for the presentation of winding up petitions against its customers by using a member of staff to consult that week’s edition of Stubbs Gazette which records all winding up petitions that have been presented. If a petition is shown as having been presented against a customer a block is placed upon the account.
9. Unfortunately that did not happen in this case. As a result of human error the advertisement was missed. The bank account continued to be operated by the Company for over three months after a winding up petition was presented. The issue on this appeal from the judgment of Blackburne J (delivered on 11 November 1999 and now reported at [2000] 1 WLR 895) is whether in these circumstances the Bank is liable, on the application of the liquidator of the Company, to restore the account to the position which it would have been in had withdrawals not been made from it in the interval between presentation of the petition and the making of the winding up order. The Judge held that the retrospective effect of the statutory declaration of voidness of post-presentation dispositions in section 127 is to render the Bank liable to make restitution to the Company.
10. Within two weeks of that decision judgment was given by Lightman J in Coutts & Co v. Stock in which he said that
“The authorities are in disarray and the state of the law is uncertain, if not confused.”
His judgment was delivered on 24 November 1999 and is now reported at [2000] 1 WLR 906, immediately after the judgment in Hollicourt. He held that the bank in that case, which concerned post-presentation drawings by a company on an account in overdraft at all material times, was not liable. Mr Stock, who was held liable as the guarantor of the company’s overdraft, appealed, but he was subsequently made bankrupt. This court was notified on the day before the hearing of the appeals in both cases that Mr Stock’s appeal would not be pursued. Nevertheless there was detailed argument at the hearing of this appeal on the judgment in the Coutts case.
11. The Facts
The facts of the case are simple. The Company carried on business in the construction industry. On 5 February 1996 a winding up petition was presented. The petition was advertised on 26 February. A compulsory winding up order was made on 7 June 1996.
12. At the time of the presentation of the petition the Company had a credit balance in its account No 605409353 with the Bank at its branch at 31 King Street, Leeds. Notwithstanding the presentation and advertisement of the petition and the absence of any court order under section 127, the account was not frozen. The Bank continued to debit that account with payments in favour of third parties totalling £156,200. Money continued to be paid into the account. The Bank first became aware of the petition on 16 May 1996. Only then was the account frozen.
13. No proceedings have been taken by the liquidator of Company to recover the amounts from the payees of the cheques. No repayments have in fact been made by them. Instead, the liquidator, Mr Raymond Claughton, issued an Originating Application on 9 September 1998 seeking repayment by the Bank to the Company of the monies paid out to third parties by the Bank after the commencement of the winding up.
14. On 11 November 1999 Blackburne J gave judgment for the Company against the Bank. He decided that all the post-presentation payments made out of the account were void under section 127 and he required the Bank to reconstitute the account. The Bank appeals.
15. The Judgment
Blackburne J set the legal scene at [2000] I WLR 898G-
“There is no doubt that, where a company withdraws a sum of money from its bank account in credit and pays that sum to a third party, there is a disposition of the company’s property which, if it occurs after the commencement of the winding up, is avoided by section 127. There is also no doubt that the third party recipient can be required to repay the sum so received, subject to validation of the payment by recourse to the dispensing power contained in the section. The question for decision on this application is whether, in these circumstances, the bank as well as the third party recipient of the payment can be required to make repayment.”
16. After reviewing English and Australian authorities cited to him the judge stated his conclusions in the following passage at p. 903C-H:
“….I fail to see why the consequence of the avoidance of a transaction by section 127 must be limited to the recipient (or disponee) of the property disposed of if by “disponee” is meant (as it appears to be in those [Australian] decisions) the person to whom the sum withdrawn from the company’s account was paid. Nor, for that matter, do I follow why, where payment is made by cheque, the disposition of the company’s property is confined to delivery of the company’s cheque to the third party. The debiting to the customer’s account of the amount of his cheque on presentation for payment (by paying out that amount to the third party in satisfaction of the cheque) seems to me to be in every sense a disposition of the company’s property.
In my judgment, the transaction which is avoided by section 127, i.e. the withdrawal from the account, is avoided not simply as against the third party recipient of the money in question but also as against the bank which makes the payment. The amount of the company’s credit balance on its account with the bank constituted a debt owed by the bank to the company. The action of the bank in debiting the company’s account with the various payments had the effect of reducing the bank’s liability to the company. The bank’s liability to the company arising out of their relationship of banker and customer could only be reduced by those payments if they were validly made (i.e.not avoided). Section 127, however, renders all such payments void and ineffective with effect from the commencement of the company’s winding up. The consequence of such avoidance, so far as the bank is concerned, must therefore be that its liability to the company falls to be considered as if those payments out had not been made. In short, the bank’s liability to the company must be what it was (i.e. the credit balance) as at the date of commencement of the winding up together with all sums credited to the account since the winding up began.”
17. Blackburne J considered that this was in accord with the conclusion of the Hong Kong Court of Appeal in Bank of East Asia Ltd v. Rogerio Sou Fung Lam [1988] 1 H.K.L.R. 181. We shall return to that decision later in this judgment.
18. He made two further points at the end of his judgment.
1. “The fact that the relationship between the company and the bank is also that of principal and agent (in respect of the drawing and payment of the customer’s cheques as against money of the company in the banker’s hands) does not afford the bank a defence against the liquidator’s claim.” (P. 905C-D).
2. “…the fact that the liquidator is entitled to seek recovery from the individual recipients of the withdrawals from the company’s account (the “disponees” to adopt the Australian terminology) does not deprive the liquidator of his remedy against the bank. He is under no duty to exhaust his remedies against the recipients before resorting to the bank.” (P. 905D-E).
19. Grounds of Appeal.
Mr Gabriel Moss QC, appearing for the Bank, made two main points which he developed in his citation of the authorities, including the Australian cases which were not followed by Blackburne J, and the later decision of Lightman J in Coutts, which was not, of course, available to him.
1. The Double Disposition Point.
This point turns on the identity of the relevant dispositions at which section 127 is aimed. The section refers to “any” disposition of the company’s property. It is common ground that, where a company pays a creditor by cheque drawn on an account in credit between the date of a petition and the winding up order, there is a disposition of the company’s property in favour of the creditor falling within section 127. But it is contended that the judge was not required by principle nor by authority to hold (and he was wrong in holding) that there was another relevant disposition of the company’s property in favour of the Bank when the Bank debited the Company’s account with the sum paid to the creditor and that that disposition was avoided by section 127, so as to render the Bank liable to restore the Company’s account to its pre-disposition condition.
2. The Void Point.
This related point turns on the extent of the legal consequences flowing from the undoubted application of section 127 to the dispositions of the company’s property in favour of the payees of the cheques. How far do the consequences of that statutory avoidance extend? It is contended that the judge was wrong to hold that the legal effect of applying section 127 to those dispositions was to avoid not only those dispositions of the company’s property as between the Company and the payees of the cheques, but also the related transactions between the Company and the Bank, as customer and banker. Blackburne J’s construction of section 127 renders the Bank liable to make restitution to the Company for what it has done as agent of the Company in honouring the cheques in accordance with its mandate.
20. The Legal Position
In our judgment this appeal succeeds on both points.
1. The Policy of Section 127.
Both grounds of appeal turn on the construction of the width of the section. Account must be taken of the purpose of this provision and of equivalent provisions in earlier corporate insolvency legislation. In Re Wiltshire Iron Company (1868) LR 3 Ch App 443 at 446 Lord Cairns LJ referred to section 153 of the Companies Act 1862 (which was in similar terms) as
“….a wholesome and necessary provision , to prevent, during the period which must elapse before a Petition can be heard, the improper alienation and dissipation of the property of a company in extremis.”
21. In Coutts & Co v. Stock at p. 909H Lightman J, in a valuable summary of the relevant principles, described the provision as
” …part of the statutory scheme designed to prevent the directors of a company, when liquidation is imminent, from disposing of the company’s assets to the prejudice of its creditors and to preserve those assets for the benefit of the general body of creditors.”
22. As Oliver J pointed out in Re J Leslie Engineers Co Ltd [1976] 1 WLR 292 at 298 the invalidating provisions (then to be found in section 227 of the Companies Act 1948) do not spell out the appropriate remedy of the company when the disposition is avoided. The right of recovery of the company’s property which has been disposed of is determined by the general law. It is common ground in these proceedings that the right of recovery, whether invoked against the payees or against the Bank, is restitutionary. There is no claim against the Bank in these proceedings for damages either for breach of an alleged duty of care owed to the Company and to the general body of its creditors or for breach of an express or implied term of a contract between the Company and the Bank.
23. In our judgment the policy promoted by section 127 is not aimed at imposing on a bank restitutionary liability to a company in respect of the payments made by cheques in favour of the creditors, in addition to the unquestioned liability of the payees of the cheques. The Bank operated the Company’s account as agent for the Company. In accordance with its mandate it debited the account with the amounts of the cheques. Those amounts have been received by the payees of the cheques in consequence of the Bank duly honouring the cheques drawn in their favour by the Company. The section impinges on the end result of the process of payment initiated by the Company, i.e. the point of ultimate receipt of the Company’s property in consequence of a disposition by the Company. The statutory purpose stated by Lord Cairns LJ and Lightman J is accomplished without any need for the section to impinge on the legal validity of intermediate steps, such as banking transactions, which are merely part of the process by which dispositions of the Company’s property are made.This is not a restitutionary situation where the Bank has been unjustly enriched as against the Company and where the general law requires the restitution of the benefit. Mr Jory for the Company has directed us to no case where in comparable circumstances restitution has been ordered.
2. Dispositions of the Company’s Property.
Consistent with that legislative policy the only dispositions of the Company’s property affected by the section in this case are the payments to the payees of the cheques drawn, after the presentation of the petition, on the Company’s bank account.What is needed for the section to operate is a disposition amounting to an alienation of the Company’s property(see Mersey Steel and Iron Co. v. Naylor Benzon & Co. (1884) 9 App.Cas. 434 at p.440 per Earl of Selborne LC). The Bank in honouring the Company’s cheque obeys as agent the order of its principal to pay out of the principal’s money in the agent’s hands the amount of the cheque to the payee (see Westminster Bank Ltd. v. Hilton (1926) 136 LT 315 at p. 317 per Lord Atkinson). The beneficial ownership of the property represented by the cheque was never transferred to the Bank, to which no alienation of the Company’s property was made.
24. We therefore reject the contention that there were additional relevant dispositions of the Company’s property to the Bank to which section 127 applies. The reasoning in the Australian authorities is convincing on this point. Lightman J expressed the view in Coutts (see p.190g-i) that the Australian cases are in accord with and supportive of the general principles expounded by him at pp. 187-188. In a recent and perceptive discussion of the authorities Professor L Sealy expressed the same view, with which we agree (See Issue 57, Company Law Newsletter 11 July 2000).
25. We also accept Mr Moss’s submission that there is no binding English decision to the contrary and that the decision of the Court of Appeal of Hong Kong relied on by Blackburne J is not persuasive on this point.
(a) The Australian Authorities.
The combined effect of sections 223 (2) and 227 (1) of the Australian Companies Act 1961 is the same as section 127 of the 1986 Act. In Re Mal Bower’s Macquarie Electrical Centre Pty. Ltd. [1974] 1 NSWLR 254 Street CJ in Eq held that the invalidating provisions do not operate to affect agencies, such as a bank interposing between the company making the disposition and the recipient of the property as “disponee.” That case concerned payments out of the company’s bank account which was in credit throughout the relevant period. The liquidator made a claim against the bank for the amount of the payments out of the account between the date of the petition and the date of the order and the date when the account was subsequently closed. The claim was dismissed. Street CJ considered (at p. 258) that there was “great force ” in the argument that
“…the paying by a bank of a company’s cheque, presented by a stranger, does not involve the bank in a disposition of the property of the company so as to disentitle the bank to debit the amount of the cheque to the company’s account. The word “disposition ” connotes in my view both a disponor and a disponee. The section operates to render the disposition void so far as it concerns the disponee. It does not operate to affect the agencies interposing between the company, as disponor, and the recipient of the property, as disponee…..The intermediary functions fulfilled by the bank in respect of paying cheques drawn by a company in favour of and presented on behalf of a third party do not implicate the bank in the consequences of the statutory avoidance prescribed by s. 227….I consider that the legislative intention….is such as to require an investigation of what happened to the property, that is to say what was the disposition, and then to enable the liquidator to recover it upon the basis that the disposition was void. It is recovery from the disponee that forms the basic legislative purpose of s. 227…”
26. This approach was followed by the Supreme Court of Queensland in Re Loteka Pty. Ltd. (1989) 7 ACLC 998 in which a claim was made by the liquidators of the company, whose account with the bank was in credit in the relevant period between the presentation of the petition and the winding up order, against the bank in respect of payments out of the account by cheques to third parties. McPherson J analysed the relation between banker and customer and held that the winding up of the company had not terminated the mandate by the company to the bank to pay the amount of the cheque drawn by the customer, provided there are funds in the account to meet it; that the invalidating provisions do not operate upon a mere contract after winding up, unless it was one that of its own force served to transfer an interest in a corporate asset away from the company; and that in the course of the transaction there was nothing in the nature of the disposition of the property of the company as customer to the bank. He said ( at p. 1, 004) that
“The amount standing to the credit of the customer’s account is simply diminished thus reducing pro tanto the indebtedness of the bank to the customer. It is the payee of the cheque that receives the benefit of the proceeds of the cheque. All that happens between customer and banker is an adjustment of entries in the statement recording the accounts between them.”
27. He concluded at p.1,005 that
” …although there was a disposition of property of the company, it took place not when the cheques were paid but on the date or dates on which each cheque was issued; and [that] the disponee in each case was not the bank but the particular creditor in whose favour the cheque was drawn and delivered….[It] is therefore only against those creditors as disponees, and not against the bank, that the disposition of company property is avoided by the operation of [sec.368(1)]….”
28. The same view was taken by Underwood J in the Supreme Court of Tasmania in Tasmanian Primary Distributors Pty. Ltd v. R C and M B Steinhardt Pty. Ltd (1994) 13 ACSR 92 in the case of a “bank cheque” (or bankers order) (see p.97) and by the Federal Court of Australia in Wily v. United Telecasters Sydney Ltd (1996) 14 ACLC 863 per Lindgren J at pp. 870-872, approving the view that where a company makes a payment by cheque, thereby reducing the amount standing to its credit in its bank account, the property of the company disposed of in such a case is, for the purpose of the corporate insolvency invalidating provisions (in that case section 468(1) of the Australian Corporations Law), the property in the cheque as tangible property and the payee must make restitution of the benefit obtained at the cost of the company i.e. the amount of the cheque.
(b) The English Authorities.
The only two English authorities are the decision of this court in Gray’s Inn Construction Co. Ltd [1980] 1 WLR 711 and of Lightman J in the Coutts case (supra). There are certain passages in the judgment of Buckley LJ in the Gray’s Inn Construction case (concurred in by Goff LJ and Sir David Cairns) which , when read out of context, appear to lend some support to the propositions that-
(I) all post-presentation cheques drawn in favour of third parties on a company’s bank account,whether that account is in credit or in debit, involve a disposition of the amount of the cheque in favour of the bank and are invalidated by the provisions, unless validated by the court (see p.715H-716F);
(ii) in consequence of statutory avoidance of such dispositions, the bank may be liable in proceedings by the liquidator for the amounts of the dispositions of property, albeit only to the extent that the amounts prove to be irrecoverable from the creditors who were paid (see p.721F-G).
29. In our judgment the Gray’s Inn Construction case is not binding authority for either of these propositions. It was unnecessary for the court to examine, let alone arrive at a final view on, either of these far reaching propositions, because of the concessions made by Counsel in the passages referred to in (i) and because the decision in the case was in fact concerned with payments made into an overdrawn account and not, as is the case here, with payments made out of an account in credit. The judgment also dealt in detail with the exercise of the court’s discretion to validate otherwise invalid dispositions. In those circumstances the passages in question cannot be relied on as part of the ratio of the decision. In view of the absence of full argument on these points it is even difficult to treat these statements as considered dicta carrying the weight which they normally would when coming from a judge as experienced and eminent in Company Law as Buckley LJ.
30. This court has had the benefit of full argument and citation of authorities on these points, as did Lightman J in the Coutts case.
31. In summary, our conclusion, in the light of these authorities, is that section 127 only invalidates the dispositions by the Company of its property to the payees of the cheques. It enables the Company to recover the amounts disposed of, but only from the payees. It does not enable the Company to recover the amounts from the Bank, which has only acted in accordance with its instructions as the Company’s agent to make payments to the payees out of the Company’s bank account. As to the intermediate steps in the process of payment through the Bank, there is no relevant disposition of the Company’s property to which the section applies.
