England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		15th November 2002

The Vice-Chancellor :

1. On 1st February 1994 Allan McLean Thoars ("the Deceased") took out a unit-linked life insurance policy with Skandia Life Assurance Co.Ltd ("the Policy"). On 1st February 1996 the annual premium, which was variable, was £1,176 for a sum payable on death then amounting to £185,568. On 19th July 1996 the Deceased, who was suffering from cirrhosis of the liver, was put on the active list for a liver transplant. On 26th July 1996 the Deceased assigned the benefit of the Policy to the defendant ("Ramlort") by means of a written declaration of trust which was not expressed to be made for any consideration. On 18th September 1996 the Deceased underwent a liver transplant. The following day he died both intestate and insolvent.
2. The claimant ("Mr Reid") is the judicial factor of the Deceased’s insolvent estate, having been so appointed by the Sheriff for the area in which the Deceased lived, namely Grampian, Highlands and Islands, on 16th September 1997. On 12th March 1999 he commenced these proceedings. He seeks an order to set aside the assignment of the policy under s.339 Insolvency Act 1986 on the grounds that it was a transaction at an undervalue.
3. S.339 provides

"(1) Subject as follows in this section and sections 341 and 342, where an individual is adjudged bankrupt and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt's estate may apply to the court for an order under this section.

(2) 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 that individual had not entered into that transaction.

(3) For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if -

(a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration,

(b) he enters into a transaction with that person in consideration of marriage, or

(c) he 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 individual."

4. S.341(1)(a) prescribes the relevant time for the purposes of ss.339 as a time within 5 years prior to the presentation of the petition on which the individual was adjudicated a bankrupt. But, by virtue of s.341(2), a time not within the last two years of that period is not relevant unless the individual was insolvent at that time or became insolvent in consequence of the transaction. In the case of a transaction between that individual and an associate of his it is presumed that those conditions are satisfied unless the individual establishes the contrary.
5. It is not in dispute that the declaration of trust was executed by the Deceased at a relevant time. Mr Reid relies on the sum payable on death as at 1st February 1996, namely £185,598, and contends that his claim comes within each of the grounds set out in s.339(3). This is disputed by Ramlort. It contends that the policy had no value or none exceeding its surrender value of £71.96. In addition it asserts that it gave good consideration for the declaration of trust by reimbursing the Deceased for the premium due on 1st February 1996, agreeing to pay the remaining premiums as and when they fell due and paying the Deceased £1,900.
6. The parties have given disclosure and exchanged the reports of experts on the valuation of the Policy. They have not exchanged witness statements or the reports of medical experts. On 27th November 2001 Mr Registrar Jaques adjourned the application to the judge for the determination of a preliminary issue in the following terms:

"To what extent (if at all) the value of the consideration provided by Mr Thoars to Ramlort Ltd by the declaration of trust made on 26th July 1996 should be assessed in the knowledge of and/or taking into account the fact that he underwent a liver transplant operation on 19th September 1996 and died during surgery on that date."

The formulation of the preliminary issue mistates the facts because the transplant was carried out on 18th September and the Deceased died, not during surgery on that day, but on the following day, 19th September, when in intensive care after the operation had been completed.

7. I did not understand that order to have been made by consent but neither side appealed. For reasons I will explain later I do not consider such a preliminary issue to be susceptible of just determination in accordance with its terms. But in view of the delays which have already occurred in the resolution of this dispute I should give such guidance as I properly can in advance of findings of relevant facts.
8. The essential point is the extent, if any, to which subsequent events may be regarded in assessing the value of consideration in money or money’s worth as required by s.339(3)(c). That the court may in appropriate circumstances have regard to subsequent events in assessing values is not in doubt. In The Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v The Pontypridd Waterworks Co [1903] AC 426, 431 Lord Macnaghten said

"If the question goes to arbitration, the arbitrator’s duty is to determine the amount of compensation payable. In order to enable him to come to a just and true conclusion it is his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?"

9. In Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143 the House of Lords considered the entitlement of a court to have regard to subsequent events in ascertaining the value of the consideration in money or money’s worth received by an insolvent company. The question arose under s.238(4)(c) which is in substantially the same terms as s.339(3)(c).
10. The facts of that case were complicated. In essence an insolvent company, AJB, transferred its stockbroking business to a subsidiary of PCG and received in exchange the benefit of a covenant by PCG to pay an annual rent of £312,500 for four years contained in an agreement for the subletting by AJB to PCG of certain computer equipment which AJB held under a head lease. It was necessary to value the benefit of that covenant and compare it with the value of the business being sold, namely £1.25m.
11. The date of the transaction was 10th November 1989. As at that date the headlease was terminable at the will of the headlessor because the sub-lease was in breach of an absolute covenant against assigning or sub-letting. Repossession of the equipment would terminate the sub-lease. As Lord Scott of Foscote, with whom the other members of the Appellate Committee agreed, said (para 23)

"So, what was the value, in money or money’s worth, of a covenant by PCG that was so precarious?"

He then referred to a number of events occurring between 10th November 1989 and 23rd February 1990 and concluded that

"PCG’s covenant, which had been precarious at the outset, had become worthless by 23rd February 1990 at the latest."

12. Lord Scott of Foscote referred to the submission of counsel for PCG that such ex post facto events should not be taken into account in valuing PCG’s covenant as at 10th November 1989 and continued, in paragraph 26:

"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 [as] 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."

