Jones & Ors v National Westminster Bank Plc

For a transaction at an undervalue under section 423(1)(c) of the Insolvency Act 1986, the court identifies the relevant transaction and its consideration, then compares the actual money values of what the transferor gave and received. An incidental increase in the value of shares held by the transferor in the transferee is not consideration for the transaction. The statutory comparison requires actual values; the professional-negligence concept of a permissible range of valuations does not apply.

A floating agricultural charge crystallises automatically when the farmer’s business ceases, unless that inherent consequence is expressly excluded. The farmer’s power to sell the charged assets ends on crystallisation.

The Bank sought to enforce mortgages and agricultural charges granted by two farmers over their land and farming assets. After the Bank demanded repayment, the farmers granted a 20-year farm tenancy to their newly incorporated company and transferred their agricultural assets to it for payment by instalments. They admitted that the transactions were intended to place assets beyond the Bank’s reach or prejudice its claims.

Neuberger J declared the securities valid, set aside both agreements under section 423 of the Insolvency Act 1986, and held that the agricultural floating charges had crystallised. The farmers appealed. The principal issues were how the relevant transactions, consideration and values should be identified under section 423(1)(c), whether cessation of the farming business automatically crystallised the floating charges, and whether section 6 of the Agricultural Credits Act 1928 enabled the company to take the assets free of those charges.

1. The appeal was dismissed. Lord Justice Mummery delivered the judgment of the court. The tenancy and sale agreement were transactions at an undervalue within section 423 of the Insolvency Act 1986. The agricultural floating charges crystallised, and the company acquired the farming assets subject to the Bank’s fixed charges.

2. The section 423(1)(c) inquiry required three questions. First, the relevant transactions were the tenancy and sale agreements made with the company for the admitted purpose of putting the farm and stock beyond the Bank’s reach and prejudicing its claims. Incorporation of the company and the issue of its shares were not relevant transactions. Secondly, the consideration comprised the company’s rent obligation and its obligation to pay the purchase price by instalments. The consequent increase in the farmers’ shares was not consideration for either transaction.

3. Thirdly, the court had to compare the actual monetary value of the consideration received by the transferors with the actual value provided by them. Section 423 contains no concept equivalent to the permissible range of valuations used in professional-negligence cases. Although the evidence may contain a range of suggested figures, the court must determine the actual values. The judge had followed that approach, and his findings of value were not challenged.

4. The floating agricultural charges crystallised automatically when the agreements left the farmers with nothing to farm and their partnership business ceased. The rationale for permitting continued dealings with assets under a floating charge had then disappeared. Neither section 7 of the Agricultural Credits Act 1928 nor the charge documents expressly excluded that general incident of a floating charge or made written notice indispensable.

5. Section 6 of the 1928 Act did not enable the company to take free of the charges. It governs property already subject to a fixed agricultural charge and permits a proper sale subject to the farmer’s statutory obligations. Here the property was subject to floating charges which became fixed on the sale itself. The farmer’s inherent power of sale under a floating charge terminated upon crystallisation.

6. The appeal was dismissed with costs. Permission to appeal to the House of Lords was refused. It was unnecessary to determine the Bank’s respondent’s notice alleging that the transactions were shams.

1. Court of Appeal (Civil Division): The appeal was dismissed by the court in [2001] EWCA Civ 1541. The declarations concerning the Bank’s securities and the orders setting aside the tenancy and sale agreements remained effective.

2. High Court, Chancery Division: Neuberger J declared the securities valid and subsisting, set aside the tenancy and sale agreements under section 423 of the Insolvency Act 1986, and held that the agricultural floating charges had crystallised. No citation is stated in the judgment.