England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION,
BIRMINGHAM DISTRICT REGISTRY
(HIS HONOUR JUDGE PURLE QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		16 November 2010

Lord Neuberger MR:

1. This is an appeal against a decision of His Honour Judge Purle QC sitting in the Birmingham District Registry of the Chancery Division. He allowed an appeal brought by Mr Paul Delaney in circumstances where Mr Delaney had been found by the District Judge to have been party to a transaction which fell foul of section 423(1)(c) of the Insolvency Act 1986.PRIVATE 
2. The factual background to the case is somewhat complicated and does not need to be set out in any detail. The appellants, Mrs Chen and Mr Du, were in partnership with a Mrs Chiu and Mr Ding, and they fell out. The effect was that the appellants obtained judgment against Mrs Chiu and Mr Ding ("the debtors") and, shortly before a charging order would have been obtained, the debtors entered into a transaction, which is the transaction which is sought to be impugned under section 423, with Mr Delaney. That transaction involved them selling their freehold, of their home, 10 Pioneer Close, Simpson Manor, which was subject to a mortgage which was in the region of £169,000, to Mr Paul Delaney for £210,000 and taking a leaseback of the property. The leaseback was on its face a rather unusual arrangement. It provided for a fixed rent of £500 per calendar month, it was for a term from 8 May 2008 until 9 May 2029 (albeit that the word "May" between "9th day of" and "2029" had been left out), and it was absolutely unassignable.
3. The applicants began proceedings against the debtors and Mr Delaney to set aside the transaction under the provisions of section 423 1(c), which provides as follows:

"(1) this section relates to transactions entered into at an undervalue and a person enters into such a transaction with another person if...

(c) he enters into a transaction with the other 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 himself."

4. Subsection (2) states the court may make such order as it thinks fit, effectively undoing the transaction if satisfied that "a person has entered into such a transaction". Section 423(3) provides:

"In the case of a person entering into such a transaction an order should only be made if the court is satisfied that it was entered into by him for the purpose –

(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him; or

(b) of otherwise prejudicing the interests of such a person in relation to the claim that he is making or may make."

5. The evidence put in by the appellants amounted to a contention or belief that the value of the property was £350,000, whereas the price paid for it, as recorded in the Land Registry on 8 May 2008, was £210,000.
6. Evidence was put in on behalf of the debtors, including a detailed witness statement from Mr Delaney who had purchased the property and had granted the leaseback. The lease, as I say, ran from 8 May 2008 when the sale of the property took place, put it was dated 1 May 2008.
7. The evidence of Mr Delaney was that he had been involved in equity release transactions with a number of people of middle or older age, selling the freehold of their homes to individuals or companies such as Mr Delaney in return for retaining a tenancy of the property until their death. He said he had been involved in a hundred of such transactions. He also set out the history of this matter so far as he understood it. He explained that the debtors had tried to enter into an equity release scheme with a company trading under the name of UK Property Buyers, and that they had then approached him, who already knew them, and eventually agreed the transaction which I have described. He attached documentation which showed that UK Property Buyers had made a not dissimilar proposal, albeit rather more disadvantageous to the debtors, that had been put to them in respect of the property. He also appended the draft proposed tenancy agreement which UK Property Buyers were in the habit of granting, and that draft granted an assured shorthold for a period of up to two years with a side letter saying that the occupier could remain in occupation thereafter and that the rent "can only increase by the rate of inflation at every two-year renewal". Because it was an assured tenancy it would not have been assignable without the landlord's consent, which can be withheld arbitrarily: see section 15(1) and (2) of the Housing Act 1988.
8. Mr Delaney and the debtors also put in valuation evidence from Jonathan Carpenter, a chartered surveyor, who said that the value of the property "with the benefit of full vacant possession as at May 2008" was in the region of £275,000 and that the value of the property "subject to the tenancy agreement noted above [I interpose to say that is the tenancy agreement granted in May 2008] was in the region of £115,000." The discussion in the report of Mr Carpenter said that the valuation figure had been arrived at

"by the comparative method for the vacant possession values and the investment method for the value subject to the tenancy. We are conscious that in practice a prudent investor buyer would probably take a view of the tenancy terminating before the end of the fixed period and then in light of this would be prepared to offer a figure higher than the investment value, but lower than the value with vacant possession."