13. Counsel for Ramlort submitted that Phillips was distinguishable on any one of four grounds. First, the relevant valuation in that case was the consideration received by the insolvent whereas this case concerns the consideration disposed of by the insolvent. It was suggested that this distinction had a real difference because though an insolvent should be discouraged from selling his assets for a speculative consideration he should not be impeded in selling assets of a speculative value for tangible consideration. I am unable to accept this distinction. It is not warranted by the terms of the subsection nor by the mischief against which it is aimed, namely a reduction in the net assets of the insolvent. Such a reduction is achieved by a mismatch between that which is disposed of and that which is received. The same valuation principles should be applied to both elements.
14. Second, it is suggested that Lord Scott of Foscote based his conclusion on the inability of the defendants to establish the value of the covenant. By contrast, in this case each party has produced the report of an expert on the valuation of the policy. This submission relates to paragraph 27 of the speech of Lord Scott of Foscote. I do not read that paragraph as qualifying in any way what is said in paragraph 26. On the contrary it is the consequence of applying the principles set out in paragraph 26 which leads to the conclusion in paragraph 27 that PCG had failed to discharge the onus of establishing the [face] value of the covenant.
15. Third, counsel for Ramlort points out that in Phillips subsequent events were relied on as confirmation that the asset of precarious value in fact had none whereas in this case Mr Reid seeks to rely on subsequent events to increase the value of the Policy. It is true that such a distinction may be drawn but I do not see why it should lead to any difference. If subsequent events are admissible because they resolve previous uncertainties then I can see no logical basis for limiting their effect so as to exclude increases in value.
16. Finally, counsel for Ramlort submitted that the use of the subsequent events in Phillips to confirm a nil value accorded with common sense, but their use in this case to give to the Policy any value beyond the nominal would not. This is not a ground for distinguishing Phillips, though it may be good reason for scrutinising its application with care.
17. For all these reasons I reject the contention of counsel for Ramlort that I am not bound by the ratio decidendi of Phillips. I take that ratio to be that (1) the value of the consideration in money or money’s worth is to be assessed as at the date of the transaction, (2) if at that date value is dependent on the occurrence or non-occurrence of some event and that event occurs before the assessment of value has been completed then the valuer may have regard to it, but (3) the valuer is entitled, indeed bound, to take account of all other matters relevant to the determination of value as at the date of the transaction. The first proposition appears from the second sentence of the passage in paragraph 26 I have quoted in paragraph 12 above. The second proposition is reflected in the third sentence of that quotation. In my view the third proposition is inherent in the last two sentences of paragraph 26 and the first sentence of paragraph 27 of the speech of Lord Scott of Foscote.
18. Counsel for Ramlort submitted that on the facts of this case it would be wrong to assess the value of the Policy as at 26th July 1996 by reference to the death of the Deceased on 19th September 1996. He pointed to absurdities which would arise in comparable cases, for example, the accidental and premature death of a young and healthy life assured, the sale of a lottery ticket at cost, the purchase or sale of quoted shares before the disclosure of market sensitive information, the sale of land with hope value which is subsequently realised or the sale of residential property the value of which goes up in line with the market. In all these cases, he submitted, the use of subsequent events to increase the value would be unjust.
19. Counsel for Mr Reid recognised the force of these submissions. In his reply he accepted that subsequent events should not be taken into account unless and to the extent that they were both relevant and foreseeable at the time the transaction was entered into.
20. In my view the examples of absurdity given by counsel for Ramlort cannot be so easily disposed of. In each case the subsequent event is foreseeable though its likelihood ranges from the remote (the lottery ticket), through the possible (sale of land with hope value) to the probable (the sale of residential property). The solution in my view lies in the third proposition to which I have referred. Subsequent events, though admissible, are only evidence on which the valuer may rely. The actual value remains a question of fact for his determination on all the evidence. In the same way that Lord Scott of Foscote referred in paragraph 26 to the likelihood of AJB raising money on the security of the covenant so the valuer is entitled to consider the likelihood of a lottery ticket being sold for more than the value of the stake before the draw has been carried out, notwithstanding that he knows that thereafter it entitled the holder to £5m.
21. This conclusion demonstrates the inappropriateness of the preliminary issue in this case. The value of the Policy as at 26th July 1996 is a question of fact for the determination of the court on all the evidence. It will depend on the court’s evaluation of the expert valuation evidence. That may, in turn, depend on the court’s evaluation of medical evidence as to the cause of death because the deceased died of cardiac arrest, not from cirrhosis of the liver. Death caused by the latter was more or less expected depending on whether or not the Deceased had a liver transplant; but was there any expectation of death from the former and if so to what extent? It is not for me, on the trial of this or any other preliminary issue, to express any view as to how the judge at the trial should resolve the issues of fact. The decision of the House of Lords in Phillips shows that evidence as to when the Deceased died and why is admissible but it is for the judge at trial to determine what, if any, effect on the value of the policy as at 26th July 1996 those facts may have.
22. In these circumstances I do not consider that it would be appropriate to give an answer to the preliminary issue. Not only is it factually inaccurate but any answer may appear to limit the scope of the fact-finding exercise to be conducted by the judge at trial. In my view the sooner that exercise is completed the better. I will invite counsel to formulate directions designed to ensure that the trial of the application takes place as soon as possible.