New case law: Setting aside transactions made in ancillary relief proceedings

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Hill v Hains [2008] Ch. 412 dealt with the difficulties a trustee in bankruptcy faces when applying to have an ancillary relief settlement set aside as a transaction at an undervalue, entered into prior to bankruptcy.  Unless they can show fraud, misrepresentation, mistake or show that another exceptional circumstance has occurred.

Sands (as trustee in bankruptcy of Mr Tarlochan Singh) v Singh and ors [2016] EWHC 636 (Ch) 22/3/16

Facts

Mr Singh commenced extensive building works at a property he owned, at that time also borrowing money from his father and executing a charge over that property in favour of his father (Charge One).  Further to this, he borrowed money from his sister, executing another charge over that same property for the money owed (Charge Two).

Shortly after, the contractor issued proceedings against Mr Singh for non-payment of the buildings works completed at the property and his wife filed for divorce, seeking ancillary relief.

Mr Singh agreed, by consent order and trust deed, to hold the property on trust for the benefit of his two children, with his wife retaining occupation of the property (Settlement).

Subsequent to this, Mr Singh was declared bankrupt.

A trustee in bankruptcy was appointed who sought to have both charges declared as void on the grounds that they were a sham. In addition, the trustee in bankruptcy also applied to set aside the Settlement as a transaction at an undervalue, for the purposes of s.339 of the Insolvency Act 1986.

Held

Charges

Charge One was deemed to be a sham and declared as null and void.  The judge held that Charge One had been created to give the impression that Mr Singh had received money from his father, when in fact he did not.

Charge Two was upheld, as there was evidence of a transfer to Mr Singh’s bank account of £70,000 from his sister.  The trustee in bankruptcy was not able to prove that both parties had not intended for the charge to have effect.

Settlement

In relation to the application to have the Settlement set aside as a transaction at an undervalue, the judge refused to do so.

The judge did not agree that the Settlement had a vitiating factor i.e. collusion between Mr Singh and his wife (Hill v Haines applied).  It was noted that, in the absence of collusion, it is possible to set aside an ancillary relief settlement if the circumstances are exceptional.  However, the judge did not accept that there were exceptional circumstances in this case.

Points to note

It has not yet been decided how much weight will be given to the extent of the knowledge of the non-bankrupt party.  A trustee in bankruptcy would need to argue that knowledge is irrelevant.

There is also some discussion over what would amount to ‘exceptional circumstances’ and this is likely to be the subject of further consideration from the courts.

There is some helpful guidance, that was highlighted in the case of Paton v Todd [2012] EWHC 1248 (Ch) where the judge considered that ‘exceptional circumstances’ would be something that was ‘out of the ordinary course, unusual or special, or uncommon; to be exceptional a circumstance need not be unique or unprecedented, or very rare but it cannot be one that it regularly, or routinely, or normally encountered’.

Comments

The judge confirmed that a trustee in bankruptcy, who is applying to set aside an ancillary relief settlement entered into prior to bankruptcy, will find this challenging.

The court have provided some useful guidance on potential grounds for doing so.  This includes the trustee in bankruptcy having to show a vitiating factor i.e. fraud, misrepresentation, mistake or another exceptional circumstance.  Although collusion is not an essential requirement in having an ancillary relief settlement set aside, the court would be reluctant to do so in its absence.

It would be difficult to obtain sufficient evidence of collusion between spouses, without a satisfactory paper trail.  Therefore, a trustee in bankruptcy would need to consider other avenues in trying to persuade the courts to set aside ancillary relief settlements.

Needless to say, this case is of interest to many insolvency practitioners and professionals in this area of law, owing to the nature of the decision.

If you would like any further advice on this or on options to set aside an ancillary relief order as a transaction at an undervalue, please contact Andrew Cawkwell on 0191 211 79857 or email [email protected]