32. We would add that, even if the Company’s bank account were in overdraft, which is not this case, the foregoing analysis of the legal effect of section 127 would produce the same result in respect of a claim for recovery against the Bank. This result has the very real practical advantage of not requiring what in some cases could be a complex analysis of whether payments were made out of an account which was in debit or in credit.The need for such an analysis cannot be justified by any sensible view of the purpose of section 127.
(c) The Hong Kong Case.
Blackburne J said (at p 905C) that the reasoning of Clough J.A. in the judgment of the Court of Appeal of Hong Kong in the Bank of South East Asia case (supra) “..is exactly in point in the present” and followed it. The relevant reasoning was that the Court of Appeal in Gray’s Inn Construction Co Ltd (supra) had regarded the payment as recoverable by a liquidator against both the payee and the company’s bank, albeit primarily against the payee; that that English Court of Appeal had not been persuaded to accept the reasoning of Street CJ in the Mal Bower case (which was not even relied on by counsel arguing the Hong Kong appeal); and that the basis of recovery was “obvious” in a straightforward case, as the section rendered the dispositions void and ineffective and, as between the company and the bank, the bank remained in receipt of the company’s property to which it was not entitled.
33. We are unable to agree with Blackburne J on the precedent value of the decision in the Bank of South East Asia case. Its force is diminished by its reliance on those parts of the judgment of Buckley LJ in Gray’s Inn Construction which, for the reasons already stated, are not considered dicta on argued points. We would also point out that the focus in the Hong Kong case was not on a claim by the company against the bank for restitution, but on a claim by the bank, which had reimbursed the company, for reimbursement by the payee to whom the amount had originally been paid. It was a case which assumed, rather than decided, that the the bank was liable under section 127 to make restitution to the company.
3. The Effect and Extent of Avoidance.
It follows from the above reasoning that there is no claim for recovery from the Bank on the basis that, quite apart from the “double disposition” point, the effect of avoiding the dispositions to the payees under section 127 is, without more, to render the Bank liable to make restitution to the Company.
The extent of the automatic retrospective avoidance is limited both by the terms of the section and by the purpose which it was enacted to achieve. The section only avoids “dispositions” of the Company’s property (see Re Oriental Bank Corporation Ex parte Guillemin (1884) 28 Ch.D 634 at pp. 638-639). It does not in terms avoid all or any related transactions.As already explained, the purpose of the section is achieved by only avoiding dispositions of the Company’s property to the ultimate payees of the cheques (i.e. the end result), without the need to affect the validity of any intermediate contracts or transactions occurring during the course of the agency relationship between the Company and the Bank. Section 127 did not avoid, revoke or countermand the Company’s mandate to the Bank to make payments of money out of its account to meet cheques sent by the Company to the payees and subsequently presented for payment. The Company continued to use the Bank as its agent for the purpose of transmitting payments to creditors. Section 127 impinges on the dispositions to the creditors, but not on the authority of the Bank to act on the instructions of the Company or on contracts and other intermediate transactions between the Company and the Bank as part of the process leading to the ultimate disposition of the Company’s property to the payees.
34. Because of this conclusion it is not necessary to say anything on the Bank’s alternative argument that, if the Bank is liable, the Company cannot recover against the Bank without first exhausting its remedies against the payees.
35. For these reasons we allow the appeal and set aside the order of the judge.
Order: Appeal allowed and the order of the judge set aside. Appellant’s costs in the appeal and below to be set aside if not agreed. Permission to appeal to the House of Lords refused.
Phillips and Another v. Brewin Dolphin Bell Lawrie and Another
[2001] UKHL 2; [2001] 1 All ER 673; [2001] 1 WLR 143 (18th January, 2001)
URL: http://www.bailii.org/uk/cases/UKHL/2001/2.html
Cite as: [2001] BCC 864, [2001] 1 BCLC 145, [2001] 1 All ER 673, [2001] 1 WLR 143, [2001] WLR 143, [2001] UKHL 2,
LORD STEYN
My Lords,
1. For the reasons given by Lord Scott of Foscote in his opinion I would also make the order which he proposes.
LORD HUTTON
My Lords,
2. I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Scott of Foscote and for the reasons which he gives I would dismiss the appeal and make the order which he proposes.
LORD HOBHOUSE OF WOODBOROUGH
My Lords,
3. I have had the advantage of reading in draft the speech to be delivered by my noble and learned friend Lord Scott of Foscote. I agree with the order which he is to propose and with the reasons which he will give.
LORD MILLETT
My Lords,
4. I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Scott of Foscote.
I agree with it, and with the order he proposes.
LORD SCOTT OF FOSCOTE
My Lords,
5. Section 238 of the Insolvency Act 1986 provides a remedy where a company goes into liquidation within two years after entering into a transaction at an undervalue. Where the section applies the liquidator may apply to the court for an order (subsection (2)) and the court:
“shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction” (subsection. (3)).
Subsection (4)(b) elucidates the meaning of a transaction at an undervalue:
“… a company enters into a transaction with a person at an undervalue if – . . . the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.”
The company in the present case is A. J. Bekhor & Co (“AJB”). On 10 November 1989 AJB entered into agreements with Brewin Dolphin & Co Ltd (“Brewin Dolphin”) and into agreements with Private Capital Group Ltd. (“PCG”). PCG was the parent company of Brewin Dolphin. These agreements were linked. I will describe later the nature of the link and how it arose. The purpose of the agreements was the sale of AJB’s stockbroking business to Brewin Dolphin. On 17 October 1989, in order to facilitate and set the stage for the sale, AJB sold its stockbroking business and business assets to Bekhor Securities Ltd (“BSL”), a wholly owned subsidiary, for a consideration of £1. The transfer of the business to Brewin Dolphin was to be brought about by a transfer of the BSL shares. Accordingly, under one of the 10 November 1989 agreements with Brewin Dolphin, AJB transferred to Brewin Dolphin its shares in BSL. Brewin Dolphin thus acquired AJB’s business. AJB received in return (i) from Brewin Dolphin, the assumption by Brewin Dolphin of AJB’s obligations to its employees, including, in particular, the obligation to make redundancy payments; and (ii) from PCG, under one of the 10 November 1989 agreements between AJB and PCG, a covenant by PCG to pay AJB £312,500 per annum for four years, the first payment to be made on 10 November 1990. This agreement was expressed to be a computer equipment leasing agreement and the payments were expressed to be rent payable for the right to use the computer equipment. The total “rent” to be paid over the four years was £1.25m. It was by no means a coincidence that £1.25m was the sum that it had been agreed would be paid for the stockbroking business. The computer equipment in question was not owned by AJB but had been leased from two lessors, Wirral Equipment Ltd and Asterrose Ltd. Each of the leases required the consent of the lessor to any subletting by AJB. Consent to the subletting of the equipment by AJB to PCG had neither been sought nor given. On account of default by AJB in paying the rent due under these head leases, the head leases were terminated in early 1990 and the computer equipment was recovered by the head lessors. This took place before the date, 10 November 1990, on which the first payment of £312,500 was due to be paid to AJB under the 10 November 1989 sublease to PCG. So PCG treated the sublease as having been brought to an end by the termination of the head leases, and consequently made none of the £312,500 payments.
6. In the negotiations between AJB and Brewin Dolphin that had led to the 10 November 1989 agreements, the value of AJB’s stockbroking business, and the sum to be paid for it, had first been agreed at £2.5m but later negotiated down to the £1.25m. There were two reasons why, under the form the transaction finally took, the £1.25m was to be paid to AJB not by Brewin Dolphin, the purchaser of the business, but by PCG as rent for the computer equipment spread over four years. One reason was that PCG hoped to be able to deduct the “rent” from its taxable profits. The other reason was that the payment of £1.25m for the goodwill of the stockbroking business would have prompted requirements by the regulatory authority for additional capital funding for that business.
7. AJB was, at the time of these agreements, in deep financial trouble. A winding up order was made against AJB on 25 April 1990. The petitioners were Wirral and Asterrose. On 4 May 1990 an administrative receiver was appointed by AJB’s debenture holder. There is no dispute but that AJB is, and was when the winding up order was made, hopelessly insolvent.
8. On 24 June 1994 Mr Phillips, the liquidator and administrative receiver of AJB, and AJB in liquidation commenced proceedings against Brewin Dolphin and PCG. It was contended that the transaction under which AJB had transferred its shares in BSL to Brewin Dolphin, thereby, in effect, transferring its stockbroking business to Brewin Dolphin, was a sale at an undervalue. An order against Brewin Dolphin under section 238 was sought. As against PCG, payment of the four annual sums of £312,500 was claimed. The payment of these was said to be the means by which “part of the value of the share capital of Bekhor Securities Limited was due to be paid to [AJB]” (para 10 of the amended statement of claim).
The judgment of Evans-Lombe J.
9. The trial took place before Evans-Lombe J: [1998] 1 BCLC 700. An important issue at the trial was the extent to which the 10 November 1989 agreement under which the BSL shares were transferred to Brewin Dolphin and the 10 November 1989 agreement under which PCG was to make the four annual £312,500 payments should be treated as together providing the consideration for the transfer to Brewin Dolphin of the BSL shares. The judge held that the two agreements were linked “in the sense that it was never contemplated that one would not be entered into without the other”. (There is an obviously unintentional double negative in this sentence). This finding of fact by the judge was not challenged in the Court of Appeal or before your Lordships. Brewin Dolphin and PCG were, said the judge, contending on the one hand that the 10 November 1989 sublease of the computer equipment was to be treated as a separate transaction, capable of being treated as at an end on the recovery of the equipment by the head lessors, but contending on the other hand that PCG’s covenant in the sublease should be treated as part of the consideration for Brewin Dolphin’s purchase of the BSL shares.
The judge said, at pp 723-724:
“It seems to me that it is not open to the defendants to put forward these two contentions simultaneously. If the payments made under the lease agreement were, in truth, part of the consideration for the purchase of the BSL shares under the share purchase agreement, then the lease agreement is not to be treated as a contract for the hire of goods within section 7 of the 1982 Act. Failure to ensure that PCG would be in position to enjoy possession of the leased equipment was not a breach going to the root of the share acquisition agreement nor did it constitute a repudiation of that agreement nor has the consideration for that agreement wholly failed, nor does the doctrine of eviction by title paramount have the effect of terminating that agreement.”
10. PCG and Brewin Dolphin were, he said, trying to “blow hot and cold”. He held that it was not open to Brewin Dolphin and PCG to represent the four £312,500 payments as being part of the consideration for the shares, and, thus, of the stockbroking business. PCG’s intention had been to set-off the four £312,500 payments against profit for the purposes of corporation tax. This could not be done if the payments were in truth part of the purchase price of the BSL shares. The judge concluded, therefore, that the covenant to make the payments under the computer equipment sublease had to be left out of account in considering whether, in selling the BSL shares to Brewin Dolphin, AJB had entered into a transaction at an undervalue. Leaving out of account the covenant to make the four annual payments of £312,500 the judge then set about the task of considering, on the one hand, what the value was of the shares, ie. in effect what the value was of AJB’s stockbroking business, and, on the other hand, what the value was of the consideration that AJB had received.
11. As to the value of the consideration received by AJB, the judge took account of the obligation cast on Brewin Dolphin under the share-sale agreement to meet redundancy costs. These costs, he noted, were the reason why, in the negotiations, an initial valuation of the business of £2.5m was reduced by £500,000 in early September 1989. The redundancy obligations were in the event discharged by Brewin Dolphin at a net cost, after the gross cost had been taken into account for corporation tax purposes, of £325,000. The judge’s calculation of this figure has not been challenged nor has his conclusion that the £325,000 should be treated as consideration given by Brewin Dolphin for the BSL shares. The £325,000 was, he held, the only consideration given for the shares that could be taken into account. I have already explained why he declined to allow the value of PCG’s covenant to pay the four £312,500 payments to be taken into account, notwithstanding that the total, £1.25m, was the sum it had been agreed AJB should receive for the business.
12. On 9 November 1989 PCG had lent AJB £312,500 as a loan for a year intended to be repaid by set-off against the £312,500 payment that would become due on 10 November 1990. Consistently with his view about the “rent” to be paid by PCG under the sublease, the judge declined to allow that £312,500 to be treated as consideration for the transfer of the shares.
13. As to the value of the shares, the judge noted that Brewin Dolphin /PCG had treated £1.25m payable over a period of four years as the value of the stockbroking business. He discounted the £1.25 million to £875,000 in order to arrive at the value as at 10 November 1989. He took into account certain other business assets and put a total value of £1,050,000 on the value of the BSL shares as at 10 November 1989.
14. It had been argued for Brewin Dolphin that for section 238 purposes the value of the stockbroking business, and thus of the shares, was no more than nominal. Various pieces of evidence were referred to and various arguments were advanced in support of this contention but, at the end of the day, the judge declined “to depart from the prima facie value which results from what Brewin Dolphin were prepared to spend in acquiring the BSL shares”. He deducted the £325,000 from the £1.05m and ordered Brewin Dolphin to pay £725,000 with interest. He dismissed the claim against PCG.
The Court of Appeal
15. Both Brewin Dolphin and PCG appealed. It is not clear to me why PCG did so. AJB cross-appealed, reviving the claim that PCG should be held liable to AJB in respect of the sums covenanted to be paid under the sublease notwithstanding that all the subleased equipment had been recovered by the head lessors. The Court of Appeal dismissed both the appeal and the cross-appeal. Their grounds, however, were rather different from those of the judge.
16. The judge had held that the 10 November 1989 share-sale agreement and the 10 November 1989 computer equipment sublease were linked in that one would not have been entered into without the other and the four £312,500 payments under the sublease were the means by which the agreed consideration of £1.25m for the shares was to be paid to AJB. But he held that Brewin Dolphin and PCG were barred from relying on the £312,500 payments as part of the consideration for the shares. Morritt LJ, with whose judgment Laws LJ and Lord Woolf MR agreed, took a stricter approach to the identification for section 238 purposes of the “transaction.” Morritt LJ said that unless the sublease agreement could be said to be a sham, or unless there had been an artificial division of the real transaction entered into by the parties, the form of the agreement into which the parties had entered would be determinative in identifying the transaction on which section 238 would bite. He identified the two issues before the court as being (1) the value of the shares in BSL to be taken into account for section 238 purposes and (2) the value of the consideration for those shares provided to AJB. And, at p 2060 of the report at [1999] 1 WLR 2052, he said this:
“The first two issues to which I referred earlier, particularly the second, depend on ascertaining, for the purposes of section 238 of the Insolvency Act 1986, what was the transaction alleged to have been entered into by the company at an undervalue. The allegation of the liquidator is that the share sale agreement was the transaction so that only the consideration passing to and from the company thereunder is to be taken into account. This was disputed by Brewin Dolphin on the basis that the court must have regard to the whole transaction not just that part of it the liquidator seeks to challenge. This is a point of some importance on the true construction and application of section 238. It is true that the word ‘transaction’ is very widely defined. It is also true, as submitted by counsel for Brewin Dolphin, that, given the purposes of sections 238, 339 and 423 to which it applies, the court should not strain to narrow the definition by judicial decision. However, the word ‘transaction’ is to be construed and applied as part of section 238 as a whole. . . First, the transaction must be identified by reference to the person (or persons, for the singular must include the plural) with whom the company entered into it. Only the elements of the transaction between the company and that person may be taken into account. Thus, without more, a contract between the company, A, and B cannot be part of a transaction entered into by the company, A, with C. I introduce the caveat ‘without more’ to guard against cases where the transaction is artificially divided. The second limit appears to me to flow from the comparison the statute requires the court to make. In each case it is necessary to ascertain the consideration to be received by the company. In the case of section 238(4)(a) the transaction is either a gift or ‘on terms that provide for the company to receive no consideration.’ In other cases, as provided for in subsection (4)(b), the task is to ascertain the value of the consideration provided by the other person ‘for’ the consideration provided by the company. Whether or not the word ‘consideration’ in those contexts is confined to its legal meaning it clearly connotes the quid pro quo for that which it is alleged the company disposed of at an undervalue.”
