7- Transaction at an undervalue s.423- New deck Flashcards
Purpose of s.423?
A stringent provision which requires the debtor/insolvent co’s intention to prejudice creditors.
Try first before 339 and 238.
Based on the property principle (principle that all the debtor’s property should form his estate)
Order in PQs?
- State provision and property principle;
- Can X bring the claim? s.424/423(5);
- Was the transaction one falling within 423(1)?
(a) Hill v Spread Trustee (also use Bacon- always compare)
(b) Agricultural Mortgage Corp - Did the transaction occur within the required time?
- Hill v Spread
- Limitation Act 1980 s.8(1); 9(1)
- Arden Hill v Spread dissent - Did the debtor/insolvent co have the necessary intent to defraud creditors under 423(3)?
- Midland Bank v Wyatt
- Hill v Spread
- Barclays Bank v Eustice - Was the debtor benefited by the transaction?
- Lloyds Furniture Palace - What order should be made?
- 423(2)
- 425(1) - Is the order restricted under 425(2)/(3)?
s.424
(1) An application for a 423 order shall not be made except;
(a) If debtor adjudicated bankrupt or co is being wound up, by the trustee, the official receiver, liquidator, administration, or (with leave of the court), a victim of the trans.
(c) In any other case, by a victim of the trans.
(2) An application by one victim represented them all.
423(5)
Definition of a victim.
Hill v Spread on victims
Victim in (5) does not just mean creditor. it is anyway prejudiced by the transaction.
Tribe v Tribe (1996)
Rule” Debtors maybring proceedings for a transaction at an undervalueto set aside transactions that they have entered into.
Case: Lessee served with schedule of dilapidations at end of tenancy which must be paid to lessor.
He transferred his controlling shareholding in family co to his son, expressed to be for consideration of £78K, but this was never paid, and was never intended to be paid.
Turned out he was not liable and son would not transfer back, so sought to have trans set aside under 423(1)(a).
Decision:
1. Since transfer was a voluntary transfer between F and S for no consideration, the presumption of advancement applies (presumption that the property transferred from parent to child is a gift.
- Presumption cannot be rebutted by an illegal purpose for the advancement.
- BUT because illegal purpose was never fulfilled, the presumption could be rebutted and he could plead under 423.
423(1)
A person enters a trans at an UV if:
(a) he makes a gift or enters a trans where he receives no consideration
(b) in consideration of marriage
(c) he enters a trans for 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 himself.
Hill v Spread Trustee
423(1)(a)- Probably correct on reading of the legislation but sad because the court didn’t realise they were undermining the distinction between the property principle (transactions at an undervalue) and pari passu (preferences).
Case: In 1989 N settled landon trust for his daughter. He toldRevenue that the land was worth £35,000 although N had received an offer for itof£700,000 and a few months later he sold it for 2m.
In 1993 under compromise with Revenue, who had not accepted the initial valuation, N paid £160,000.
After receiving the proceeds of the 2M salethe trustee had lent most of it back to N.
N later made charges over other land he owned in the trust’s favour, and assigned sums he was due on his loan account to the trust, in order to continue to secure the loan (i.e. these were seemingly provided without any consideration by T)
In 1998 Revenue served statutory demand for further tax andin January 1999 N was made bankrupt on their petition as he could not pay the demands.
N’s trustee in bankruptcy argued the charges and settlements to T fell under 423(a).
Decision:
1. The effect of Millet in Re MC Bacon is not that simply providing a charge to secure an existing debt can be good consideration and must thus fall outside 423.
- Millet wascareful to point out that the giving of security only amounted to consideration because it was given in exchange for forbearance by the creditor from demanding repayment/winding up the co (NB: This is not really what Millet meant- he wanted therule to be wider than this, the forebearance not being the focus)
- In the present case, the trustee did not provide any consideration in the form of forbearance for later charges. The loans of the proceeds of the 2m sale were not due until 1998 and 2013, so trustee could not have provided consideration in the form of forbearance from demanding repayment, and therefore the transaction falls under 423(1)(a)
NB: So, following Hill, if you can say that there is some forebearance forming consideration then can take it away from 423 to preferneces, but if not then must try both.
Hill v Spread evaluation
- Court confuse the property principle (that all debtor’s property should go to his creditors) and pari passu (non-preferential distribution).
- Millet in Bacon- The rationale for a transaction at an undervalue is that value has left the estate, thereby depriving the creditors of property which is actually the debtors (the anti-deprivation rule).
