Delaney v Chen and Another
| Jurisdiction | England & Wales |
| Judge | Judge Purle QC |
| Judgment Date | 08 January 2010 |
| Neutral Citation | [2010] EWHC 6 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/AP/360 |
| Date | 08 January 2010 |
[2010] EWHC 6 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
(On appeal from 4BM30021 – District Judge Ingram)
Birmingham Civil Justice Centre
The Priory Courts
33 Bull Street
Birmingham B4 6DS
Before: His Honour Judge Purle QC
(Sitting as a High Court Judge)
Case No: CH/AP/360
Hearing date: 5 th November 2009
This case concerns the impact of section 423 of the Insolvency Act 1986 (“the Act”) upon sale and lease back transactions. There are now a number of organisations who will purchase properties from home owners upon terms requiring the buyer to grant a tenancy or other interest back to the original home owners. The purchase price is reduced to take account of the tenancy or other interest granted back. The original home owners thus release some of the equity in their house, without having to move. The issue is whether and to what extent such a transaction may be vulnerable to attack as a transaction at an undervalue.
The present case concerns the sale of a house (“the Property”) by Mrs. Ge Chiu and Mr. Ji Feng Ding (“the sellers”) to Mr. Paul Delaney (“the buyer”) at a price which was substantially lower than the unencumbered freehold value because of the grant back to the sellers of a tenancy of a day or two over 21 years. The address of the Property is 10, Pioneer Close, Simpson Manor, Northampton, and is registered at HM Land Registry. It was sold to the buyer for £210,000 on 8 th May 2008. Of the sale proceeds, £160,435.15 was applied to discharge an existing mortgage taken out by the sellers. The balance (a little under £50,000) was paid to the sellers. The sale was challenged by judgment creditors of the sellers, Mrs. Can Chen and Mr. An Xiang Du (“the victims”) who say that a substantial purpose of the sellers was to put assets beyond their reach or otherwise harm their interests as judgment creditors. I emphasise that in describing the judgment creditors as “the victims” I in no way pre-judge the outcome of this appeal. I do so because that is (as will appear) the language chosen by Parliament to describe persons claiming (as they do) the benefit of section 423. For the avoidance of doubt, the expression “the victims” should be understood whenever it is used in this judgment in relation to the judgment creditors as a reference to their alleged status as such.
The matter came before me by way of an appeal from the Order of District Judge Ingram made on 9 th July 2009. The District Judge decided that the sale was a transaction at an undervalue with the requisite purpose. She declared that the transfer to the buyer of the Property was void as against the victims. She also ordered the retransfer of the Property to the sellers, though subjecting it to a charge with repayment to the buyer of the sum of £160,435.15 (the amount of the previous mortgage), which was to have priority over 2 charging orders made in the victims favour to secure costs orders made on 7 th May 2008 by Judge McCahill QC and by the District Judge on the day she handed down judgment. The charging orders would in the events which then ensued have had no effect upon the freehold without a retransfer, as they were made against the interests of the sellers in the Property, who transferred the freehold to the buyer before the charging order could be protected on the register.
The litigation between the victims and the sellers has a long history. The proceedings (commenced in 2004) did not originally involve the buyer, who is a property investor and long-standing acquaintance of the sellers, though he gave evidence at the trial before Judge McCahill QC. Following that trial, the sellers were on 22 nd November 2007 found to hold half of the shares in a company (Herbmagic (UK) Limited) upon trust for the victims, who were awarded their costs to be assessed. The sum of £30,000 (then standing in Court) was ordered to be paid to the victims on account of their costs, and was paid. Subsequently, Judge McCahill QC, at a hearing on 7 th May 2008 in Bristol, made an order for a further interim payment of £30,000 on account of the victims costs and made a charging order nisi in respect both of the Property, and another buy-to-let property owned by the sellers. As the order was not drawn up immediately by the Court in Bristol, the Charging Orders could not then be protected on the register. As regards the other buy-to-let property, there presently appears to be no, or no significant, equity in it following its remortgage by the sellers.