Then, addressing himself to the facts of this case, Morritt LJ concluded that “the transaction” was the share sale agreement alone. He explained his conclusion in the following passage at p 2061:
“First, the parties acting at arm’s length and for readily understandable commercial reasons chose so to structure the deal between them so that on the face of the documents the share sale agreement and the lease agreement effected two separate, though linked, transactions. There is no indication that this different treatment was a sham or otherwise colourable. If parties in such circumstances choose so to structure their commercial dealings in my view the court should give full weight to their intentions. Second, for the reasons I have already given, the share sale agreement and the lease agreement cannot be the same transaction for the purposes of the section because, though the company was party to both of them, only Brewin Dolphin was party to the first and only PCG party to the second. Third, the parties to the lease agreement . . . unambiguously attributed the four annual payments of £312,500 to rent due thereunder for possession and use of the computer equipment to which it related. The promise to make those payments cannot be recharacterised as consideration from PCG or Brewin Dolphin ‘for’ the shares being sold by the company.”
17. For those reasons, different from those of the judge, Morritt LJ declined to allow the value of PCG’s covenant to pay the £312,500 to be treated as part of the consideration for the shares.
18. On the values to be attributed to the shares on the one hand and to the consideration given for the shares on the other, Morritt LJ agreed with the judge. So the appeal and cross-appeal were dismissed.
19. This appeal by Brewin Dolphin and PCG is brought with the leave of your Lordships’ House. There is no cross-appeal by AJB. So PCG stands excused from any liability to AJB under the 10 November 1989 sublease. The four payments of £312,500 each are not going to be made.
The first issue
20. The first issue for your Lordships to decide is whether Evans-Lombe J and the Court of Appeal were right in declining to allow PCG’s covenant in the sublease to be taken into account in assessing the value of the consideration for which AJB entered into the share sale agreement. Evans-Lombe J would, I think, have allowed it but for the view he took about Brewin Dolphin and PCG “blowing hot and cold”. The Court of Appeal based its decision on the form of the agreements into which the parties had entered. In my respectful opinion, neither approach was right. One must, obviously, start with the share sale agreement. That was the agreement under which AJB agreed to divest itself of its allegedly valuable asset, namely, the shares in BSL. It is worth repeating the language of section 238(4)(b): “. . . the company [AJB] enters into a transaction [the share sale agreement] with that person [Brewin Dolphin] for a consideration the value of which . . .” etc. The subsection does not stipulate by what person or persons the consideration is to be provided. It simply directs attention to the consideration for which the company has entered into the transaction. The identification of this “consideration” is in my opinion, a question of fact. It may also involve an issue of law, for example, as to the construction of some document. But if a company agrees to sell an asset to A on terms that B agrees to enter into some collateral agreement with the company, the consideration for the asset will, in my opinion, be the combination of the consideration, if any, expressed in the agreement with A and the value of the agreement with B. In short, the issue in the present case is not, in my opinion, to identify the section 238(4) “transaction”; the issue is to identify the section 238(4) “consideration”.
21. On the facts of this case it is, in my opinion, plain that the consideration for the BSL shares was, apart from obligations assumed by Brewin Dolphin under the share sale agreement itself, the entry by PCG into the sublease agreement under which it covenanted to pay £312,500 per annum for four years. The facts are fully and clearly set out in Evans-Lombe J’s judgment and are concisely and accurately summarised by Morritt LJ at pp 2056 – 2058 of the report in [1999] 1 WLR Both set out the relevant part of a memorandum prepared in September 1989 by Brewin Dolphin’s finance director. The memorandum described what had been agreed:
“The basic concept is that Brewin Dolphin purchases the trade of [AJB] for a consideration of £1.25 million payable over four years . . . The detailed scheme is as follows (1) [AJB] forms [BSL] as a subsidiary. [AJB] sells its business excluding its computer and other fixed assets to [BSL] . . . [AJB] sells [BSL] to Brewin Dolphin. The purchase consideration would be £1 . . . (2) [AJB] enters into a finance lease for the computer and other assets with PCG. PCG enters into an operating lease with Brewin Dolphin for the computer, the lease payments to be yearly in arrears for four years at a rate of £312,500. This means that the purchase price will be tax allowable and there will be no goodwill.”
So the purchase price of £1.25m was to be paid under the sublease in four annual payments of £312,500 each. No other conclusion is, in my opinion, possible but that on those facts the consideration for the BSL shares included the benefit of the covenant given by PCG under the sublease. In In re MC Bacon Ltd [1990] BCLC 324, 340 my noble and learned friend, Lord Millett, then a Chancery judge, analysed the requirements of section 238(4)(b). He said:
“To come within that paragraph the transaction must be (i) entered into by the company; (ii) for a consideration; (iii) the value of which measured in money or money’s worth; (iv) is significantly less than the value; (v) also measured in money or money’s worth; (vi) of the consideration provided by the company.”
In my respectful opinion, that is a useful breakdown of the statutory requirements. In the present case the agreement for the sale of the shares was entered into for a consideration which included the benefit of the sublease agreement. So I now move on to the issues of value.
What was the value, in money or money’s worth, of PCG’s covenant under the sublease?
22. This was not an issue which either Evans-Lombe J or the Court of Appeal had to consider. The approaches of each, different though they were, were alike in treating this issue as irrelevant. Naturally enough Mr Mitchell, counsel for Brewin Dolphin and PCG, contends that the value of the covenant was its face value. He points out that there is not, and never has been, any question as to PCG’s ability to pay. I agree that there is no doubt as to PCG’s ability to pay but the value of the covenant needs, in my opinion, to be investigated a little more deeply. The covenant was, according to the sublease, given in exchange for the right to use the computer equipment. But it appears that, by the end of September 1989, Brewin Dolphin had decided not to use the equipment in order to run the business it was negotiating to acquire but, instead, to update its own existing computer system. This decision did not, of course, affect the willingness of PCG to pay the £312,500 per annum for four years. The amount of those payments was attributable to the purchase, via the BSL shares, of AJB’s business and was not attributable in the least to any value placed on the right to use the computer equipment. Nonetheless, the payments, according to the terms of the sublease, were for the right to use the computer equipment. The computer equipment, as Brewin Dolphin and PCG knew, was held by AJB under head leases from Wirral and Asterrose. Under each of these head leases, the lessee, AJB, was barred from assigning or subletting any of the equipment. The bar was expressed as an absolute one. It was not subject to the lessor’s consent first being obtained or anything of that character. In each head lease the events on the occurrence of which the lessor would become entitled to terminate the lease include (i) failure by the lessee to pay the due rent, (ii) the appointment of an administrative receiver of the lessee’s assets, and (iii) breach by the lessee of any of the terms of the lease. The right to terminate was expressed to be exercisable “at any time [after the event in question] notwithstanding any subsequent acceptance by the lessor of any rental …”
23. The 10 November 1989 sublease, under which the four £312,500 payments were to be made, constituted, ipso facto, a breach by AJB of a term of the head leases. So the head leases became terminable at any time by the head lessors and the equipment comprised in the sublease could at any time have been repossessed by the head lessors. The re-possession of the computer equipment, which is what happened, would, and did, bring to an end the sublease and the payment obligations of PCG. So, what was the value, in money or money’s worth, of a covenant by PCG that was so precarious?
24. Mr. Mitchell suggested that the covenant was worth something, because the benefit of the sublease, and of PCG’s obligation to pay the £312,500 sums, could have been assigned by AJB to the head lessors. There is, however, no evidence that the head lessors would have had any interest at all in such an assignment. If a covenant with the precarious character of PCG’s covenant in the sublease is to have value attributed to it for section 238 purposes, the value must, in my opinion, be placed on a more firm footing than that of speculative suggestion. The actual events that took place in 1990, before any payment under the sublease had become due, are in my opinion, relevant. First, within a week of the date of the sublease agents for the head lessors wrote to AJB complaining about the sublease and threatening proceedings. In January 1990 AJB defaulted in payment of the rents due under the head leases and shortly thereafter the head lessors demanded the return of the equipment. On 5 February PCG confirmed that neither it nor Brewin Dolphin would obstruct the repossession of the equipment by the head lessors and on 23 February 1990 solicitors for PCG wrote to solicitors for AJB notifying them that “our client intends to accept your clients’ repudiatory breach of the agreement between them. Alternatively there has been a total failure of consideration by your clients in relation to the lease of equipment dated 10 November 1989.”
25. PCG’s covenant, which had been precarious at the outset, had become worthless by 23 February 1990 at the latest. To complete the point, AJB went into compulsory winding up in April 1990 and an administrative receiver was appointed in May. These events would inevitably have led the head lessors to terminate the head leases and recover their equipment, if they had not done so previously, thereby bringing the sublease to an end.
26. Mr Mitchell submitted that these ex post facto events ought not to be taken into account in valuing PCG’s sublease covenant as at 10 November 1989. I do not agree. In valuing the covenant as at that date, the critical uncertainty is whether the sublease would survive for the four years necessary to enable all the four £312,500 payments to fall due, or would survive long enough to enable some of them to fall due, or would come to an end before any had fallen due. Where the events, or some of them, on which the uncertainties depend have actually happened, it seems to me unsatisfactory and unnecessary for the court to wear blinkers and pretend that it does not know what has happened. Problems of a comparable sort may arise for judicial determination in many different areas of the law. The answers may not be uniform but may depend upon the particular context in which the problem arises. For the purposes of section 238(4) however, and the valuation of the consideration for which a company has entered into a transaction, reality should, in my opinion, be given precedence over speculation. I would hold, taking account of the events that took place in the early months of 1990, that the value of PCG’s covenant in the sublease of 10 November 1989 was nil. After all, if, following the signing of the sublease, AJB had taken the sublease to a bank or finance house and had tried to raise money on the security of the covenant, I do not believe that the bank or finance house, with knowledge about the circumstances surrounding the sublease, would have attributed any value at all to the sublease covenant.
27. Where the value of the consideration for which a company enters into a section 238 transaction is as speculative as is the case here, it is, in my judgment, for the party who relies on that consideration to establish its value. PCG and Brewin Dolphin are, in the present case, unable to do so.
28. For these reasons I, as did Evans-Lombe J and the Court of Appeal for different reasons, would treat the value of the consideration for which AJB entered into the share sale agreement as being confined to the value of the consideration under that agreement. The sublease covenant, in my opinion, adds nothing.
The value of the consideration given by the company
29. On this issue, Mr Mitchell submitted that AJB’s business as at 10 November 1989 was worthless and that the BSL shares were therefore valueless. This submission was based on the fact that AJB appears to have been hopelessly insolvent and by November 1989 was trading at a substantial loss of £13,000 odd per day. The judge’s findings on the value of the BSL shares are conveniently summarised at para 4.3 of AJB’s case:
“(1) Bekhor’s business assets were an attractive package to buyers such as Brewin Dolphin.
(2) It could not be inferred that Brewin Dolphin was the only potential purchaser.
(3) Brewin Dolphin was a reasonably well informed potential purchaser from the class of typical purchasers.
(4) The contemporary view of what a reasonably well-informed potential purchaser was prepared to pay was some evidence in assessing the market value of the BSL shares.
(5) Brewin Dolphin had been prepared to pay about £1,050,000 for the BSL shares.”
30. I respectfully agree with this approach. The value of an asset that is being offered for sale is, prima facie, not less than the amount that a reasonably well informed purchaser is prepared, in arms’ length negotiations, to pay for it.
31. On this issue the judge reached his figure of £1,050,000 after hearing and assessing the evidence, including expert evidence. It has not been demonstrated that in doing so he misdirected himself. The Court of Appeal reviewed the judge’s conclusion. Morritt LJ at p 2063, described his conclusion as “eminently sensible and evidently right” and upheld it. Your Lordships have, in my opinion, been provided with no reason to come to any different conclusion.
The £312,500 loan
32. In my opinion, in agreement with the judge and the Court of Appeal, AJB succeeded in establishing that, for the purposes of section 238, it had entered into a transaction, namely the share sale agreement, at an undervalue and that the amount of the undervalue was £725,000, ie. £1,050,000 less £325,000. The order made by the judge and upheld by the Court of Appeal required Brewin Dolphin to pay that sum, with interest, to AJB. Neither before the judge nor before the Court of Appeal was any account taken of the £312,500 loan that had been made by PCG to AJB on 9 November 1989 and that had been intended to be repaid by set-off against the same amount due on 10 November 1990. In my opinion, however, that sum ought to be taken into account. It constituted an advance payment, as a loan, of a part of the consideration that had been given for the BSL shares. The receipt of that sum was an advantage that AJB would not have received but for its entry into the share sale agreement and the sublease agreement.
33. PCG has proved for that sum in the liquidation of AJB, but what, if any, dividend will be received is not known. I imagine it will be negligible.
34. Under section 238(3), the court has a broad discretion to make “such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction”. In my opinion, an order under the subsection that did not take account of AJB’s receipt of the £312,500 would be unfair to Brewin Dolphin and PCG. I would, therefore, vary the order against Brewin Dolphin by allowing credit to be taken for the £312,500 and interest thereon. The interest should run from the same date and at the same rate as the interest on the sum payable by Brewin Dolphin. PCG will, of course, have to withdraw its proof for the £312,500 in the liquidation. With that variation to the order made by Evans-Lombe J, however, I would uphold the order and dismiss the appeal.
Arbuthnot Leasing International Ltd v Havelet Leasing Ltd (No 2)
[1990] BCC 636
Scott J’
“ I have lost count – and I hope those in court will forgive me for not trawling through my notebook to produce an accurate count – of the number of days that the hearing of this matter has involved. Over the many weeks since the action was commenced and for the purposes of the numerous interlocutory applications made therein, a very large number of affidavits have been sworn. On Mr Maughan’s side affidavits have been sworn by himself and by a co-director of his, Mr Hart, who was in charge of the financial side of the Havelet business. Affidavits have been sworn on behalf of Arbuthnot. Since the appointment of administrators under an administration order in respect of Leasing, affidavits have been sworn on behalf of the administrators. A volume of evidence has been built up. Files run from A down to G. There are in addition loose documents littering the desk in front of me, consisting of a number of recent affidavits which have been sworn by Mr Maughan additional to those in the bundles.
All of this material has been generated in connection with interlocutory applications and before the trial of any issue has taken place. The costs already incurred by these interlocutory applications must be very high. The cost of the administration order regime in connection with Leasing is going to be very high. That is not intended to be any sort of criticism of the administrators; it is one of the facts of life that professionals, whether they are solicitors, barristers or accountants, charge high fees. So, inevitably, the costs of the administration will be heavy…
Nobody must think, and I am sure Mr Maughan does not think, that that disposes of the litigation in its entirety. Arbuthnot retains proprietary claims. I have no view on those and express none. There may be misfeasance claims against Mr Maughan himself: I have not referred to evidence about various bonus payments that he received from Leasing. I express no view on those matters either. All I am concerned with at the moment is to make an order under sec. 423 so as to reverse the improper transfers of assets from Leasing to Finance…
Mr Maughan stressed in his submissions to me and in the affidavit to which I have just referred that what he did he did on legal advice from solicitors and counsel and without any dishonest intent. I accept – because he has not been cross-examined on his affidavits – that evidence. It does not, however, seem to me that it is by itself an answer to a sec. 423 application. Subsection (3) refers to the requirement, if relief under the section is to be granted, that the court must be satisfied that the transaction was entered into for the purpose of putting assets beyond the reach of a person who is making, or may at some time make, a claim against the company. The fact that lawyers may have advised that the transaction is proper or can be carried into effect does not by itself mean that the purpose of the transaction was not the subsec. (3) purpose. It seems to me that, beyond any argument, that was the purpose for which these transactions were made. Mr Maughan formed the view that the litigation against Leasing and the judgments that were liable to be obtained would ruin Leasing’s business and would be detrimental to Leasing’s creditors, not simply Arbuthnot but the other banks as well. Mr Maughan’s motive of saving Leasing’s business was not necessarily a dishonest motive, but is consistent with an intention to put Leasing’s assets out of the reach of Arbuthnot. But for the transfers that Mr Maughan put into effect. Leasing would have had a business and assets to which recourse could have been had in satisfaction or part-satisfaction of the judgment debt that, at the time of the transfers, Arbuthnot was seeking and that shortly thereafter it succeeded in obtaining. Execution against those assets probably would, I accept, have done very great damage to Leasing’s business. It may have done damage also to the underlying interests of the other creditors, such as the other banks. But, nonetheless, Leasing’s assets were deliberately put out of the reach of Arbuthnot. The only asset left against which execution could be levied was Leasing’s right to receive quarterly-in-arrears payments from Finance.
Was the transaction at an undervalue? Subsection (1) provides that a transaction is at an undervalue if the consideration is “significantly less than the value, in money or money’s worth, of the consideration provided” by the transferor. The consideration provided by the transferor in respect of the transfers of the LPs was the benefit of the income stream. The consideration coming back to Leasing consisted of the quarterly-in-arrears payments. In addition, the capital assets of Leasing, apart from the LPs, were transferred to Finance for the purpose of enabling Finance to carry on an ongoing business. It is right, in my judgment, to regard the transactions whereby Leasing’s business was transferred to Finance as one transaction. This transaction was, in my judgment, a transaction at an undervalue within the meaning of that expression in subsec. (1) of sec. 423 .”
Re Gray’s Inn Construction Co Ltd
[1980] 1 WLR 711
Buckley LJ’
“ It is a basic concept of our law governing the liquidation of insolvent estates, whether in bankruptcy or under the Companies Acts, that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent’s unsecured creditors as at that date. In bankruptcy this is achieved by the relation of the trustee’s title to the bankrupt’s assets back to the commencement of the bankruptcy. In a company’s compulsory winding up it is achieved by section 227. There may be occasions, however, when it would be beneficial, not only for the company but also for its unsecured creditors, that the company should be enabled to dispose of some of its property during the period after the petition has been presented but before a winding up order has been made. An obvious example is if the company has an opportunity by acting speedily to dispose of some piece of property at an exceptionally good price. Many applications for validation under the section relate to specific transactions of this kind or analogous kinds. It may sometimes be beneficial to the company and its creditors that the company should be enabled to complete a particular contract or project, or to continue to carry on its business generally in its ordinary course with a view to a sale of the business as a going concern. In any such case the court has power under section 227 of the Companies Act 1948 to validate the particular transaction, or the completion of the particular contract or project, or the continuance of the company’s business in its ordinary course, as the case may be. In considering whether to make a validating order the court must always, in my opinion, do its best to ensure that the interests of the unsecured creditors will not be prejudiced. Where the application relates to a specific transaction this may be susceptible of positive proof. In a case of completion of a contract or project the proof may perhaps be less positive but nevertheless be cogent enough to satisfy the court that in the interests of the creditors the company should be enabled to proceed, or at any rate that proceeding in the manner proposed would not prejudice them in any respect. The desirability of the company being enabled to carry on its business generally is likely to be more speculative and will be likely to depend on whether a sale of the business as a going concern will probably be more beneficial than a break-up realisation of the company’s assets. In each case, I think, the court must necessarily carry out a balancing exercise of the kind envisaged by Templeman J. in his judgment. Each case must depend upon its own particular facts.
Since the policy of the law is to procure so far as practicable rateable payments of the unsecured creditors’ claims, it is, in my opinion, clear that the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the unsecured creditors as a body. If, for example, it were in the interests of the creditors generally that the company’s business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition is presented but not yet paid for, the court might think fit in the exercise of its discretion to validate payment for those goods.
Where a third party proposes to enter into a transaction with a company which is liable to be invalidated under section 227 of the Companies Act 1948, the third party can decline to do so until the company has obtained a validating order, or it might itself seek a validating order, or it can enter into the transaction in anticipation of the court making a retroactive validating order at a later date. In the present case the bank adopted the last course. A third party who does that takes the risk of the court refusing to make the order.
It may not always be feasible, or desirable, that a validating order should be sought before the transaction in question is carried out. The parties may be unaware at the time when the transaction is entered into that a petition has been presented; or the need for speedy action may be such as to preclude an anticipatory application; or the beneficial character of the transaction may be so obvious that there is no real prospect of a liquidator seeking to set it aside, so that an application to the court would waste time, money and effort. But in any case in which the transaction is carried out without an anticipatory validating order the disponee is at risk of the court declining to validate the transaction. It follows, in my view, that the parties when entering into the transaction, if they are aware that it is liable to be invalidated by the section, should have in mind the sort of considerations which would influence the court’s decision. A disposition carried out in good faith in the ordinary course of business at a time when the parties are unaware that a petition has been presented may, it seems, normally be validated by the court (see In re Wiltshire Iron Co (1868) L.R. 3 Ch.App. 443 ; In re Neath Harbour Smelting and Rolling Works (1887) 56 L.T. 727 , 729; In re Liverpool Civil Service Association (1874) L.R. 9 Ch.App. 511 , 512) unless there is any ground for thinking that the transaction may involve an attempt to prefer the disponee, in which case the transaction would probably not be validated. In a number of cases reference has been made to the relevance of the policy of ensuring rateable distribution of the assets In re Civil Service and General Store Ltd (1888) 58 L.T. 220 ; In re Liverpool Civil Service Association, L.R. 9 Ch.App. 511 and In re J. Leslie Engineers Co. Ltd [1976] 1 W.L.R. 292 . In the last-mentioned case Oliver J. said, at p. 304:
“I think that in exercising discretion the court must keep in view the evident purpose of the section which, as Chitty J. said in In re Civil Service and General Store Ltd, 58 L.T. 220 , 221, is to ensure that the creditors are paid pari passu.”
But although that policy might disincline the court to ratify any transaction which involved preferring a pre-liquidation creditor, it has no relevance to a transaction which is entirely post-liquidation, as for instance a sale of an asset at its full market value after presentation of a petition. Such a transaction involves no dissipation of the company’s assets, for it does not reduce the value of those assets. It cannot harm the creditors and there would seem to be no reason why the court should not in the exercise of its discretion validate it. A fortiori, the court would be inclined to validate a transaction which would increase or has increased, the value of the company’s assets, or which would preserve, or has preserved, the value of the company’s assets from harm which would result from the company’s business being paralysed: In re Wiltshire Iron Co (1868) L.R. 3 Ch.App. 443 ; In re Park Ward & Co. Ltd [1926] Ch. 828 , where the business of the company was eventually sold as a going concern, presumably to the advantage of the creditors; In re Clifton Place Garage Ltd [1970] Ch. 477 . In In re A. I. Levy (Holdings) Ltd [1964] Ch. 19 the court validated a sale of a lease which was liable to forfeiture in the event of the tenant company being wound up, and also validated, as part of the transaction, payment out of the proceeds of sale of arrears of rent which had accrued before the presentation of the petition for the compulsory liquidation of the company. If that case was rightly decided, as I trust that it was, the court can in appropriate circumstances validate payment in full of an unsecured pre-liquidation debt which constitutes a necessary part of a transaction which as a whole is beneficial to the general body of unsecured creditors. But we have been referred to no case in which the court has validated payment in full of an unsecured pre-liquidation debt where there was no such special circumstance, and in my opinion it would not normally be right to do so, because such a payment would prefer the creditor whose debt is paid over the other creditors of equal degree.”
Goff LJ and Sir David Cairns concurred.
Re MC Bacon Ltd
[1990] BCLC 324
Millet J
“ The applicant now claims to have the debenture set aside (1) under sec. 239 of the Insolvency Act 1986 (“the Act”) as a voidable preference, or (2) under sec. 238 of the Act as a transaction at an undervalue. Originally the applicant also alleged that from 15 April 1987 onwards the bank was a shadow director of the company and claimed that it had thereby rendered itself responsible for what was alleged to have been the wrongful trading of the company on and after 15 May 1987. These last mentioned allegations were rightly abandoned by the applicant after six days of oral evidence. As a result, I can set out the facts at shorter length and in less detail than would otherwise have been the case…
So far as I am aware, this is the first case under the section and its meaning has been the subject of some debate before me. I shall therefore attempt to provide some guidance.
The section replaces sec. 44(1) of the Bankruptcy Act 1914, which in certain circumstances deemed fraudulent and avoided payments made and other transactions entered into in favour of a creditor “with a view of giving such creditor … a preference over the other creditors”. Section 44(1) and its predecessors had been construed by the courts as requiring the person seeking to avoid the payment or other transaction to establish that it had been made “with the dominant intention to prefer” the creditor.
Section 44(1) has been replaced and its language has been entirely recast. Every single word of significance, whether in the form of statutory definition or in its judicial exposition, has been jettisoned. “View”, “dominant”, “intention” and even “to prefer” have all been discarded. These are replaced by “influenced”, “desire”, and “to produce in relation to that person the effect mentioned in subsec. (4)(b) ”.
I therefore emphatically protest against the citation of cases decided under the old law. They cannot be of any assistance when the language of the statute has been so completely and deliberately changed. It may be that many of the cases which will come before the courts in future will be decided in the same way that they would have been decided under the old law. That may be so, but the grounds of decision will be different. What the court has to do is to interpret the language of the statute and apply it. It will no longer enquire whether there was “a dominant intention to prefer” the creditor, but whether the company’s decision was “influenced by a desire to produce … the effect mentioned in subsec. (4)(b) ”.
This is a completely different test. It involves at least two radical departures from the old law. It is no longer necessary to establish a dominant intention to prefer. It is sufficient that the decision was influenced by the requisite desire. That is the first change. The second is that it is no longer sufficient to establish an intention to prefer. There must be a desire to produce the effect mentioned in the subsection.
This second change is made necessary by the first, for without it, it would be virtually impossible to uphold the validity of a security taken in exchange for the injection of fresh funds into a company in financial difficulties. A man is taken to intend the necessary consequences of his actions, so that an intention to grant a security to a creditor necessarily involves an intention to prefer that creditor in the event of insolvency. The need to establish that such intention was dominant was essential under the old law to prevent perfectly proper transactions from being struck down. With the abolition of that requirement intention could not remain the relevant test. Desire has been substituted. That is a very different matter. Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.
It is not, however, sufficient to establish a desire to make the payment or grant the security which it is sought to avoid. There must have been a desire to produce the effect mentioned in the subsection, that is to say, to improve the creditor’s position in the event of an insolvent liquidation. A man is not to be taken as desiring all the necessary consequences of his actions. Some consequences may be of advantage to him and be desired by him; others may not affect him and be matters of indifference to him; while still others may be positively disadvantageous to him and not be desired by him, but be regarded by him as the unavoidable price of obtaining the desired advantages. It will still be possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditor’s position in the event of its own insolvent liquidation.
There is, of course, no need for there to be direct evidence of the requisite desire. Its existence may be inferred from the circumstances of the case just as the dominant intention could be inferred under the old law. But the mere presence of the requisite desire will not be sufficient by itself. It must have influenced the decision to enter into the transaction. It was submitted on behalf of the bank that it must have been the factor which “tipped the scales”. I disagree. That is not what subsec. (5) says; it requires only that the desire should have influenced the decision. That requirement is satisfied if it was one of the factors which operated on the minds of those who made the decision. It need not have been the only factor or even the decisive one. In my judgment, it is not necessary to prove that, if the requisite desire had not been present, the company would not have entered into the transaction. That would be too high a test.
It was also submitted that the relevant time was the time when the debenture was created. That cannot be right. The relevant time was the time when the decision to grant it was made. In the present case that is not known with certainty. It was probably some time between 15 April and 20 May, although as early as 3 April Mr Glover and Mr Creal had resigned themselves to its inevitability. But it does not matter. If the requisite desire was operating at all, it was operating throughout…
…
The granting of the debenture was not a gift, nor was it without consideration. The consideration consisted of the bank’s forbearance from calling in the overdraft and its honouring of cheques and making of fresh advances to the company during the continuance of the facility. The applicant relies therefore on paragraph (b).
To come within that paragraph the transaction must be:
(1) entered into by the company;
(2) for a consideration;
(3) the value of which measured in money or money’s worth;
(4) is significantly less than the value;
(5) also measured in money or money’s worth;
(6) of the consideration provided by the company.
It requires a comparison to be made between the value obtained by the company for the transaction and the value of consideration provided by the company. Both values must be measurable in money or money’s worth and both must be considered from the company’s point of view.
In my judgment, the applicant’s claim to characterise the granting of the bank’s debenture as a transaction at an undervalue is misconceived. The mere creation of a security over a company’s assets does not deplete them and does not come within the paragraph. By charging its assets the company appropriates them to meet the liabilities due to the secured creditor and adversely affects the rights of other creditors in the event of insolvency. But it does not deplete its assets or diminish their value. It retains the right to redeem and the right to sell or remortgage the charged assets. All it loses is the ability to apply the proceeds otherwise than in satisfaction of the secured debt. That is not something capable of valuation in monetary terms and is not customarily disposed of for value.
In the present case the company did not suffer that loss by reason of the grant of the debenture. Once the bank had demanded a debenture the company could not have sold or charged its assets without applying the proceeds in reduction of the overdraft; had it attempted to do so, the bank would at once have called in the overdraft. By granting the debenture the company parted with nothing of value, and the value of the consideration which it received in return was incapable of being measured in money or money’s worth.
Mr Vos submitted that the consideration which the company received was, with hindsight, of no value. It merely gained time and with it the opportunity to lose more money. But he could not and did not claim that the company ought to have received a fee or other capital sum in return for the debenture. That gives the game away. The applicant’s real complaint is not that the company entered into the transaction at an undervalue but that it entered into it at all.
In my judgment, the transaction does not fall within subsec. (4), and it is unnecessary to consider the application of subsec. (5) which provides a defence to the claim in certain circumstances.
IV. Conclusion In my judgment, the granting of the debenture to the bank was neither a voidable preference nor a transaction at an undervalue and I dismiss the application.”
Saxton & Anor v Clarke & Anor
[2002] EWHC 2411 (Ch)
MR. JUSTICE LLOYD: This is my judgment in relation to two proceedings, both arising from the same transaction and concerning a company called Conegrade Ltd. which is now in creditors’ voluntary liquidation. The transaction involved the transfer by the company to Mr. and Mrs. Clarke, who were Directors and shareholders of it, of a freehold property valued at £125,000.
By proceedings commenced by claim form, the company alleges against Mr. and Mrs. Clarke that this transfer was effected in breach of section 320 of the Companies Act 1985.
By an originating application in the Companies Court, the joint liquidators assert against Mr. and Mrs. Clarke that the transfer constituted a preference of them within the meaning of section 239 of the Insolvency Act 1986. Accordingly, they claim an order that Mr. and Mrs. Clarke pay compensation to the company. They also seek a declaration that Mr. and Mrs. Clarke were guilty of misfeasance in procuring or assisting the transfer of the property to themselves.
Although the two proceedings have to be separate for procedural and jurisdictional reasons, they are, in effect, different and alternative ways of challenging the same conduct. As it happens, the same remedy is sought based on each claim. I have been told that directors’ disqualification proceedings are also pending in relation to the company, but I know nothing about the charges made in those proceedings.
Conegrade was a small engineering company. It was originally founded in about 1974 by four men. Two of them withdrew quite soon and the third in the early 1990s. That left Mr. Ashley Clarke. By 1995 he, too, wanted to withdraw.
On 1st June 1995, he and his wife made an agreement with the company and a Mr. Brian Bayes for the latter to acquire some shares and to be appointed Managing Director and for Mr. and Mrs. Clarke not to receive any salary for six years but, as and when required to perform duties for the company, to be paid at an hourly gross rate of £10. Their loan account was to be repaid by equal monthly instalments over six years with interest at 7 per cent.
The agreement stated that it was the intention of Mr. and Mrs. Clarke to continue their policy of giving financial support to the company, but the dividends would be paid as and when agreed to be appropriate. Mr. and Mrs. Clarke then greatly reduced their active participation in the company’s affairs for a time, but in 1997 they resumed more or less full time work for the company, for reasons which I do not need to identify for present purposes.
The loan account had been about £100,000 in 1995 and repayments were made against it for a while. Mr. and Mrs. Clarke made further loans to the company after 1997 and, moreover, did not draw all that was due to them in respect of remuneration.
In 1998 the company put up for sale its freehold property in Station Road, Uppingham. This had been bought in 1977 and it was one of three sites then used for the company’s business. Another of them, also in Uppingham, was rented from Mr. and Mrs. Clarke. The asking price was £160,000 but no interest was expressed at more than £120,000 and in fact no offers were received. The idea, at that stage, had been to restrict the space used by the company to the other two sites and to raise further working capital.
No sale having materialised, the company considered other courses of action. The company’s bankers were National Westminster Bank. They had security over the property and the book debts for an overdraft facility which, strictly speaking, was no more than £60,000, although it was sometimes exceeded on an unauthorised basis. The company felt that this was not sufficient and that more extensive facilities ought to be obtainable.
At some point in 1999 the idea emerged of the property being sold to Mr. and Mrs. Clarke. In November 1999, the Clarkes instructed local valuers, Culshaws, to prepare a valuation of the property. It is said that this was on the advice of the company’s auditors but such advice is not recorded in any document produced in evidence. The valuation was given on 14th February 2000 and showed the value of the property to be £125,000.