- so cannot be a transaction at an undervalue, according to principle, because no value leaves the estate.
- While theasset provided in security disappear, so also does the liability which it secured, so the accounts remain unchanged.
This does not offend the property principle- because all of the debtor’s property is, in this scenario, available to his creditors. - More appropriate for preference law. It offends PP, because it causes unequal distribution among creditors.
- However, Hill does appear to be agreeable with s.423
Essay subject - is this bad law?
Agricultural Mortgage Corp v Woodward (1995)
Case: Debtor secured £700,000 loan from creditor on security of his farm. Fell into arrears arears on the payment of the mortgage and agreed a deadline to pay off arrears with creditor. Shortly before deadline he granted his wife a tenancy of the farm at market rent. Value of the farm (and thus the charge) with vanact possession was £1m.
Value in occupation was £500m. Wife admitted that the reason she took the tenancy was the prejudice the creditor’s interests so he would not sell the farm.
Decision:
1. A lease at market rent can be a transaction at an undervalue within 423(1)(c) even if full market rent is charged.
- In Bacon a similar conclusion was reached in the bankruptcy context and in Menzies v National Bank of Kuwait the CoA approved the analysis and said it was also applicable to s.423(1)(c).
- Applying Bacon,the fact that the creditor suffered a detriment by reason of a reduction in value is not of itself material.
- What matters is that the tenancy gave the tenant a protected status (‘reason’ position) which placed her in a position to hold the debtor to ransom in negotiating a surrender value. The conferment of that benefit formed part of the bargain for consideration, so the value in money or money’s worth that she received was significantly more than the consideration she provided in market rent.
- i.e. the consideration in Bacon was forbearance, the consideration here was the surrender value. Bacon shows that rights such as these can form consideration (though in Bacon this meant the case could not be tried under 423(a) and here it meant the case fit under 423(c).
- N.B. this may have the consequence of any lease potentially being a transaction at an undervalue (note that s.339 needs purpose to deprive
Hill v Spread on time limit
- Limitation periods for claims to be brought under 423 (and 238-241) run from when the bankruptcy order was made, andare:
12 years if under s.8(1) Limitation Act 1980- normal claims, or
6 years if under s.9(1) 1980- if claim is for a sum of money claimed under a statute.
- There isno inherent objection to the notion that there might be separate limitation periods for different applicants under s 423
Arden dissent on time limit (Hill)
- Time limit should begin when a person becomes a victim of the transaction, not begin on adjudication of bankruptcy/liquidation.
- Hill proceedings begun in 2002, over 12 years after the trust settlement was made. The majority therefore held that the limitation period began on the date of the bankruptcy order, so the claim could be made (NB this differentiates 423 from 339 and 238 which require trans to have occurred at a relevant time before the bankruptcy/winding up, but do not have limits on when the claim can be brought).
- On correct statutory interp a period of limitation runs from the date on which all of ingredients of a cause of action are complete. It is complete when all the facts that would be necessary to prove in proceedings could be pleaded.
- One of these necessary ingredients is that there is a victim.
- There could be a victim of the trans before the bankruptcy order/winding up order.
- Likewise, it would be odd if the limitation period began on the order if there were no victims at that date.
- Why would Parliament enact a provision to protect victims where the limitation period began before the victim had become a victim
423(3)
An order shall only be made if the court is satisfied that the trans was entered into by the debtor/insolvent co for the purpose of:
(a) putting assets beyond the reach of a person who is making, or may at some time make, a claim against him (UCs); or
(b) otherwise prejudicing the interests of such persons in relation to a claim he is making or may make.
Midland Bank v Wyatt (1997)
423(3)
Case: Debtor made declaration of trust of family home in favour of wife and daughter in 1987 when about to embark onnew business via a limited company; debtor solvent at time.
In 1991 bank obtained charging orderon house; debtor revealed declaration of trust for first time when opposing charging order being made absolute (bank wants to set aside trust).
Decision:
1. For purposes of s.423(3) if it can be proven that theintention of the debtor wasto put assets beyond the reach of future creditorsit doesnot matter whetherat the time of creating the trust the debtor was not about to enter into harardous business.
- The more harardous the business being contemplated is, the more readily the court will be satisfied of the necessary intention.
- On the facts D intended to protect his family from the long term financial risk should he set up a company- so the necessary intention under (3) can be inferred
Hill v Spread Trustee on 423(3)
Inducing the Revenue to make a wrong assessment of the capital gains wasenough to show that N acted with a purpose under s 423(3).
