Stonham v Ramrattan and Bortolussi
Friday 7th May 2010High Court success for Ashfords' Restructuring and Insolvency Team
In a landmark judgment delivered on Wednesday 5 May 2010, Mr Justice Mann allowed an appeal by a Trustee in Bankruptcy against the decision of Mr Registrar Simmonds, who had refused to set aside a transfer of a matrimonial home from husband to wife notwithstanding that he had earlier found the transfer to be a sham, or alternatively a Transaction at Undervalue.
Mr Justice Mann’s decision contains important clarification on the exercise of the discretion to make no remedial order in respect of a Transaction at an Undervalue (noted in Re Paramount Airways Ltd (in Administration) (No 2) [1993] Ch 223 (CA) and exercised in Singla v Brown [2008] Ch 357).
In a late challenge this morning, at a hearing listed to deal with the consequential orders (inter alia possession and sale), the Respondent's Counsel (acting pro bono) sought to challenge Mr Justice Mann's ability to make a possession order on the basis of the use it or lose it provisions.
The Facts
The husband was adjudged bankrupt on 16 October 1995. A few weeks within the five year "relevant time" for Transactions at Undervalue, the bankrupt had transferred the matrimonial home to his wife for "natural love and affection". This was previously held by him in his sole name and was mortgage free.
Within a few days of the 12 year limitation period (given the claim related to a "speciality"), the Trustee issued an application to set aside the transfer as a Transaction at an Undervalue pursuant to section 339 Insolvency Act 1986.
The bankrupt and his wife claimed both in a private examination and throughout the course of the proceedings that the registration of the bankrupt as legal owner of the property was a mistake by their solicitor and the Transfer deed was intended to rectify that mistake.
The matter came on for trial before Registrar Simmonds on 24 and 25 November 2009, some 19 years after the transfer by the bankrupt.
During the trial it became apparent in cross examination that the Transfer was a forgery and that the only genuine signature was that of the bankrupt. In cross examination the bankrupt admitted to forging the signatures of his wife and the witnesses and deliberately lying on his bankruptcy questionnaire regarding a previous bankruptcy.
The Registrar's decision
In his first judgment the Registrar made adverse findings about the bankrupt's honesty and reliability and made declarations that the Transfer was a sham or, alternatively, that it was a Transaction at an Undervalue. In addition he made a finding that the wife had no beneficial interest in the property.
The Registrar did however have concerns in light of Paramount and Singla v Brown about the consequential orders to be made (inter alia possession and sale) and, having requested details of the debts and expenses of the bankruptcy, listed a further hearing to determine the final order.
At the adjourned hearing the Registrar (citing Paramount and Singla v Brown) handed down a further judgment in which he conducted a balancing exercise. The Registrar concluded that the facts of the case were "exceptional", therefore justifying a refusal to exercise discretion in the Trustee's favour, notwithstanding his earlier declarations that the Transfer was a sham and a Transaction at Undervalue.
The factors below led the Registrar to conclude that the bankrupt and his wife would suffer substantial prejudice if he exercised his discretion to set aside the Transfer.
1. Delay. The Registrar was concerned with the time that had elapsed between the date of the Transfer and the issue of proceedings (the Trustee having been in office since 1995). In language reminiscent of the pre-CPR authorities on want of prosecution, he categorised the delay as "inordinate and exceptional".
2. Evidence to rebut the presumption of insolvency. Given the passage of time and fading memories, the evidence required to rebut the presumption may have been lost or destroyed. However the wife had not sought to rebut the presumption - her case was that the Transfer simply rectified a mistake made by the conveyacing solicitors.
3. Ability to refinance. The Registrar found that it would be difficult for the bankrupt and his wife to refinance to annul the bankruptcy, given their ages. The Registrar indicated that, had the proceedings been issued earlier, their ability to refinance would have been better. On several occasions, the Trustee had urged the bankrupt and his wife to annul whilst making it clear that, if they did not, he would apply to set aside the Transfer.
4. Creditors. As there were only three creditors the Registrar found it likely, given the passage of time, that records would have been lost and that creditors probably would have lost interest in being paid.
5. Statutory Interest. The Registrar decided that a substantial proportion of this was caused by the delay, which impacted on the potential surplus due back to the bankrupt.
6. Fees and expenses. As the substantial amount claimed under this head was solicitors' fees under a CFA and the risk of not recovering was built into the contract, the Respondents would suffer greater prejudice than the Trustee if a remedial order was granted.
Decision on appeal
The Trustee appealed on the grounds that the Registrar erred when exercising his discretion and, in any event, ought to have made consequential orders having declared the Transfer to be a sham. Mann J agreed - holding that having found the transfer was a "sham" or otherwise of no effect, the Registrar should have declared that the wife held the property on trust for her husband and subsequently his Trustee in bankruptcy once appointed.
Notwithstanding that the Trustee succeeded on the "sham" point, Mann J went on to make alternative findings on the exercise of discretion as a result of the factors above, namely:
1. Delay. This by itself was not a reason to refuse relief. There may however be other factors that when combined with delay could, in appropriate circumstances, justify a refusal to make a remedial order.
2. Evidence to rebut presumption of insolvency. This carried little weight given that Parliament had set the 12 year limitation period and the five year "relevant time" period. Parliament had therefore built into the system that memories might fade. Moreover no case was advanced that memories had faded or that evidence had been lost by the Respondents.
3. Ability to refinance. There was no evidence advanced on this point and the conclusion reached was surmise on the part of the Registrar.
4. Creditors. This could be a factor but the Registrar had speculated and, without evidence, attributed too much weight to the Respondents’ loss of their home.
5. Statutory Interest. Mann J concluded that the Registrar failed to take into account any corresponding increase in the value of the property or the fact that the bankrupt and his wife had lived in the property rent free for a considerable period.
6. Fees and expenses. The Trustee was not "an author of his own misfortune" because of the delay. During a private examination on oath the wife had given confusing evidence about the circumstances surrounding the Transfer and it was only some years later, having instructed new solicitors, that the Trustee had been able to issue proceedings.
Costs were not a relevant factor when contemplating the exercise of discretion under s.339, not least because the delay in bringing proceedings meant a corresponding delay in the Trustee being paid. The fact that the Registrar might refuse to set aside the Transfer was not something Mann J considered was under contemplation by the solicitors when entering into the CFA.
Use it or Lose It
The respondents' counsel argued that, following the declarations above, the natural consequence was that the bankrupt's interest had vested in the Trustee in 1995. Given the transitional provisions he argued that the interest re-vested in the bankrupt on 1 April 2007 as the Trustee did not issue his claim (or take any other steps to realise his interest ) until October 2007.
The Trustee relied on 283A(5) Insolvency Act 1986 and, in particular, that he was not aware of the sham until trial in November 2009. Accordingly, the three years for "use it or lose it" had not started to run until that date and he had stopped the clock in time.
Mann J agreed with this submission and, despite lengthy argument as to the applicability and conflict between 283A and 339 Insolvency Act 1986, found for the Trustee. He made no ruling on the applicability of 283A in Transaction at an Undervalue cases, and in particular, the apparent shortening of the limitation period of 12 years to 3 years if the submissions were proved correct.
Comment
The decision is a long overdue victory for officeholders.
Following a series of difficult decisions against them, Mann J has reaffirmed the "exceptional" element of cases of this nature, which would justify the refusal to exercise the discretion to make an Order upon a finding of a Transaction at an Undervalue. Following a finding of undervalue, the starting point was always to exercise discretion in favour of the Trustee unless there was something "exceptional" or "unusual" to allow the Court to decline to exercise that discretion.
It also reemphasised that, when conducting the balancing exercise, Judges should always make findings based on the evidence before them and not on surmise.
On the "use it or lose" it point, but for the sham declaration, the Trustee may have been in difficulty. The statutory provisions of 283A and 339 raise a natural issue of conflict. Should the time start to run following an order reversing the transaction or date of knowledge of the potential undervalue transaction? Mann J speculated in obiter comments the former but commented he could see potential arguments of applying the principles of 283A by analogy when considering whether to exercise discretion following a declaration as to an undervalue.
Unless Parliament or further case law decides the point the uncertainty will remain for Trustees and caution will need to be exercised in similar circumstances.
Alan Bennett of Ashfords LLP acted for the Trustee who instructed Richard Ascroft from Guildhall Chambers.
Ashfords LLP is regulated by the Solicitors Regulation Authority. The information in this note is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.
