Commissioners of Inland Revenue v Hashmi and Another

JurisdictionEngland & Wales
JudgeLADY JUSTICE ARDEN,Lord Justice Laws,LORD JUSTICE LAWS,LORD JUSTICE SIMON BROWN,Lady Justice Arden
Judgment Date03 May 2002
Neutral Citation[2002] EWCA Civ 981
Docket NumberA2/2001/2254
CourtCourt of Appeal (Civil Division)
Date03 May 2002
Between
The Commissioners of Inland Revenue
Claimant/Respondent
and
(1) Mohamed Akram Hashmi
(Executor of the Estate of Muzamil Ghauri Deceased)
Defendant
(2) Omar Ghauri
Defendant/Appellant

[2002] EWCA Civ 981

Before

Lord Justice Simon Brown

Vice President of the Court of Appeal, Civil Division

Lord Justice Laws

Lady Justice Arden

A2/2001/2254

IN THE SUPREME COURT OF JUDICATURE

CIVIL DIVISION

ON APPEAL FROM THE HIGH COURT

CHANCERY DIVISION

(Mr Justice Hart)

The Royal Courts of Justice

The Strand

London

MR N CADWALLADER (instructed by Emsleys, 35B Main Street, Garforth, Leeds) appeared on behalf of the Appellant

MISS K SELWAY (instructed by Commissioners of Inland Revenue, Solicitors Office, Somerset House, London WC2R) appeared on behalf of the Respondent

Friday 3 May 2002

LADY JUSTICE ARDEN
1

This is an appeal by the second respondent ("Omar"), with the permission of the judge, against the order of Hart J dated 4 October 2001, setting side a written declaration of trust dated 20 February 1989 made by Mr Muzamil Ghauri ("Mr Ghauri"), whereby Mr Ghauri declared that he held the beneficial interest in the property known as 83 Buslingthorpe Lane, Leeds, on trust to Omar, pursuant to section 423 of the Insolvency Act 1986. The deed was stated to be in consideration of natural love and affection and in favour of Omar, the son of Mr Ghauri, who was then 16.

2

For some years Mr Ghauri had been carrying on the business of an Indian restaurant at 83 Buslingthorpe Lane ("the property"). Mr Ghauri had the opportunity of buying the freehold in the property in 1989 for £18,000. He bought it and executed the declaration of trust on the same day. In 1993 the Inland Revenue received information that Mr Ghauri had, either alone or with his eldest son, Karim, purchased properties in this country and in Spain with business profits which had not been declared to the Revenue. This led to an investigation. The investigation resulted in an agreement between Mr Ghauri and the Revenue for settlement of unpaid tax liabilities, interest and penalties. The amount of the admitted undeclared profits of the restaurant business were £885,000 for the period from 6 April 1983 to 5 April 1994. The Revenue brought proceedings under section 423 of the Insolvency Act 1986 to set aside the declaration of trust, following disclosure of the declaration of trust which did not occur until after Mr Ghauri died in July 1997.

3

I now turn to section 423. This provides:

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

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

(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.

(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for —

(a) restoring the position to what it would have been if the transaction had not been entered into, and

(b) protecting the interests of persons who are victims of the transaction.

(3) In the case of a person entering into such a transaction, an order shall 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 which he is making or may make."

4

I shall refer to the purpose which is required to be shown by virtue of subsection (3) as "the statutory purpose".

5

There is no direct evidence of Mr Ghauri's intention. The judge held that the evidence was sufficient to draw an inference that Mr Ghauri had the purpose in section 423(3). He relied on the fact that there had been "a persistent pattern of gross under declaration of profits" over the years preceding 1989. In his judgment the inescapable inference was that the defendant had acted deliberately and dishonestly and that the defendant would have known that, should his dishonesty be uncovered, he would be liable for tax, interest and penalties in very considerable amounts. The judge held that Mr Ghauri was therefore in 1989 sitting on "a potential financial bomb" although there was no inevitability that it would ever explode.