The impugned transfer was the next day, 8 th May 2008. The sellers sold the Property to the buyer for £210,000. The sale was not with vacant possession (despite routine completion information suggesting otherwise) though it was with full title guarantee. The intention was that the sellers would continue to live there. In anticipation of the transfer, the buyer had previously, on 1 st May 2008, granted a tenancy of the Property to the sellers expressed to commence from 8 th May 2008 “to and including the ninth day of 2029” at a rent of £500 per calendar month exclusive of Council Tax and water charges. The argument proceeded before the District Judge (and before me) on the assumption that the intended reference was to 9 th May 2029. The buyer was responsible for the maintenance of the external areas of the Property, and for insuring the building. The sellers in turn covenanted to keep the interior of the Property in good repair and condition. There was no provision for rent review during the term granted by the tenancy. The tenancy was also expressed to be an Assured Shorthold Tenancy as defined by Section 19A of the Housing Act 1988 as amended. It was also expressed to be “exclusive” to the sellers and “unassignable”. It was common ground before me that the transfer took effect subject to the tenancy, as plainly it did.
Section 423 of the 1986 Act relates to transactions (defined in section 436 as including a gift, agreement or arrangement) entered into at an undervalue. If such a transaction is entered into by a person for the purpose of putting assets beyond the reach of a person (the victim) making a claim against that person or otherwise to prejudice the interests of the victim in relation to his claim, the Court may make such order as it thinks fit for restoring the position to what it would have been if the transaction had not been entered into. A person enters into a transaction at an undervalue if the value of the consideration, in money or money's worth, provided by the other party to the transaction, is significantly less than the value, in money or money's worth, of the consideration provided by himself. This is not a complete or verbatim statement of the section, but a summary of the parts relevant to the present appeal.
The District Judge noted that the section required a comparison to be made between the value obtained by, and the value of the consideration provided by, the sellers. Founding herself upon the observations of Millett J (as he then was) in In re MC Bacon Ltd (No 1) [1990] BCLC 324 (which related to section 238 of the Act), she said that both values must be considered from the point of view of the sellers. In that case, Millett J held that the granting of a debenture was not a transaction at an undervalue, as the granting of the debenture did not deplete or diminish the value of the company's assets. The real complaint was not that the company entered into the transaction at an undervalue, but that it entered into it at all.
The Court of Appeal in National Bank of Kuwait SAK v Menzies [1994] 2 BCLC 306 approved the approach of Millett J towards undervalue and applied it to a section 423 case.
On the evidence before the District Judge, the unencumbered freehold value of the Property in May 2008 was £275,000. Thus was based upon the buyer's own assessment (as recorded in paragraph 34 of his witness statement) and a valuation of Jonathan Carpenter FRICS (“Mr. Carpenter”) obtained for the purpose of these proceedings by the buyer. Though given the opportunity to do so by paragraph 6 of Judge McCahill QC's order of 28 th July 2008, the victims did not seek permission to adduce valuation evidence of their own, but based their submissions on the buyer's evidence (including Mr Carpenter's valuation, which was admitted into evidence without objection). The District Judge held that there was an undervalue of £65,000.
The buyer appeals this ruling upon the grounds that he did not acquire the unencumbered freehold, but a freehold subject to the tenancy. The tenancy had been granted prior to the 8 th May transfer and took effect simultaneously with that transfer, which coincided with the commencement date of the term. Even if the tenancy had been created at the same time as the transfer, the position would have been the same. The transfer and tenancy were indissolubly bound up as part of the same overall transaction. Just as a purchaser dependent on a mortgage never acquires anything other than an equity of redemption ( Abbey National BS v Cann [1991] 1 AC 56, in particular Lord Oliver of Aylmerton at 92F-93C) so the buyer in this case never acquired anything other than a freehold reversion. The full title guarantee was irrelevant to this conclusion as the tenancy was an incumbrance created by the buyer himself (and therefore well known to him) to take effect on completion as part of the bargain between himself and the sellers: see section 6(2) of the Law of Property (Miscellaneous Provisions) Act 1994.
In Redstone Mortgages plc v Welch [2009] 36 EG 98, HHJ Worster held that the registered purchaser under a...
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