In the meantime, a meeting of the Board had been held on 11th December 1999, attended by Mr. and Mrs. Clarke and Mr. Bayes. A Mr. Guy Davies was to be appointed Managing Director in January and was to have 5 per cent of the shares, Mr. Bayes becoming Chairman.
Three items in the Minutes of this meeting are important. I will read them:
“(7) That, due to difficult trading conditions, it was impossible to repay ACA and J Clarkes’ loan account debt which was, including undrawn salary, in excess of £100,000. It was agreed that, to discharge this debt, the company should sell to ACA Clarke the factory buildings and land, leasing these back to the company at a nominal rent with an inflation clause and regeneration agreement on a long lease. The independent valuation for the property is anticipated to establish a cash payment to be made by the Clarkes to allow them to purchase it from the company and it was agreed by all that this sum of money be used to reduce company debt and facilitate company development”.
“(9) Concern was also expressed that a very loose agreement was being applied by the National Westminster for the financial support of the company in the form of an overdraft facility. The bank had taken a charge on the company’s building and debtor’s ledger but were reluctant to say what amount of cash they would advance on these assets. It was agreed that the situation stated above could not be tolerated and that the company approach the HSBC Bank for factoring terms which, if successfully obtained, should release the company’s property deeds to the company’s custody so that they can be transferred to ACA Clarke when he has purchased the property from the company.” “
(11) That ACA and J Clarke had received no salary for one year by January 2000, this being done to help the company over a difficult financial period. It was agreed that a dividend be declared and payment be made to the Clarkes’ loan account and payment from Mr. Bayes’ loan account be made to him monthly from the dividend paid to his loan account; this method of payment being made to reduce the financial pressure on the company’s cashflow situation.”
That is the first reference to the transaction which is the subject of these proceedings.
On 2nd February, a further Board meeting was held. It was agreed to change banks from National Westminster Bank to HSBC who were prepared to factor the book debts and, thereby, to advance more than the National Westminster Bank would. At item (2) of the Minutes there is the following: “It was agreed also that ACA and J Clarke advance the company £40,000 on 2nd February to assist the company’s finance and that the company would sell to ACA and J Clarke the company’s property and site at Station Road, Uppingham for the value of their loan account as per previous Directors’ meeting.” It was also agreed that Mr. and Mrs. Clarke’s salary, in arrears for 15 months, be paid by way of dividend and transferred to their loan account.
Mr. and Mrs. Clarke duly paid the £40,000 in the course of February. Before this, their loan account was recorded in the company’s books at £68,428 so that by the year end, on 29th February, the total was given as £108,428. It is clear that this does not include any arrears of salary or remuneration which may have amounted, by then, to some £40,000.
On 14th February, as I have mentioned, the value of the property was identified as £125,000 by the valuation which had been commissioned by Mr. and Mrs. Clarke.
On 1st March, a further Board meeting, attended by Mr. and Mrs. Clarke, Mr. Bayes and Mr. Davies, discussed the sale of the property and resolved that the property “be re-assigned to Mr. and Mrs. Clarke in respect to the payment of £40,000 on 28th February 2000, and the outstanding loan account being reduced by the balance (balance minus independent valuation, £125,000, minus £40,000 = £85,000)”. That is signed by all four Directors. Mr. and Mrs. Clarke and Mr. Bayes were then the only shareholders so, in fact, the shareholders also agreed (although they were not expressed to do so as such).
The transfer of legal title took place on 17th April but it is reasonably clear that Mr. and Mrs. Clarke and others treated the ownership as having passed at the beginning of March. A Board Minute of 7th March is in the following terms: “(1) It was agreed that ACA and J Clarke would advance a further sum of £20,191.99 to Conegrade Ltd. to clear the company’s debt with NatWest Bank. This is to close the company’s account with that bank. The £20,191.99 is to be added to the Clarkes’ loan account. “(2) It was agreed that the company be granted the use of the premises in March 2000 rent free. A lease, taking effect from 1st April 2000, is being arranged. “(3) It was agreed that ACA and J Clarke would forego their dividend payment on 29th February 2000, this to be posted and paid when affordable. The loan of £20,191.99 being accepted as final payment for the company’s property. This virtually clears the company’s loan debt to the Clarkes.”
The reference to rent free occupation in March (although this was in fact later changed) shows that Mr. and Mrs. Clarke were treated as being the company’s landlords already. By this time, there was no suggestion of the company ceasing to use the property so terms for its occupation were needed.
On 16th March, Mr. Clarke wrote to Mrs. Margaret Dainty, a conveyancer employed by the company’s solicitors, Messrs. Crombie Collins. He sent her a Minute for inclusion in the Minute Book, which she held. He said:
“We have bought out Conegrade’s overdraft with National Westminster Bank and secured for ourselves the property occupied by Conegrade”.
He went on:
“I wish you now to proceed with the transfer of title to June and myself as soon as possible as we have paid for it in advance and will probably have to find more support for the company at the end of March, as the company’s expanding cashflow is a problem and I have to provide financial support. Please do not worry about the lease for now as you will see that part of my support for the company is to let it use the property rent free.”
On the next day, at a Board meeting, the property was spoken of as “now owned by the Clarkes”. The company had had management accounts prepared by a Mrs. Julie Wright, though none has been produced in evidence. However, at about this time, it was discovered that she had been falsifying the figures to conceal misappropriation of funds from a company called Courtyard Coatings Ltd., which was then a subsidiary of the company, although it ceased to be a subsidiary later on. By the end of March it seemed that Mrs. Wright’s misdeeds had involved stealing some £6,000 or so but not a much larger sum, as had been feared.
At a Board meeting of Conegrade on 31st March the consequences were considered and the meeting resolved as follows:
“(3) It was agreed that the company was in a difficult trading position and, although things were looking much more promising with the introduction of more and more products by our new sales force. To help the company through a difficult transition period and overcome the problems caused by Mrs. Wright’s cover-up of her illegal activities of Conegrade and Courtyard, the Clarkes agreed to advance a further £10,000 to Conegrade, this sum to be added to their loan account and repaid as soon as possible.
“(4) The meeting thanked the Clarkes for their support and noted that the company now owed them 16 months’ salary, undrawn since November 1998, amounting to £46,678. This was to be paid as dividend but has since been delayed until the company recovers financially.”
It was also noted that Brian Bayes had now also been without salary for three months and loan account interest had also not been paid to the Clarkes in the 16 month period. The additional £10,000 agreed was duly paid by Mr. and Mrs. Clarke to the company early in April.
In the meantime, on 27th March, two loans due to former Directors, amounting to some £30,000 odd, had been agreed to be waived and, on 20th March, Mr. and Mrs. Clarke had said that they would not charge the company any rent for April 2000.
Also at the end of March, on the 28th, Mr. and Mrs. Clarke and Mr. Bayes went to see Mrs. Dainty about the transfer of the property. She mentioned the risk of a challenge should the company be made bankrupt and questioned whether they should take advice about that. They did not take up that suggestion.
Having heard Mrs. Dainty’s evidence, I am satisfied that she mentioned bankruptcy only as a standard precaution, perhaps because it was clearly not a transaction negotiated at arms’ length, rather than because she had any reason to suppose that the company was in fact insolvent.
The agreement and transfer were signed and sealed then or soon thereafter but only dated when clear Land Registry searches had been obtained. The price is recorded as £125,000, and as having been paid direct by the buyer to the seller.
To anticipate one matter but to complete the story of Mrs. Dainty’s involvement, early in July Mr. Clarke spoke to her on the telephone about the intended lease to the company. Her notes include the following: “The Clarkes just bought property to reduce loan account — becoming too large — then want to lease to the company”. The commencement date of the lease was to be 12th May and rent was payable monthly at the rate of £1,000 per month with a five year term. In October, the lease was executed in those terms.
Going back in time, however, on 1st May at a Board meeting it was recorded that there was little prospect of the Clarkes being paid a salary in April or May and that over £50,000 in undrawn salary was due to them. In the light of their support for the company, it was agreed that the company should pay rent to them for March of £1,000 and that this be added to their loan account.
On 9th May a further Board meeting was held. After recording changes to the shareholders, the Minute continues as follows:
“It was agreed that the Clarkes have now completed their part of the agreement made on 11th December 1999. It was agreed, having given the company financial support (£75,000) and practical support for 1 1/2 years for no financial gain (£50,000 salary owed), that, during the month of May, they retire from active participation in the company as agreed by the new Executives. It was the intention of the company to pay the Clarkes’ salary owed off slowly when finances recover.”
At that point, Mr. and Mrs. Clarke ceased to be active in the company’s affairs, though they did not in fact resign from the Board until August, and they remained as shareholders.
I must say something, in outline, about the later course of the company’s affairs. The eventual resignation of the Clarkes as Directors was dealt with at a Board meeting on 1st August. By then, the Clarkes had provided the company with a further £5,000. Figures were given for the company’s indebtedness to the Clarkes, including loan account, undrawn salary and unpaid rent, of £146,000 or £192,000 — in each case subject to checking. Mr. Clarke said he thought that these were wrong in not taking off the £125,000 as the value of the building. It was said that the company would start to re-pay the loan account as soon as possible and that dividends would be paid.
A shareholders’ meeting was held on 6th September at which it was said that Mr. Clarke said they had not been aware of how critical the cashflow situation had become. They had waived the monthly rent on the main building and the other unit rented from them. In a letter dated 7th October from Mr. and Mrs. Clarke to Mr. Bayes, there is reference to an overdraft of £20,000 and to creditors waiting for their money, but the letter is cast in terms which clearly shows that they hoped that the company would recover.
In October, Courtyard Coatings which, as I have mentioned, had been a subsidiary of the company though, by then, it no longer was and was a debtor, went into receivership owing the company £90,000, none of which was recoverable.
In January 2001 the position became critical and insolvency practitioners were asked to advise. The advice was to wind up the company unless a considerable cash injection was obtained. Mr. and Mrs. Clarke agreed to make a final cash injection of £12,000, which they did. Special terms were agreed for this, including a personal guarantee by Mr. Davies. In fact the sum was not re-paid and they did not call the guarantee.
The company went into creditors’ voluntary liquidation on 4th April 2001 with an estimated deficiency for creditors of over £300,000, according to the Statement of Affairs. At that stage, the loan account of Mr. and Mrs. Clarke was put at £45,915. This was made up of elements that I have already mentioned, plus the payment of £1,771 in legal and other fees to do with the sale of the property and £14,500 unpaid rent. It was recorded that Mr. Clarke had undrawn remuneration of £50,000 though, probably, correctly this should have been shown as due to Mr. and Mrs. Clarke.
Evidence was given before me by a Mr. Marshman, one of the liquidators, and by Mrs. Dainty and, for the defendants, by Mr. and Mrs. Clarke and by Mr. Bayes. Nothing turns on Mr. Marshman’s evidence since he had no direct knowledge of the relevant facts.
Mrs. Dainty gave evidence of what she was told about the sale. She confirmed the accuracy of her notes. She knew Mr. and Mrs. Clarke reasonably well and knew that they had given financial and moral support to the company. She remembered Mr. Clarke saying, at some stage, that he wanted to keep the company going as it was keeping a lot of people in work but she was not party to any discussion about future support nor was she told about any particular payments made after March other than that the Clarkes paid her firm’s bill, although she did understand that the property was to be used rent free for a time. I accept her evidence as entirely reliable and helpful.
Mr. Bayes is a respondent to the directors’ disqualification proceedings and has his own solicitors in relation to that. His witness statement was produced at a late stage and was admitted with permission granted at the outset of the trial. I have reservations about some of his evidence. He said, for example, that someone from the company’s accountants’ firm was on the company’s premises as a temporary accountant in February and March 2000 and that they assured the Directors that the company was solvent. It seems that the relevant period was late March and April between the sacking of Mrs. Wright and the date when the replacement took up the post in May.
More seriously, at paragraphs 16 and 17 of his witness statement, he said in terms that the Directors made no inquiries of the accountants as to the legality or propriety of the transaction because they had no thought that it was not entirely solvent.
In the light of that, I cannot accept his oral evidence that they were advised the company was solvent. Probably what he was referring to was that there was a clear audit report for the figures as at 29th February 2000 signed off on 19th May. It sounded as if he meant more than that and his evidence, therefore, has to be treated with care. He did accept, as did Mr. and Mrs. Clarke, one point which shows that the year end balance sheet was not correct, namely that they did not expect to be able to recover the £80,000 owed, at that stage, by Courtyard Coatings, within 12 months. It should, therefore, not have been included, as it was, as a current asset in the balance sheet. If it had not been so included the net liabilities figure should have been at least some £95,000 instead of £65,000, even if one were to include the property at its up-to-date value of £125,000 instead of the book value of just over £73,000.
In fact, the £80,000 should probably have been heavily discounted by a provision, as well deferred, because the accounts of Courtyard Coatings would have shown that it, too, was loss-making. It depended on achieving profitability to be able to pay any part of this debt and the prospect of that was remote.
It is clear from his evidence that the company was going through a difficult time, some parts of its business being currently unprofitable due to severe pressure on prices. He thought the company should go back to its core business which was profitable but that, for the time being, the company depended on continuing credit given by the Clarkes who said the company was not to be pressed to re-pay the loan account.
He was unable to help as to who first proposed that the company should sell the property to the Clarkes, nor could Mr. or Mrs. Clarke. I accept that one subject discussed was the desirability of changing banks to HSBC who could factor the book debts. This could not be done without paying off National Westminster Bank, which had security over both the book debts and the property.
At first, it may have been thought that the proceeds of the factoring would re-pay the whole of the National Westminster Bank debt and, therefore, release the property. Later, it became clear that another £20,000 was needed and the Clarkes paid this. However, they could have provided that loan without becoming owners of the property. They could even have taken security for that loan over the property.
I find that the idea of the transfer of the property was first mentioned by Mr. Clarke. I will come later to the question of what lay behind this.
According to the Clarkes’ pleadings, they contended that they gave some £72,000 worth of new money to the company in return for the transfer of the property. Mr. Bayes said that they introduced £60,000 to £70,000 of extra cash as part consideration for the value of the property but he accepted that nothing was discussed about support except for the payment needed to bring the loan account up to the value of the property. He was asked, in chief, about the Minute of 9th May, which I have read out in part, and he said that Mr. and Mrs. Clarke were going to and did provide additional funding for the company which came to £75,000. In the light of his answer later in cross-examination, that answer has to be very much qualified as due to hindsight.
Mr. and Mrs. Clarke both gave evidence. I accept them both as honest witnesses trying to do their best to assist the court. Mr. Clarke had a pronounced tendency not to wait for the end of counsel’s question before answering and, even when he did wait, not to limit his answer to the proper ambit of the question.
However, I bear in mind that he had been involved with this company — running it and trying to keep it going — for the best part of 25 years, and its eventual failure must have been deeply disappointing to him. He has medical problems of his own and he referred to other personal problems, in evidence, of which I need say no more. He is a forthright man, no doubt accustomed to saying what he wants to say and having a good deal he wanted to say about the company and the particular transaction. His memory for detail and for dates is not particularly good and he had a tendency to answer a question directed to a particular point in the sequence of events by reference to hindsight. His evidence was, therefore, not always as helpful or reliable as I might have hoped.
Mrs. Clarke was fully committed to and active in the company. She prepared the Minutes of the meetings from her husband’s dictation. She was clear in her views in her evidence and provided some vivid comments on the history and the situation.
Both of the claims before me turn, in part, on an analysis of what was the relevant transaction between the company and Mr. and Mrs. Clarke. I propose to make findings of fact as to that before going on to the other matters that are relevant in relation to the separate claims.
Mr. Lawson-Cruttenden, appearing for Mr. and Mrs. Clarke, submitted that there was a rolling or developing transaction. Clearly, the matter was discussed and agreed, first, in principle and, later, in successively greater degrees of detail. However, it is necessary to form a view as to the terms on which the property was transferred as they finally took shape. In one sense, the answer is to be found in the agreement of transfer, but those only show that the consideration was £125,000 and that it had already been paid. Further inquiry is necessary to see how that sum was made up. The agreement and transfer are dated 17th April 2000, but that is, in a sense, a fortuitous date since the documents were in final form by the end of March, signed and sealed in escrow, subject to clear searches being obtained.
The stage at which instructions were given to Mrs. Dainty to proceed with the transaction was 28th March. That seems to me to be the last date at which one can properly look at the position. The earliest is 1st March because the previous resolutions were only decisions in principle, the value of the property being then not known.
According to the 1st March Minute, the consideration was for £40,000 cash just paid and £85,000 off the loan account. In fact, the loan account, according to the company’s books, stood then only at £68,428 before the additional £40,000 was paid.
On 16th March, however, £20,192 was paid by the Clarkes to the National Westminster Bank on behalf of the company. That is referred to in the 7th March Board meeting as “the final payment towards the property”. That payment, of course, went to pay off an existing creditor so it did not alter the amount of the company’s debts, although it did (a) substitute a soft creditor, the Clarkes, for a relatively hard one, National Westminster Bank and (b) enabled the company to take advantage of HSBC’s debt factoring facility.
In those circumstances, it seems to me that the Clarkes can legitimately claim that this sum of £20,192 was real new cash introduced for the company’s benefit. That being so, I regard it as proper to treat the £125,000 consideration as having been provided as to £60,192 by new money introduced by the Clarkes and, as to the balance of £64,808, by setting it off against their pre-existing loan account.
Mr. Lawson-Cruttenden submitted that the consideration for the transfer of the property also included a commitment to provide further support to the company, at least up to the value of the property.
Mr. Clarke said, in evidence, that he firmly intended to go on supporting the company as long as it needed support and that he would provide support at least to the value of the property. He said that, from February 2000 onwards, he did in fact provide more than £125,000 support, taking into account undrawn remuneration and rent not charged or waived or simply not paid. He did say that he did not mention any such commitment to the management at any time between December 1999 and April 2000 but that he and Mrs. Clarke had agreed on it. But he also said that his willingness to continue supporting the company was well known and would be taken for granted by the management in any event.
In my judgment, there is no basis for Mr. Lawson-Cruttenden’s contention that the consideration for the transfer included any commitment to provide further support for the future. No such commitment was mentioned, and deliberately so. Even if present in Mr. and Mrs. Clarke’s mind, it could have no contractual force. The fact that the Clarkes were known to be loyal and generous to the company and might be expected to continue to be, and that in fact they did go on supporting it, cannot make any of the later support they did in fact provide part of the price of the £125,000 which, as recorded in the transfer, had already been paid and which, as recorded in the Minute of 9th March, included a final payment, being £20,192. He cannot even bring into the equation, in my judgment, for these reasons the £10,000 paid early in April which is not in any way linked in Board Minutes to the transfer and was paid after the final instructions to proceed had been given and the documents, including the reference to the price having already been paid, had been signed.
Thus, while I accept that Mr. and Mrs. Clarke did pay £10,000 in early April and gave further financial assistance to the company thereafter in cash and through not taking payment of sums due, I cannot accept that more than £60,192 out of the £125,000 is to be regarded as new money introduced into the company on account of the purchase.
The payments and other benefits afforded by the Clarkes which do not fall to be taken into account include the £10,000 paid in April 2000, £5,000 paid in July 2000, the £12,000 paid in early 2001, the period of work on the part of each of Mr. and Mrs. Clarke from December 1999 to May 2000 during which they took no remuneration and the rent concessions of one kind and another which are put at £14,500.
They also included payment of Mrs. Dainty’s firm’s legal bill though I doubt whether the £881 paid for the valuation fee should be in the same category since that was clearly commissioned by the Clarkes and it was their debt in any event. The evidence does not allow me to put a figure on the amount of undrawn remuneration accruing to Mr. and Mrs. Clarke during the relevant period, though I have mentioned the figures that were given at the time for the amount of this indebtedness.
On the basis of this finding I will now consider, first, the claim based on section 320 of the Companies Act and start with the statutory provisions. Section 320 is headed:
“Substantial property transactions involving directors, etc.”
Under subsection (1), subject to irrelevant exceptions,
“a company shall not enter into an arrangement –
(a) whereby a director of the company”
as Mr. and Mrs. Clarke were
“…. acquires or is to acquire one or more non-cash assets of the requisite value”
as the property was
“from the company …. unless the arrangement is first approved by a resolution of the company in general meeting.”
What is said for the company is that there was no shareholders’ meeting and, therefore, no resolution approving the arrangement. So the transaction is in breach of the section and the transaction gives rise to an obligation on the Directors to account for any gain and to indemnify the company against any loss.
Mr. Russen, for the company and the liquidators, contends that the loss was of £85,000 but, on the basis of my finding already stated, would say that it was £64,808.
Mr. Lawson-Cruttenden accepted that there was no meeting convened as a general meeting of the company but points to the fact that all three shareholders were present, albeit in their capacity as Directors, at meetings at which the transaction was approved by the Board on 11th December 1999, 2nd February 2000, 1st March 2000 and 7th March 2000.
He prays in aid the decision of Buckley J. In re Duomatic Ltd. [1969] 2 Ch. 365. That case arose in relation to the approval of remuneration of the Directors under Article 76 of Table A to the 1948 Companies Act. In that case there was also a preference shareholder who, in the given circumstances, had no right to receive notice of or attend meetings and it was held that the absence of his consent was irrelevant where all those entitled to attend and vote did in fact agree.
Buckley J. said this at page 373C: “In other words, I proceed upon the basis that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”
That proposition is not entirely general and a doubt has been expressed in DeMite v. Public Health Ltd. [1998] BCC 638 as to whether it applies in relation to section 320. For my part, however, I do not see why, at any rate where there has been a meeting attended by all those who were entitled to attend and vote at a general meeting and that meeting has considered the matter and has resolved, in terms, that the company shall enter into the particular transaction, the fact that the Minute is headed “Board Meeting” rather than “General Meeting” and was not convened on the notice proper for a General Meeting and was attended by a Director who does not hold shares, should make it impossible to regard section 320 as having been satisfied.
Mr. Russen submitted that it is necessary to be clear as to what is being approved and I entirely agree as to that. But the Minute of 1st March is clear, and it was modified by that of 7th March in only one respect, but a clear one, namely, to bring the £20,192 into account.
Accordingly, in my judgment, the transaction whereby the property was sold by the company to Mr. and Mrs. Clarke for £125,000 of which £60,192 was paid in February and March as new money and the balance was set off against the pre-existing loan account was approved as required by section 320 on 7th March by the meeting, expressly held as a Board meeting, amending that which had been approved at the previous Board meeting on 1st March; both of those meetings being attended by all three shareholders who agreed unanimously in favour of the transaction. I therefore hold that there was no breach of section 320 in relation to the arrangement as I hold it to have been.
Mr. Lawson-Cruttenden had a further submission which I should mention, although it does not arise on my finding. He said that the £10,000 paid in April was part of the consideration and, although not approved in terms in advance, it was in fact ratified after the event by the Board meeting of 9th May, also attended by all the then shareholders. This depends on a proposition that the £75,000 support there referred to was regarded as part of the completion by the Clarkes of their part of the agreement made on 11th December, that is to say, the agreement for the transfer of the property.
Even if I were wrong about the status of the £10,000, I do not see that this Minute is to be read in that way. There are two separate statements. First, the agreement for transfer of the property has been fully performed. Secondly, the Clarkes having done what is referred to specifically in the Minute, part of which is plainly not relevant to the property transfer, they are to retire from active participation. Quite apart from issues about subsequent approval under section 320, this would not have sufficed on the facts.
In the Clarkes’ defence to the claims based on section 320 they contended that almost £73,000 was to be regarded as the new money introduced under the transaction but they relied on the Board meeting on 1st March 2000 as having approved the arrangement and as being as effective as if it had been convened as a general meeting. I disagree on the sums and I think the 7th March meeting is also relevant but I hold that the defence is well made out.
I therefore turn to the claim based on preference under section 239 of the Insolvency Act 1986. I need to start by referring to several statutory provisions. Section 239 allows an office-holder to apply for an order under the section where a company has, at a relevant time, given a preference to any person. The Clarkes being creditors of the company, a preference was given to them under subsection (4)(b):
“…. if — (b) the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done”.
In the Clarkes’ defence, they admitted that this was satisfied by the transfer of the property, though only to the extent of the difference between £125,000 and the new money introduced, which they put at almost £73,000. On my finding, the admission would show a preference of £64,808.
Mr. Lawson-Cruttenden does not admit that there was any preference because he contends that all the later support should come into the equation. I reject that. Plainly, if the company had gone into insolvent liquidation in late April 2000 the Clarkes would have been in a better position, having exchanged their unsecured debt for the freehold property. The only extent to which that is to be qualified is the new money introduced under the transaction, which is why I quantify the preference at £64,808.
Moving on, however, and before I consider what is meant by “the relevant time” in section 239(2), I must read subsections (5) and (6). “(5) The court shall not make an order under this section in respect of a preference given to any person unless the company which gave the preference was influenced in deciding to give it by a desire to produce in relation to that person the effect mentioned in subsection (4)(b). “(6) A company which has given a preference to a person connected with the company (otherwise than by reason only of being its employee) at the time the preference was given is presumed, unless the contrary is shown, to have been influenced in deciding to give it by such a desire as is mentioned in subsection (5).” Clearly, therefore, it is for Mr. and Mrs. Clarke to rebut the presumption that the company was influenced by the desire to put them in such a better position.
As regards “the relevant time”, there are two matters to be considered. Under section 240(1), there is a two year cut-off date before the onset of insolvency and this transaction is clearly within that period. But, under subsection (2), it must also be shown that, at the time, the company either was unable to pay its debts or that it became so in consequence of the preference; inability to pay its debts having the same meaning as under section 123 of the Act.
There is a presumption in this case, too, against a connected person which reverses the burden of proof but, for reasons not apparent to me, this only applies for the purposes of section 238, which is concerned with a transaction at an undervalue, and not for the purposes of section 239. Therefore, the burden is on the liquidators to satisfy the court on the question of insolvency.
So the questions arising are: Can the Clarkes rebut the presumption that the company was influenced by the relevant desire and can the liquidators show that the company was or became insolvent at the time?
I will take the latter point first. A company is insolvent for this purpose either if it cannot pay its debts as they fall due (see section 123(1)(f)) or if the value of the assets is less than that of its liabilities taking into account contingent and prospective liabilities (see section 123(2)).
The company’s accounts, as at 29th February 2000, were approved by the Board and passed by the auditors on 19th May with no qualification. The profit and loss account shows an operating loss of £68,484 for the year (up from £18,206 the previous year) and a loss for the year of £81,694 (up from £34,838 the previous year). The balance sheet shows net current liabilities of £65,651 as against current assets a year before of £7,510 and total net assets of £34,332.
These figures include the property at its net book value of £73,787 rather than its current value of £125,000. The position could be improved by £51,213 on that score. However, as I have said, the £80,000 debt owed by Courtyard Coatings was extremely doubtful at all and was certainly not a current asset. Moreover, the accounts do not reflect the true extent of the company’s indebtedness to Mr. and Mrs. Clarke. As I have said, there was a substantial amount of undrawn remuneration. Already, by the end of February, there was some unpaid rent although that mainly arose later.
Mr. Clarke said these sums were deliberately not added to the loan account because he thought that if they were he would have to pay tax on them. Be that as it may, a position in which, by the end of March, over £46,000 was said to be owed to Mr. and Mrs. Clarke for undrawn salary, which is not referred to anywhere in the company’s accounts, is thoroughly unsatisfactory. No steps were taken to have sums due to Mr. and Mrs. Clarke properly recorded as not being due within 12 months (if that be the case) except in relation to the sums covered by the 1995 agreement. Indeed, from time to time, hopes were expressed that something would be paid off for the arrears of salary.
If an additional £40,000 had been shown as due to Mr. and Mrs. Clarke, that would have a further adverse effect on the balance sheet. Mr. Lawson-Cruttenden submits that, as regards the position at the end of March or on 17th April, the company had been relieved of £30,000 odd of debt due to former Directors. This was not formalised until later in the year, but it may be fair to take this into account. By that date, of course, the undrawn salary due to Mr. and Mrs. Clarke was higher. It was referred to as £46,678 in the Board Minutes of 31st March, and by then there was three months’ salary owing to Mr. Bayes as well.
It would be inappropriate to apply too mechanical a process to the adjustment of the accounts, but in the absence of a full consideration of the accounts by experts, I can do no more than estimate the true position of the assets against the liabilities by considering how various adjustments might have affected the figures shown in the audited accounts.
In my judgment, taking into account the various matters that I have mentioned, the true position was that the company was insolvent on a balance sheet basis at the end of February 2000, and still so at the end of March 2000 and, if it be relevant, on 17th April.
So far as paying debts as they fell due is concerned, there is no reference to creditor pressure until later in the year in any correspondence I have seen and the evidence was that outside creditors never, for example, refused to supply at this stage. It was the internal creditors who were not being paid and could not be — Mr. and Mrs. Clarke and Mr. Bayes. These were patient creditors but the fact remains that the company could not pay them as and when they were entitled to be paid sums including, in particular, remuneration.
I find that the liquidators have shown the company to be insolvent at the material time, in the sense of inability to pay its debts as they fell due as well as balance sheet insolvency.
I must, therefore, now consider the question whether the company was influenced by the desire to give a preference to Mr. and Mrs. Clarke. On this, Mr. Lawson-Cruttenden cited to me the judgment of Millett J. (as he then was) in Re MC Bacon Ltd. [1990] BCLC 324, especially the passage from 335E to 336D, which discusses the statutory test in an illuminating way which I take into account but will not read out at this stage. That was not a case of a preference to a connected person but the criteria are the same, subject to the question of who has the burden of proof.
Mr. Lawson-Cruttenden relied on several points for saying that the relevant desire did not influence the company’s decision. First, he said the Directors did not consider that the company was insolvent although it had had and was going through difficult times. Second, he pointed to the purpose of the transaction being to obtain more working capital for the company, especially through the HSBC facility. He also relied on the clients’ commitment to provide yet further support, but my findings (already made) exclude that as a factor since there was no such binding commitment.
So far as the working capital element is concerned, the transaction gave the company the £40,000 paid in February, the substitution of the Clarkes for National Westminster Bank as a creditor for £20,192 and the ability to enjoy a higher level of bank credit through HSBC. The issue, however, is as to preference for the amount net of the £60,192. The change of banks did not in any way require the transfer of property. Although there were references in the evidence to “restructuring”, these were all very vague. None explained in what respect any such thing led to or justified the transfer of ownership of property.
I am therefore left with the optimism of Mr. and Mrs. Clarke as to the company’s recovery from its financial difficulties and, therefore, their belief that it was not insolvent as the principal reason for concluding, as Mr. Lawson-Cruttenden invites me to, that the Directors did not have any desire to prefer Mr. and Mrs. Clarke as any element in the process that led them to commit the company to a transaction.
I accept, as Mr. Lawson-Cruttenden submitted, that whether or not people generally or the Directors in particular were influenced by the relevant desire is a subjective matter but it has to be determined objectively and if they did desire a particular result, it matters not that they thought an insolvent liquidation was a remote risk.
Mr. Russen points out, first, that the obvious effect of the transaction was to put Mr. and Mrs. Clarke in possession of a valuable and realisable asset instead of having an unsecured debt with no prospect, in the foreseeable future, of it being paid.
Secondly, he says that is exactly what all concerned wanted and intended to achieve. It was just because the loan account was getting too large that Mr. and Mrs. Clarke insisted on having it repaid by taking the company’s most solid asset in exchange. That is apparent from paragraph 7 of the Board Minute of 11th December 1999, from Mr. Clarke’s letter to Mrs. Dainty of 16th March and Mrs. Dainty’s note of 3rd July.
I am prepared to suppose that one of the reasons why the idea of the transfer of the property came up was the discussion about changing the company’s bankers and the need to redeem all property subject to National Westminster Bank security. That may have been what put the idea of the transfer of the property into the minds of Mr. and Mrs. Clarke. But it seems to me clear that the attraction of the idea to them was that the company owed them a great deal, which they knew the company could not pay, and this was a way of reducing the company’s debts; that is to say, by reducing this one debt owed to them.
Mr. Clarke spoke of the size of the company’s debts as being a problem and, of course, the transfer did reduce that overall level of debt. But it did so at the cost of letting go of probably the company’s most realisable asset and only in favour of one internal creditor.
It seems to me that the strongest argument in favour of Mr. and Mrs. Clarke on this score is the fact that they did continue to support the company to a substantial further extent with some cash and more credit. The case would, clearly, have been stronger for the liquidators if the Clarkes, having got the property, had not extended further support.
Does it follow, however, from this that the presumption that the company was influenced by the relevant desire is rebutted? Re MC Bacon Ltd. points out the difference between intention, which is objective and includes the intention to achieve the necessary results of one’s actions, and desire, which is subjective and may be at odds with the consequences of actions.