6

He found that the amount of unpaid liabilities up to and including the 1988/1989 tax year amounted to some £86,000 exclusive of penalties and interest. At the same time Mr Ghauri's assets consisted of the property, his dwelling-house at 160 Shadwell Lane (valued in the disclosure of assets to the Revenue at some £83,500 but later valued in 1998, so it appears, at £170,000) and various bank accounts of unknown amount. The judge held that it could hardly be supposed that after tax Mr Ghauri thought he would be likely to be left with a sufficient sum to discharge tax liabilities in respect of past years which had accrued as a result of his dishonest conduct. This was particularly so as his contemplation must have been that he would persist in his dishonest practices and therefore, in the judge's words, "clock up further potential liabilities". The judge also relied on the fact that the declaration did not have immediate effect. The restaurant carried on in the property was sold in December 1991. After it was sold the property was let and the rent was paid to Mr Ghauri. Moreover, in the course of the Revenue's investigation Mr Ghauri disclosed the property as his apparently unencumbered property. As I have explained, Mr Ghauri died on 23 July 1997. He had had serious health difficulties for many years before that and was ill in 1989.

7

The judge then turned to the question whether as a matter of law the statutory purpose had to be a dominant purpose. He accepted that so far as his family was concerned Mr Ghauri was a caring parent who honestly desired to secure his children's future, and the declaration of trust was a product of such a desire. He accordingly held that Mr Ghauri had two purposes in making the declaration. He wanted to give Omar the security of the property as an asset for the future. In addition, he wanted to put the property beyond the reach of creditors, should creditors emerge. The judge expressed himself satisfied that Mr Ghauri would have been alive to the fact that the transaction would have had that effect and therefore had that purpose at the date of the declaration.

8

The judge then turned to the authorities. In Chohan v Saggar [1992] BCC 306, Mr Evans-Lombe QC (as he then was), sitting as a Deputy High Court Judge of the Chancery Division, held that section 423(3) required a plaintiff to show a dominant purpose to remove assets from the reach of actual or potential claimants or creditors, but not excluding the possibility that there might be other purposes behind the relevant transfer. In the later case of Pinewood Joinery v Starelm Properties Limited [1994] 2 BCLC 412, Judge Moseley QC, sitting as a Judge of the High Court, expressed doubt as to whether it was necessary to find a dominant purpose. In Royscot Spa Leasing Ltd v Lovett [1995] BCC 502 the matter was touched on in the judgment of Sir Christopher Slade in this court. He referred to the holding of Mr Evans-Lombe in Chohan v Saggar and added at 507G:

"For the purposes of this appeal, though without deciding the point, I am content to assume in favour of the plaintiffs that the relevant purpose which has to be established in the application of s 423 is substantial purpose, rather than the stricter test of dominant purpose."

9

Sir Christopher Slade went on to point out that the actual point of the transfer had to be investigated and that the test was not solely an objective one. In In re Brabon, unreported, 3 March 2000, Jonathan Parker J held as follows:

"I start with the words of section 423(3), set in the context of the mischief at which the section is directed. The subsection itself does not apply any epithet to the word 'purpose'… Once that is accepted, and given that, notwithstanding section 423 is entitled 'Transactions defrauding creditors', it is not necessary for the trustee to establish dishonesty, I confess that I find some difficulty in distinguishing between a 'dominant' purpose and a 'substantial' purpose. On the basis that there is a difference, however, and that 'substantial purpose' is indeed a lesser test than 'dominant purpose', I am content to proceed in the instant case on the footing that 'substantial purpose' is the correct test. I emphasise, however, that I do so on the same basis as the Court of Appeal in Royscot Spa: that is to say, on the basis that if the trustee cannot meet the lesser test, a fortiori he could not meet the stricter one."

10

In his judgment in this case Hart J also expressed the view that there was no warrant in the statutory language for any qualification of this statutory purpose as being the dominant purpose. Moreover, in his judgment, in the classic type of case to which this section is intended to apply it will frequently be the case that the motive to defeat the creditors and the motive to secure the family for the future will co-exist in such a way that even the transferor himself may be unable to say which was uppermost in his mind. The judge considered it was difficult to see why the statutory purpose should not exist where there are two purposes of equal power. However, the judge held on the evidence that if it was, as it was, necessary for him to find that the statutory purpose...