9. The question is whether section 423 is engaged, and that involves two questions, the first being whether subsection (1) was satisfied, and the second being whether subsection (3) is satisfied. Judge Purle was satisfied that subsection (3) was engaged on the ground that, although the debtors entered into the transaction because they were anxious to protect their home, another purpose was to prejudice the interest of the appellants. I am content to assume that that is correct, and indeed it would be difficult for this court to interfere with it, given that it appears that there were concurrent findings of fact on that issue at both stages below, although the reason I express it somewhat cautiously is that it appears that at no stage was there any cross-examination of either the debtors or Mr Delaney.
10. The issue on which the District Judge and Judge Purle differed was whether the first question and in particular section 423(1)(c) was satisfied. There are two possible ways of analysing the transaction. The first is that advanced by Mr Mark Anderson QC, who appears on behalf of Mr Delaney in this court, and it is that what was sold by the debtors was the freehold -- ignoring the mortgage for the moment, which was paid off out of the £210,000 -- subject to the lease, as that was sold for £210,000 whereas the valuation, subject to the qualification, is £115,000. He says that it is fanciful to suggest that the sale was at an undervalue. The alternative analysis is that preferred by Mr Alper Riza QC, who appears for the appellants. It is that what the debtors had initially was the freehold, worth £275,000, and what they sold it for was a combination of £210,000 and the lease. In my view, it is unnecessary to decide which of these two analyses is correct, given that they are both logically defensible. It seems to me it would be very surprising if one analysis resulted in the conclusion that section 423(1)(c) was engaged, whereas the other did not.
11. It is true that in relation to the second analysis, there is no evidence as to the inherent value of the lease. Mr Riza, not surprisingly, makes much of that point and he suggests that, applying the reasoning of Lord Scott of Foscote in Phillips v Brewen Dolphin Bell Lawrie [2001] 1 All ER 673 at paragraphs 24 to 27, it was for the debtors and Mr Delaney to establish that the lease had value, and their failure to do so means that it should be treated as having no value. Consequently, he argues, on the basis that the second analysis of the transaction is correct, there is a shortfall between the £210,000 obtained by the debtors and the £275,000 at which the property is valued.
12. In my opinion, even if the second analysis is correct, the conclusion is wrong. If the value of the freehold with vacant possession is £275,000 and the value of the property subject to the lease is £115,000 and the inherent value of the lease itself is assumed to be nil, then there is a marriage value of £160,000. In the absence of any evidence to the contrary, one would split the marriage value of £160,000 equally between the freehold and the leasehold, in which case the lease would be worth £80,000. On that basis, therefore, it follows that, on this unchallenged evidence, the lease is worth £80,000 and consequently, if the second analysis is adopted, then on the unchallenged figures, the debtors received more than the £275,000 which the property was worth, namely £210,000, which is what they were paid, and £80,000, the value of the lease they received.
13. Now it is perfectly true that the expert evidence suggests his valuation figures are not wholly reliable, but it seems to me that once one has his figures, even with that caveat, it is impossible to say in the absence of any contrary evidence that the sale of the property was at an undervalue.
14. It may be unnecessary in those circumstances to deal with another point raised by Mr Riza, but it is right to deal with it, as it had been raised. That point is that, as a matter of principle, the lease should not be accorded any value for the purposes of section 423(1)(c) because it could not be sold in the open market as it is unassignable. In my view, that argument is wrong as the lease has a surrender value. Quite apart from that Mr Anderson is right in contending that that argument is effectively shut out by the decision of this court in Re (Thoars) (deceased) (No 2) Reid v Ramlort [2005] 1 BCLC 331, as is clear from the judgment of Jonathan Parker LJ at paragraph 95. It also seems to me as at present advised that the basis of the reasoning in Agricultural Mortgage Corporation v Woodward [1994] BCC 688 is inconsistent with that proposition as well.
15. It appears to be plain (following the decision of Millett J (as he then was) in re MC Bacon Limited [1991] Ch 127, as approved by this court in Menzies v National Bank of Kuwait [1994] BCC 119 and considered in the Agricultural Mortgage case as well) that for section 423 purposes, one looks at the value received from the point of view of the debtor, the person effecting the sale which is sought to be impeached under section 423. On that basis, albeit that one can well see that from the point of view of the appellants the transaction was very unattractive, the fact that the debtors were seeking to protect themselves in their home, may be is an additional factor to support the justification for what they did in terms of value. It is not necessary to consider whether that point adds anything, because, in the light of the figures to which I have referred, it seems to me plain that Judge Purle was right to conclude (and in the absence of any cross-examination could only have concluded) that this was not a sale at an undervalue.
16. It is only right to add this. There was a suggestion, which carried some weight with me when I first looked at the papers, that there was something underhand or suspicious about the transaction which the debtors entered into with Mr Delaney. There was such a suggestion – before both the lower courts, and in the skeleton argument and oral submissions advanced on behalf of the appellants. However, having been taken through the evidence by Mr Anderson, including Mr Delaney's denial of any involvement in anything underhand, his full explanation as to how the transaction was entered into, and his experience of such transactions and the fact that other entities and such organisations enter into such transactions, I am of the view that it would be quite unfair on the debtors and on Mr Delaney (particularly in the absence of any cross-examination or any hard evidence to the contrary) to suggest that there was anything underhand on the facts of this case. If parties are going to allege anything improper on the part of a party to a transaction, then particularly in the face of a clear denial of any wrongdoing, it would be a very unusual case indeed where an allegation of wrongdoing would be found to be made out without cross-examination.
17. In the event, therefore, I would dismiss this appeal.

Lord Justice Carnwath:

18. I agree.

Lord Justice Sullivan:

19. I also agree.

Order: Appeal dismissed