While, therefore, it is a reasonable starting point to say that, the result of the transaction being undoubtedly to put the Clarkes in a better position in an eventual insolvent liquidation, that must have been intended, and on the part of the Clarkes at least, desired, that is not necessarily the whole of the picture.
As Mr. Russen points out, one of the striking features of the case is the absence of any objectively compelling reason for the transfer other than to put the Clarkes into a better position. It was not needed for the change of banks and the restructuring plans are so vaguely described that it is impossible to tell what they entailed. The company was going to continue to use the premises and, therefore, having parted with the freehold, it had to take a lease and, therefore, to accept the obligation to pay rent.
In the end, it comes down to the fact that the Clarkes asked for and insisted on the transfer, thereby placing themselves in a better position than they had been before. They are presumed in this to have been motivated by the relevant desire. Can they rebut this by saying that they considered the company to be solvent and intended to keep it afloat as long as they could?
I accept that this was their position most clearly by reference to the evidence given as regards the meeting with Mrs. Dainty on 28th March in the course of which she mentioned the question of the implications of possible later insolvency. They did not, however, take any advice about that from a solicitor or an accountant. Although the auditors were sent the Minutes of Board meetings, one by one, Mr. Clarke made it quite clear that he did not ask them to advise on any aspect of this. Mr. Bayes said the same in his witness statement.
On the one hand, it seems to me that it would be unsatisfactory that a well-intentioned but ill-founded belief that the present condition and future prospects of a company which is in fact insolvent can result in an undoubted act of preference to a Director escaping the accountability imposed by section 239. On the other hand, of course, the section does require, in conclusion, that the transaction was, subjectively, motivated by the relevant desire.
I have not found the resolution of this issue easy, but having read and re-read the witness statements and my notes of the oral evidence, I come to the conclusion that Mr. and Mrs. Clarke were influenced by the relevant desire. They knew that they would be put in a better position as a result of taking the property. They knew that, essentially, this could only be justified if they were to take the property in exchange for new financial support for the full value of the property.
Mr. Clarke justified this in his own mind and in discussion with Mrs. Clarke by saying that they would, in future, provide more support, if necessary, to that amount. But he deliberately kept this to himself, whatever hopes or expectations the management might have had from knowing them. If he had chosen not to support the company further or had been unable to do so, or if the company had gone down suddenly in circumstances in which he could not try to rescue it, he would not have broken any obligation to the company but would have secured for himself and his wife the property for less, in terms of new cash, than its true value.
Interestingly, one feature of the history is that he is now letting the property to a new company set up by Mr. Davies carrying on a similar business (possibly on a smaller scale) and employing some of the staff. That gives Mr. Clarke some satisfaction in that those employees, at any rate, have continuing employment. But it is not much consolation to the unsecured creditors of the company.
Accordingly, even without regard to the burden of proof lying on Mr. and Mrs. Clarke, and more so having regard to that, I conclude that Mr. and Mrs. Clarke, and through them the board of Conegrade, was influenced by the desire to create the effect of putting them in a better position than they would otherwise be in the event of an insolvent liquidation in causing the company to enter into the transaction by which a preference was given to Mr. and Mrs. Clarke to the extent of £64,808.
The liquidators’ case is, therefore, made out on preference though not under section 320. It is not necessary to consider, separately, the issue of breach of fiduciary duty or misfeasance.
In terms of remedy, it seems to me that the consequence is that I ought to order Mr. and Mrs. Clarke, under section 241(1)(d), to pay the company £64,808, no doubt with interest, although this will, of course, increase, by that amount, the debt for which they can prove in the liquidation.
In re Ryan, a Bankrupt.
[1937] IR 371
Johnson J
This matter comes before me by way of Charge and Discharge, the assignees of the bankrupt (one, Michael Ryan,) seeking by their Charge to set aside a mortgage executed by the bankrupt on October 8th, 1934, in favour of one, Michael Dargan, to secure a sum of £300, and a mortgage, dated October 17th, in favour of Philip Ryan to secure a sum of £200. The former mortgage was registered on October 31st and the latter on October 23rd, and the property mortgaged was certain licensed premises in the town of Cashel, held by the bankrupt on a tenancy from year to year. These premises were purchased by Ryan in October, 1928, for a sum of £850, of which a sum of £200 is alleged to have been advanced by Philip Ryan, the bankrupt’s father.
The matter with which I am concernedin fact, the whole of the bankrupt’s misfortunesarose from an unfortunate occurrence that took place on the evening of September 4th, 1933. Ryan had taken four of his friends, including Dargan and one, John Quigley, a shoemaker in Cashel, for an outing in his motor car, and coming home in the evening Ryan, who was driving, had his attention distracted for a moment with the result that the car swerved and overturned. Dargan and Quigley were pinned underneath and suffered severe injuries. They were taken to a Dublin Hospital where they were treated for a period of three or four months suffering, as a result of it all, both in mind, body and pocket. It is said that the accident occurred through the negligence of Ryan, and I do not doubt that that is so.
Quigley, when he got out of hospital, brought an action to recover damages. The proceedings were instituted on March 20th, 1934; a defence was filed on June 5th, in which Ryan denied that he had been negligent and pleaded contributory negligence on the part of Quigley, and the action came to trial on November 7th and 8th when judgment was entered up for a sum of £450 which, with the costs, amounted to the substantial sum of £672 14s. 9d. It is upon that debt that Ryan was adjudicated a bankrupt. During the pendency of the proceedings, various efforts were made by Ryan to arrive at a settlement of both claims. First of all, he offered on March 28th to pay Quigley’s medical and hospital expenses and his law costs. It was explained then to Quigley’s solicitor that Ryan’s”circumstances are only moderate; he has a young family to support and maintain, and with an overdraft in the bank it will mean ruination to his business to fight a Supreme Court action. His credit will be shaken and your client’s prospects of recovering the amount of his judgment may not prove attractive.” His offer was refused, and on April 19th Quigley was offered a sum of £300, which offer also was refused.
On April 27th Dargan’s solicitors threatened to institute proceedings. On May 8th Ryan’s solicitor offered to pay Dargan a sum of £300, the solicitor adding: “He has already offered £300 to the other passenger, Quigley.”Messrs. D’Arcy & Co. promptly accepted Ryan’s offer. Some further correspondence then took place, and Ryan, who was unable to pay cash, offered on May 16th to give Dargan a mortgage upon the licensed premises in question as security for the debt, and on the following day Dargan accepted this offer also. Some delay seems to have taken place in the preparation of this deed; but, ultimately, on September 22nd the draft deed was sent by Dargan’s solicitor to Mr. N. F. Maher, Ryan’s solicitor, for approval, and it was executed on October 8th and registered on October 31st. Dargan thereupon became entitled to have the amount of this debt raised out of Ryan’s licensed premises in Cashel.
Quigley, whose judgment against Ryan was recovered on November 8th, 1934, appears to have done nothing to enforce his right for a very considerable time; but on June 15th, 1936, he proceeded to adjudicate Ryan a bankrupt and he himself was appointed Creditors’ Assignee in due course. He seeks now to set aside the mortgage deed as against the creditors on the grounds:(a) that the consideration was not truly stated and that the mortgage was not made for value or in good faith; (b) that it was made with intent to defeat, delay, hinder and defraud the creditors of the bankrupt; and (c) that it was executed with a view of preferring Michael Dargan, and was therefore void.
In regard to the first claim there is, in my opinion, no substance in it. The mortgage truly sets out the circumstances as to the injuries which Dargan had sustained and the agreement that Ryan had agreed to pay a sum of £300 “in full discharge of all claims, actions and demands which the mortgagee may have against the mortgagor as a result of such accident.” I am satisfied that Dargan fully intended to bring proceedings to enforce his rights, and it scarcely lies in Quigley’s mouth to say that those proceedings would not have succeeded. The amount that was to be paid was a very moderate amountQuigley, who recovered £450, cannot deny thatand it seems to me that Ryan showed great wisdom in agreeing to pay this moderate sum, thus avoiding a possible liability for heavy law costs.
The third ground set out in the Charge is equally unsubstantial. I know no reason (apart from the law of bankruptcy) why a debtor should not be allowed to prefer one creditor to another. Indeed a creditor who is prompt and diligent in looking after his rights is a favourite of the law. As Heath J. said in Cox v. Morgan (1): “The using of legal vigilance is always favoured and shall never turn to the disadvantage of the creditor”; but there is one very important modification of this rule in bankruptcy proceedings. The doctrine of fraudulent preference was devised at an early period by the Judges in bankruptcy to prevent a trader on the eve of bankruptcy from making a voluntary distribution of his property amongst his creditors, so as to defeat that equal distribution which is contemplated by the bankruptcy laws: Linton v. Bartlet (1); Devon v. Watts (2). Later, this doctrine was placed on a strictly defined basis by the Legislature. The provision in the Irish code is sect. 53 of the Act of 1872, which avoids the making of payments or the giving of securities to a creditor, “with a view of giving such creditor a preference over the other creditors,” if the payment is made or the security given within three months before the debtor becomes a bankrupt. But that provision has no applicability in the present case where the security was created nearly two years before the adjudication of the debtor, and I am satisfied in fact that it was not created with any view to prefer Dargan over Ryan’s other creditors.
The remaining matter is the second ground set out in the Chargethat the mortgage was made with intent to defeat, delay, hinder and defraud the creditors of the bankrupt and is void against the chargeants. This part of the Charge is grounded upon the Act against Fraudulent Conveyances of 10 Car. 1, Sess. 2, c. 3, which declares that every fraudulent conveyance and other alienation of a debtor’s property which is “devised and contrived . . . to the end, purpose and intent to delay, hinder, or defraud the debtor’s creditors of their lawful debts” shall be”clearly and utterly void and of none effect”; but that the legislation shall not extend to any conveyance of property made “upon good consideration” to a person”not having at the time of such conveyance . . . any manner of notice or knowledge of such covin, fraud or collusion.” This Act came under review quite recently by Meredith J. and myself in the case of Bryce v. Fleming and Gilvarry (3) and the general principles upon which the Act is to be applied are set out very clearly and attractively in the judgment of Meredith J.
I think that the primary object of the Act was to render void voluntary deeds which were “devised” or “contrived”with the intent to delay, hinder or defraud the creditors of the grantor; but the legislation extends also to defeat even conveyances of property for “good consideration”where the grantee had notice or knowledge that “such covin, fraud or collusion” was being committed. The use of the words “devised” and “contrived” connotes some degree of moral turpitude, or, at any rate, something of a tricky or questionable character. But I do not think that the Act has any application to a case like the present where a debtor under pressure mortgages a portion of his property to secure a bona fide debt due to a single creditor, the debtor gaining nothing for himself out of the transaction. This principle has been firmly established by a long line of cases ranging from Holbird v. Anderson (1)in 1793 to Bulteel v. Parker (2) in 1916, and is founded upon good sense and fair play. I may be permitted to refer to one of these casesEx parte Games(3)and to the judgment of James L.J. at p. 323: “Here there was a debt of £249 bona fide due from the mortgagor to the mortgagee, and the mortgagee afterwards made further advances to the mortgagor. The security was limited to £300, and the mortgagee took the property only by way of security. If the equity of redemption is really valuable, I cannot see that there has been any fraud on the other creditors. The mortgagor had a right to sell all his property and pay this particular creditor, and he had an equal right to give him all his existing property as security for the debt. If an act of bankruptcy was committed by the execution of the deed, it was published to all the world by the registration under the Bills of Sale Act, and any creditor could have availed himself of it to make the mortgagor a bankrupt. . . It appears to me that the deed was nothing more nor less than a preference of this particular creditor, and it was made more than a year before the bankruptcy. I see no evidence of any fraud upon the creditors.” Almost every word of this passage applies to the question in the present case. The case of Holbird v.Anderson (1) was another case in which it was held that the giving of a security to a creditor was not fraudulent within the meaning of the statute. Lord Kenyon said at p. (238):”There is no fraud in this case. The plaintiff was preferred by his debtor, Charter, not with a view of any benefit to the latter, but merely to secure the payment of a just debt to the former, in which I see no illegality or injustice.” The case of Exton v. Scott (4) is an even stronger decision in favour of a creditor.
In truth I cannot appreciate the argument of counsel for the chargeant on this point. What was the situation in September, 1933, when this unfortunate accident took place? Michael Ryan was at that time a publican carrying on his business in valuable premises which he had acquired some years previously, and carrying on that business successfully and profitably for anything that I know to the contrary. There is no evidence that he had any creditors at that time, except the bank, to whom he owed a small overdraft. That was a circumstance of no importance. It is probable that the overdraft, as overdrafts do, increased or diminished in amount with the ups and downs of the trading and with the exigencies of the business. And then this unfortunate and unforeseen accident took place, and Ryan became liable to Dargan and Quigley for damages. The former settled his claim for £300a very moderate sumand, instead of insisting upon payment at once, he took a mortgage upon the debtor’s premises as security for the debt. The whole of the negotiations as to this transaction is related in a very candid way in the correspondence that passed between Dargan’s and Ryan’s solicitors. In entering into the arrangement the parties proceeded in a very leisurely way. The agreement to give a mortgage was entered into upon May 16th, 1934; the deed was not executed till October 8th, and it was not registered until October 31st so that it cannot at all be regarded as a snap mortgage. When it was agreed in May that a mortgage should be given to secure Dargan, Quigley’s action was pending, but his rights had not been determined. He might have recovered a great deal less than £450 and he might have been awarded only costs on the Circuit Court scale. The mortgage to Dargan contained a plain statement that the mortgagor”is unable to pay to the said mortgagee the said sum of £300 immediately,” and he entered into a covenant to pay the debt on January 1st, 1935.
The chargeants do not rely upon the law of bankruptcy in regard to their case that this was a fraudulent conveyance; but if they had done so the result would have been the same. One of the “acts of bankruptcy” upon which an adjudication may be based is the fact that “the debtor has . . . made a fraudulent conveyance, gift, delivery or transfer of his property or of any part thereof”; but such a conveyance is available as the groundwork for bankruptcy proceedings only if the petition be filed within six months after the commissions of the fraud, and here a period of twenty months has elapsed. The mortgage, therefore, could not have been relied upon by Quigley as an act of bankruptcy.
In regard to Philip Ryan’s mortgage deed, executed on October 17th, 1934, as security for an alleged debt of £200 different considerations arise. Philip Ryan died during the pendency of these proceedings, and on January 15th, 1937, an order was made by this Court appointing Mary Ann Ryan, his widow, to represent his estate for all purposes of the bankruptcy proceedings, and, in particular, for all purposes of the proceeding by way of Charge and Discharge. Mrs. Ryan has not chosen to file a Discharge and has allowed these proceedings to go by default. I have not seen Ryan’s mortgage and no evidence has been given in support of it. The only evidence that I have that such a mortgage ever was executed is a copy of the memorial prepared for the purpose of registration. There is no reliable evidence before me of the existence of this alleged debt of £200 or of how it arose. It is suggested that it represented a loan made by Philip Ryan to his son Michael in 1928 when Michael purchased the public-house for £850. It is strange that if such a loan was made, some security was not given for it at the time, and that Philip Ryan and his son waited for six years before a mortgage deed was executed. When that deed was executed on October 17th, 1934, it may well be that the debt had become barred by virtue of the Statute of Limitations. It certainly was executed under very suspicious circumstancesat a time when one creditor had, nine days previously, forced Michael Ryan to give him security for the payment of a genuine debt of £300 and proceedings were pending against him at the suit of a second creditor which eventuated in the recovery of a judgment for £672. These are matters of which no explanation has been given and under the circumstances I feel that I am obliged to set aside the mortgage deed of October 17th, 1934, and the registration thereof effected on October 23rd, as against the assignees in bankruptcy of Michael Ryan and to declare that such mortgage and registration are clearly and utterly void and of none effect as against the said trustees in bankruptcy. I think, however, that I must make this declaration without prejudice to the right of Mary Ann Ryan, or of any other person to claim to prove in the bankruptcy for a debt of £200 formerly owing to Philip Ryan deceased as an unsecured creditor.
In re Cutts
[1956] 2 All ER 537, [1956] 1 WLR 728
Lord Evershed MR, ‘If a debtor, knowing himself to be insolvent and knowing also that bankruptcy is imminent, deliberately elects to pay his oldest friend or his closest relative and to leave his other creditors unpaid or with little chance of being paid, it would appear to me to be irrelevant that he made the selection because of the love he bore for his friend or relative or because of his hopes for general but unspecified favours from them in the future…For if a debtor deliberately selects for payment A in preference to all his other creditors, it cannot, to my mind, matter, in the absence of other relevant circumstances, whether A is the debtor’s oldest friend, closest relative or best client.’
Doherty -v- Quigley & anor
[2015] IECA 297 (21 December 2015)
URL: http://www.bailii.org/ie/cases/IECA/2015/CA297.html
Cite as: [2015] IECA 297
JUDGMENT of Mr Justice Peart delivered on the 21st day of December 2015:
1. It is unusual these days for the determination of an appeal to turn on the interpretation of a statutory provision enacted during the reign of King Charles I of England, almost four hundred years ago. But s. 10 of the Conveyancing Act (Ireland) 1634 (10 Chas. 1 sess. 2 c.3) was not repealed until the commencement of the Land and Conveyancing Law Reform Act, 2009 on the 1st December 2009, and was therefore extant on the dates of the two transfers of property made in 1998 and 2000 by the first defendant in favour of his wife the second defendant, and which the plaintiff seeks to have set aside. The language of the section is of its time, and therefore arcane and tortuous to modern eyes. However, just as Theseus unravelled a string to ensure his safe escape from the labyrinth having slain the Minataur, I have for the reader’s assistance underlined the essential words of this ancient section as a guide to its conclusion. It provides:
“10. And furthermore for the avoiding and abolishing of fained, covenous and fraudulent feoffments, gifts, grants, alienations, conveyance, bonds, suits, judgements and executions, as well of lands, and tenements, as of goods and chattels … which feoffments, gifts, grants, alienations, bonds, suits, judgments and executions have been and are devised and contrived of malice, fraud, covin, collusion or guile, to the end, purpose and intent to delay, hinder or defraud creditors and others of their just and lawful actions, suits, debts, accompts, damages, penalties, forfeitures, herriots, mortuaries, and reliefs, not only to the lette or hindrance of the due course or execution of law and justice, but also to the overthrow of all true and plaine dealing, bargaining and chevisance between man and man, without the which no common wealth or civill society can be maintained or continued; All and every feoffment, gift, grant, alienation, bargaine and conveyance of lands, tenements, hereditaments, goods and chattels … made, to or for any intent or purpose before declared and expressed, shall be from henceforth deemed and taken only as against that person or persons, his or their heires, successors, executors, administrators, and assignes, and every of them, whose actions, suits, debts, accompts, dammages, penalties, forfeitures, herriots, mortuaries and reliefs, by such guileful, covenous fraudulent devises and practices, as is aforesaid, are, shall, or ought to be in any wise disturbed, hindered, delayed or defrauded to be clearly and utterly void, and of none effect …”.
2. The plaintiff seeks to have these two transfers set aside on the grounds that they were effected for the purpose of ensuring that the lands would not be available to satisfy any judgment which she might obtain against him, even though by then no proceedings had actually been commenced, nor even a letter written warning of a possible claim in damages being made. However, the trial judge found as a fact that he had reason to believe by the date of the first transfer in February 1998 that she might seek damages against him in respect of sexual abuse which she alleged he had perpetrated against her during the 1980s when she was a teenager, and about which she had first made complaint to An Garda Síochána in August 1993, because he was interviewed by the Gardaí about those matters immediately following her complaint being made.
3. A number of findings of fact were made by the trial judge before reaching her conclusion that the two transfers of land to his wife without consideration other than “natural love and affection” were fraudulent transactions, and therefore void, within the meaning of s. 10 of the Act of 1634, and that they should be set aside. Counsel for the appellants does not ask this Court to set aside any findings of fact, but rather bases the appeal on the legal ground that a person who seeks to set aside a transfer on the basis that it is void under s. 10 of the Act of 1634 must, at the date of that transfer already be a creditor of the disponer, and not just someone such as the plaintiff who may become his creditor in the future.
4. As found by the trial judge, the first named defendant was aware by 1991 that the plaintiff was claiming that she had been sexually abused by him, and that in August 1993 she had made her first complaint to the Gardaí, immediately following which the first defendant was interviewed by them. She found also as a fact that in February 1998, both defendants met the plaintiff at an All-Ireland dancing competition in Ennis, on which occasion the plaintiff said to the second named defendant in a sarcastic tone “bet you are delighted to see me”. She found also that on 26th February 1998 the second defendant became registered as the sole owner of lands at Meenagowan, Co. Donegal on foot of a transfer made in consideration of natural love and affection – in other words a voluntary transfer, and that in January 1999 the first defendant was arrested and charged with 24 counts of indecent assault upon the plaintiff, and further that on 21st March 2000 the second defendant became registered as the sole owner of the family home at Barnhill Park, Letterkenny, again on foot of a voluntary transfer. The trial judge was not persuaded as to the truthfulness of each of the explanations (set out at paragraph 29 of the judgment) that were proffered by the second defendant for these voluntarytransfers. The trial judge concluded that the plaintiff had established that on the dates of these transfers, the first defendant had committed repeated tortious wrongs upon her, and that by divesting himself of all of his property for no valuable consideration he had deprived the plaintiff of the benefit of the property in respect of any award or compensation that she might have been granted in the future, and further that the natural and probable consequence of these transfers was to delay or defeat the plaintiff as a creditor.
5. I would add one other undisputed fact which provides a context for the remark made by the plaintiff to the second defendant when they met at a dancing competition in Ennis in February 1998. It is that in January 1994 – that is, some five months after first making her complaint to the Gardaí – the plaintiff left Ireland and moved to Texas, USA, and that in late 1997 or early 1998 she and her husband returned to live in Ireland. It was very shortly after her return that the meeting at the dance competition in Ennis occurred.
6. There is no doubt that by the dates of these two voluntary transfers, the plaintiff had not yet become an actual creditor, as by that date not only had she received no award of damages but she had not even commenced her proceedings claiming damages, nor even written a letter signalling an intention to claim damages. This is a matter heavily relied upon by the appellants in support of their submission that the plaintiff is not a creditor within the meaning of the Act of 1634.
7. The plaintiff’s proceedings were commenced in December 2007 following an authorization being made by the Personal Injuries Assessment Board. The case was heard by Ryan J. (as he then was) and in his judgment delivered on the 5th July 2011 he made an award of damages in the sum of €400,000, and the costs of the proceedings in favour of the plaintiff. The appellants submit that it was only at that date that the plaintiff assumed the mantle of creditor, and that the transfers predated that date by some eleven and thirteen years respectively, and ought not to be considered fraudulent under the section.
8. A net issue arises for determination on this appeal, namely whether the plaintiff must be an actual creditor at the dates of the transfers in order to avail of the provisions of s. 10 of the Act of 1634, or whether it is sufficient that on those dates she is a potential creditor so as to come within the phrase “creditors and others” in s. 10 .
9. In reaching her conclusion that the plaintiff came within the meaning of “creditor” for the purpose of s. 10 of the Act of 1634, Donnelly J. stated:
13. In MIBI v. Stanbridge, Laffoy J. confirms that the 1634 Act and the earlier English statute, Fraudulent Conveyances Act 1571 (13 Eliz.1, c. 5) were merely declaratory of the common law. There is reliance by both parties on May on The Law on Fraudulent and Voluntary Conveyances (3rd. ed. Stevens and Haynes, 1908). May states that the statute is couched in very general but simplistic terms and its expansiveness has ‘enabled the judges to bring within its scope, and extend its operation to almost every kind of transaction resorted to by debtors to the prejudice of their creditors’.
14. Counsel for the plaintiff relies upon a number of cases to show that a creditor within the meaning of the 1634 Act is not required to have obtained a judgment in his or her favour. There is very clear authority from the case of Barling v. Bishopp (1865) 29 Beav. 417. In that case, the then Master of the Rolls stated with respect to the Elizabethan statute on which the Irish statute was based, that ‘[i]t is obvious that the statute is not, in terms, restricted to existing creditors alone, but that it extends to future creditors also’. Baron Fitzgerald in Smith v. Tatton (1879) 6 L.R. Ir. 32 stated at p. 41 with respect to the 1634 Act, that
‘[t]here can be no doubt that the statute makes no distinction between present and future creditors, and the fraudulent intent to defeat any creditor practically avoids the deeds against all’.”
10. The trial judge went on to consider whether the defendants’ argument (as to a future creditor not being within s. 10 of the Act of 1634) could be assisted by In re Daniel Kelleher [1911] 2 I.R. 1. However, she concluded, correctly in my view that it was decided on very different facts, and was distinguishable on that basis.
11. As to fraudulent intent, she concluded, on the basis of authority cited including the judgment of Laffoy J. in MIBI v. Stanbridge [2011] 2 IR 78, that the onus lay upon the plaintiff to demonstrate a fraudulent intent – either an express fraudulent intent or by way of an inference to be drawn from circumstances found to have existed.
12. She considered firstly whether there was evidence from which she could find an express intent on the part of the first defendant to defeat or delay his creditors. She drew no adverse inference as to his intention in that regard from the fact that he had not given evidence nor even sworn an affidavit., and she looked at two explanations for these transfers offered in evidence by the second defendant, and concluded that she was “not persuaded as to the truthfulness of each of the explanations that was offered by the second defendant”. Having considered the remaining evidence she was satisfied that this onus had not been discharged by the plaintiff, though she added that if the onus had been on the defendants she would not have been satisfied that these were bona fide transactions made with no fraudulent intent.
13. Having reached that conclusion she went on to conclude that the natural and probable consequence of the transfers, looked at from an objective viewpoint, was in all the circumstances to delay or defeat the plaintiff as a creditor, so that a reasonable inference of an intention to defraud the plaintiff could be drawn. She so found in respect of each transfer, the reasons being slightly different in relation to each, but not in any way material to the particular ground being argued.
14. The appellants have submitted that there is no factual basis for a finding that the plaintiff was a creditor on the dates of these transfers of property. In particular they say that in 1998 she was not a creditor, nor a person likely to be prejudiced by the transfers since up to that time, including the date on which she made the sarcastic remark at the dance competition in Ennis referred to above, since the only intention evinced by her, namely by making a complaint to the Gardaí in 1993, was to have the first defendant charged with and convicted of offences which she was alleging were committed against her, and that she had not given the first defendant any reason to believe that she was intending to claim damages. In that regard it is noted that the first occasion on which such an intention was indicated was when her solicitor first wrote to the first defendant in 2005.
15. It has been submitted that in all the cases where a transfer was found to be void as fraudulent, there has been a particular set of facts from which an express intent to defraud was found to exist, or from which an inference of such intent could be drawn, and that in the absence of such concrete facts in this case the plaintiff cannot be considered to be a creditor for the purpose of the section. Counsel has referred to In Re Moroney, a bankrupt, MIBI v. Stanbridge, and Keegan Quarries Ltd v. McGuinness [2011] IEHC 453, Barling v. Bishopp 29 Beav. 689, as well as Smith v. Tatton [1879] 6 L.R. IR. 32 for the submission that in order for the plaintiff to be considered a future or potential creditor for the purpose of the section, there must be some clearly established fact showing that she was such a creditor, before any inference can be drawn that the transfers were effected with an intent to defraud the plaintiff or hinder her in recovery of damages not by that date sought. It is submitted that there were now contemporaneous facts established by 1998 to show that she was a creditor or someone who may become a creditor in the future. While it is accepted by the first defendant that he had been interviewed in August 1993 after the plaintiff had made her complaints, it is submitted that there was no evidence that he made any admissions in relation to the acts being alleged, and it is submitted that to now impute to him an intention to defraud the plaintiff by making the transfers in 1998 and 2000 is to look at events with the benefit of hindsight, and that in so far as the trial judge has done so, she has erred.
16. A finding that the natural and probable consequence of the two transfers of property by the first defendant was to delay or hinder his creditors is sufficient to fulfil the second limb of the test for a finding of fraudulent intent as propounded by Palles C.B. in In Re Moroney, a bankrupt [1887] 21 L.R.Ir. 27 to which the trial referred in her judgment. In that case the Chief Baron stated at p. 61:
“Therefore to bring a conveyance within the statute, first, it must be fraudulent; secondly, the class of fraud must be an intent to delay, hinder or defraud creditors. Whether a particular conveyance be within this description may depend upon an infinite variety of circumstances and considerations. One conveyance, for instance, may be executed with the express intent and object in the mind of the party to defeat and delay his creditors, and from such an intent the law presumes the conveyance to be fraudulent, and does not require or allow such fraud to be deduced as an inference of fact. In other cases, no such intention actually exists in the mind of the grantor, but the necessary or probable result of his denuding himself of the property included in the conveyance, for the consideration, and under the circumstances actually existing, is to defeat or delay creditors, and in such a case … the intent is, as a matter of law, assumed from the necessary or probable consequences of the act done; and in this case, also, the conveyance, in point of law, and without any inference of fact being drawn, is fraudulent within the statute. In every case, however, no matter what its nature, before the conveyance can be avoided, fraud, whether expressly proved as a fact, or as an inference of law from other facts proved, must exist.”
17. These principles have been applied ever since, and most recently by Costello P. in McQuillen v. Maguire [1996] 1 ILRM 394, by Laffoy J. in MIBI v. Stanbridge [supra], and by Finlay Geoghegan J. in Keegan Quarries Limited v. McGuinness [2011] IEHC 453.
18. The finding of fraudulent intent made by the trial judge by way of inference for the purpose of the second limb of the test stated by Palles C.B in In Re Moroney, a bankrupt is in my view irresistible and correct on the facts of this case, and was correctly drawn by the trial judge. She applied the correct test in that regard. In so far as it has been submitted by the appellants that there must be facts from which the necessary inference as to intent can be drawn, I am satisfied that this is established by the fact that in 1993 the plaintiff made a complaint in 1993 to the Gardaí in relation to certain acts by the first defendant, and that thereafter he was interviewed about it.
19. I am satisfied also that even though the plaintiff’s intention was that her complaints should lead to him being charged and convicted of criminal offences arising from those actions, those alleged actions were also tortious acts capable of giving rise to a claim in damages. Those tortious acts, and the complaints made in relation to same, and the interview of the first defendant, existed as facts at the date of the two transfers from which the necessary inference could be drawn for the purpose of the second limb of the Palles C.B’s test in In Re Moroney, a bankrupt notwithstanding that the damages claim arising from them was not determined until 2011. The plaintiff was a creditor in the sense of a future creditor, and it is noteworthy also that section 10 refers not only to “creditors” but to “creditors and others” who may be delayed, hindered or defrauded by a fraudulent transfer of property.
20. As I have stated, the appellants’ challenge is limited to the question of whether the trial judge was correct in concluding as a matter of law that the plaintiff was at the date of the two transfers a creditor within the contemplation of s. 10 of the Act of 1634. Her conclusion was that “although there may have been no debt prior to the judgement due to the fact that the damages were only ascertainable after an action at law, it is undoubtedly the case that the plaintiff was a creditor within the meaning of the 1634 Act”.
21. In my view this conclusion is amply supported by authority and is correct on the facts as found by the trial judge. As far back as 1860 in Barling v. Bishopp 29 Beav. 689, Romilly MR on facts not dissimilar to the present case stated at p. 690, albeit to the equivalent provision in the Fraudulent Conveyances Act of 1571( 13 Eliz 1, c. 5) which was in identical terms to s. 10 of the Act of 1634:
“I am of opinion that the effect of the deed was to defeat persons who might become his creditors, and was executed in favour of his daughter, who it is clear would not allow her father to starve. It is not necessary to go into the question of whether he had other property or not, but if I took his schedule filed on his insolvency as proof, it would appear that he had no other property, and that he disposed of the whole. I am of opinion that it is a necessary inference to be drawn from the facts and dates, that the deed was executed with a view to defeating persons who might become his creditors in consequence of acts done by him.”
22. These statements represent as correct an interpretation of the Act of 1634 today as they did when they were made, and establish that s. 10 of the Act of 1634 applied not just to existing creditors, but also to persons who by reason of facts existing at the date of transfer might become a creditor in the future. No authority to the contrary has been cited by the appellants. Where it has been found, in my view correctly, that the transfers in question have been made for no consideration, and a claim for damages by the plaintiff in the future by reason of tortious acts already committed was possible on the facts as found, the inference was correctly drawn as a matter of law that the first defendant intended that the property being transferred both in 1998 and in 2000 should be placed beyond recourse of the plaintiff as a future creditor should she be successful in her damages claim in the future. It is relevant to note that no evidence was given by the defendant of any other means available to him at the dates of transfer to meet a future award to the plaintiff. Also the explanations offered by the second named defendant for the transfers were rejected by the trial judge, and that the first defendant gave no explanation.
23. For these reasons I consider that the trial judge was entirely correct in her conclusions, and I would dismiss this appeal.