To continue reading

Request your trial
43 cases
  • JSC BTA Bank v Mukhtar Ablyazov and Another
    • United Kingdom
    • Queen's Bench Division (Commercial Court)
    • 9 December 2016
    ...on the meaning of the phrase " for the purpose" in section 423 is to be found in the decision of the Court of Appeal in Inland Revenue Commissioners v Hashmi [2002] BCC 943. 125 Arden LJ, giving the leading judgment of the Court, addressed this issue at [23]–[25]: The question arising on th......
  • Dornoch Ltd and Others v Westminster International BV and Others (The" WD Fairway" (No. 3))
    • United Kingdom
    • Queen's Bench Division (Admiralty)
    • 17 July 2009
    ...In any event, underwriters are at this stage of the argument seeking to give effect to a contractual right. 128 In IRC v Hashmi [2002] 2 BCLC 489 the jurisdiction was successfully invoked in a case where there was no formal insolvency, although had the deceased debtor lived and his dishones......
  • Kazakhstan Kagazy Plc v Baglan Abdullayevich Zhunus (formerly Baglan Abdullayevich Zhunussov)
    • United Kingdom
    • Queen's Bench Division (Commercial Court)
    • 21 December 2021
    ...company. (c) Purpose 224 The purpose referred to in section 423(3) need not be the debtor's sole or dominant purpose ( Commissioners of Inland Revenue v Hashmi [2002] EWCA Civ 981 §§ 19 and 23, per Arden LJ). In the latter paragraph Arden LJ said: “…it will often be the case that the motiv......
  • Northampton Borough Council v Anthony Michael Cardoza
    • United Kingdom
    • Chancery Division
    • 24 January 2019
    ...236 Mr Morgan submitted that the crucial question is the purpose for which the transfer was made. Mr Morgan referred to IRC v Hashmi [2002] BCC 943, in particular the judgment of Arden LJ (as she then was) at [23], as establishing that there was no requirement to show that the statutory pur......
  • Request a trial to view additional results
3 firm's commentaries
4 books & journal articles
  • Table of Cases
    • United Kingdom
    • Wildy Simmonds & Hill Watson-Gandy On Corporate Insolvency Practice - 2nd Edition Contents
    • 29 August 2017
    ...(No 544/SD/98), Re Gray’s Inn Construction Co Ltd, Re [1980] 1 WLR 711, [1980] 1 All ER 814, (1980) 124 SJ 463, CA 80 Hashmi v IRC [2002] EWCA Civ 981, [2002] BCC 943, [2002] 2 BCLC 489, [2002] BPIR 974 377 Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542, [2007] 1 WLR 2404, [2007] 1 All ER......
  • Table of Cases
    • United Kingdom
    • Wildy Simmonds & Hill Law of Insolvent Partnerships and Limited Liability Partnerships Contents
    • 29 August 2015
    ...(Ch), [2007] Bus LR 879 444 Inland Revenue Commissioners v Bland [2003] EWHC 1068 (Ch) 52, 53 Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981, [2002] BCC 943 560 Inland Revenue Commissioners v Wimbledon Football Club Ltd and Others [2004] EWCA Civ 655, [2004] BCC 638 50, 64, 82, 8......
  • Insolvency Litigation
    • United Kingdom
    • Wildy Simmonds & Hill Law of Insolvent Partnerships and Limited Liability Partnerships Contents
    • 29 August 2015
    ...Parry, Transaction Avoidance in Insolvencies (Oxford University Press, 2nd edn, 2011), Ch 10. 81 Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981, [2002] BCC 943. 82 Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981, [2002] BCC 943, approving Pinewood Joinery v Starelm Prop......
  • Application to set aside a transaction defrauding creditors
    • United Kingdom
    • Wildy Simmonds & Hill Watson-Gandy On Corporate Insolvency Practice - 2nd Edition Contents
    • 29 August 2017
    ...the court can make are listed at section 425(1) of the Insolvency Act 1986 2 Section 423 of the Insolvency Act 1986. 3 Hashmi v IRC [2002] EWCA Civ 981. 4 HMRC v Begum [2010] EWHC 799 (Admin); Jetivia v Bilta [2015] UKSC 23. 5 Feakins v DEFRA [2005] EWCA Civ 1513, [2006] BPIR 895. 6 Rule 1.......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT