Summary

For obvious reasons a trustee in bankruptcy will be keen to set aside any property transaction where the value of the consideration given is either nil or significantly less than the value of the property. The decision of the Court of Appeal in Hill v Haines [2008] Ch.412, makes plain the difficulties involved where the transaction in question is an Ancillary Relief (“AR”) settlement entered into prior to bankruptcy. Now the Court in Sands v Singh has held that, absent fraud or collusion, a transferee under a transfer made in AR proceedings is generally to be regarded as having given consideration equivalent to the value of the property being transferred.

The Sands v Singh case will be of interest to insolvency practitioners and their lawyers looking for ways to distinguish the decision in Hill v Haines.

The Claim

Mr Singh was the sole legal and beneficial owner of the family home. In January 2010, Mr Singh had executed a charge over the property in favour of his father (“the January Charge”). A year later and some 9 months prior to his bankruptcy, Mr Singh and his then wife agreed a settlement in AR proceedings under which the family home was to be held on trust for their 2 young children. The settlement was contained in a Consent Order and a Trust Deed (“the AR Settlement”). The Consent Order was approved by a district judge in the usual way.

Following Mr Singh’s bankruptcy, his father had applied for a declaration that he, rather than his son, was the beneficial owner of 16 properties (“the Buy To Let Properties”) which were registered in Mr Singh’s name. Judge Cooke, sitting as a judge of the High Court, dismissed that application.

In these proceedings, Mr Sands (“the Trustee”) applied, inter alia:

  1. For a declaration that the January Charge was void on the ground it was a sham; and
  2. To set aside the AR Settlement as constituting a transaction at an undervalue, for the purposes of s.339 of the Insolvency Act 1986.

The Decision

The judge, Mr Justice Newey, found that the January Charge was a sham and so a nullity. He refused to set aside the AR Settlement.

Firstly, he did not accept that the AR Settlement was the product of collusion between Mr Singh and his wife. Secondly, whilst acknowledging that it was possible to set aside an AR settlement in the absence of collusion if the circumstances were exceptional, he declined to do so in this case. The judge approached this issue on 2 alternative factual bases.

  1. That the facts were as set out in the AR proceedings i.e. that the January Charge was genuine and that the Buy To Let Properties were beneficially owned by Mr Singh’s father, rather than by Mr Singh. The judge decided that on these assumed facts the AR settlement did not make excessive provision for the wife and her children.
  2. That the facts were as he and Judge Cooke had found them to be i.e. that the January Charge was a sham and that the Buy To Let Properties were owned by Mr Singh. The judge’s view was that, even if these facts were known to the district judge dealing with the AR settlement, it was not evident that the Consent Order could not have been approved by the court in any event.

Thirdly, the judge dealt with the question of jurisdiction. There has been doubt in the past over whether insolvency issues have to be dealt with in the Family Court seized with the AR proceedings. The judge helpfully confirmed that it is not necessary for a trustee in bankruptcy to intervene in the AR proceedings in order to bring his claim.

Comment

It remains the case that any application by a trustee in bankruptcy to set aside an AR settlement on the grounds that the same was a transaction at an undervalue, is going to be challenging. The court in this case, however, has provided some clarification as to the potential grounds for such an application.

The applicable principles are neatly set out at para. 73 of the judgment.

  • Giving up a claim for AR constitutes “consideration” within the meaning of s.339. An AR order, therefore, cannot be challenged under s. 339(3)(a).
  • Usually an order cannot be challenged under s.339(3)(c) either. The value of the AR claim will generally be taken to have been equivalent to the value of the money and property required to be paid and transferred under the order.
  • This principle applies to consent orders as well as to those made after contested hearings.
  • In order to set aside an order made a trustee in bankruptcy will have to show a “vitiating factor” such as fraud, mistake, misrepresentation or some broadly similar exceptional circumstance.
  • The paradigm case in which an order can be set aside will be one involving collusion between the spouses. Collusion is not, however, an essential requirement, although the Court will be slow to set aside an order in the absence of collusion.
  • A trustee does not have to bring his claim by intervening in the AR proceedings. He may bring separate proceedings in the Chancery Division or County Court to have an order set aside under s. 339.

However, Sands v Singh does leave some outstanding issues which are likely to be litigated in the future such as the following.

(1) Knowledge

The extent to which the knowledge of the non-bankrupt party is relevant has yet to be decided. In this case the court was invited to proceed on the basis that if the wife did not know that the January Charge was a sham, then it should be assumed that it was genuine when considering whether the AR order made excessive provision for the wife and her children. No doubt this concession was made for tactical reasons but one can see that, in other cases, the trustee would want to argue that knowledge would be irrelevant. Indeed, Newey J gives some indication in para. 73(v) that knowledge may be irrelevant, at least in an extreme case.

(2) Exceptional circumstances

What amounts to “exceptional circumstances” is also likely to be the subject of further judicial consideration. Is the fact that the bankrupt (or indeed the other party) lied about the extent of his assets exceptional? Newey J gives the example of a bankrupt who conceals his debts and lies about the extent of his assets so that the court makes an order in favour of his wife and children which it would never have made if it had known the true facts.

Some guidance might be found in the judgment of Morgan J in Paton v Todd [2012] EWHC 1248 (Ch); [2012] 2 EGLR 19. The judge considered the meaning of this phrase under para. 6(3) of Schedule 4 to the Land Registration Act 2002 in the context of a claim to rectify the land register at para. 67 where he said that the word exceptional describes a circumstance “which is out of the ordinary course, or unusual or special, or uncommon; to be exceptional a circumstance need not be unique or unprecedented, or very rare but it cannot be one that is regularly, or routinely, or normally encountered.” Morgan J sets out the kind of matters that will be relevant at paras.79-80 of his judgment.

The Way Forward?

Finding an adequate paper trail to support a claim that husband and wife have colluded in reaching an AR settlement is always going to be a challenge. A trustee in bankruptcy would be well advised to look at other ways of strengthening his hand in potential s.339 cases where the trustee wishes to attack an AR settlement.

Firstly, the trustee should consider whether a transaction can be set aside as void on the basis that it is a sham (i.e. a document created to give the appearance to third parties that legal rights and obligations exist when no such rights, or different rights, exist).

Secondly, if the trustee can argue that the sham transaction formed part of the evidence put before the judge in the AR proceedings which led to the AR order, then that might provide a ground for establishing that the court would never have approved the order if it had been aware of the true facts (see para. 73(v) of the judgment).

Thirdly, the trustee will want to check the financial information put forward by each party in the AR proceedings. If sufficient facts are found to be untrue, once again this might support a s.339 application where collusion cannot be proved.