Inland Revenue v Hashmi & Anor

A transaction at an undervalue may be set aside under section 423 of the Insolvency Act 1986 where putting assets beyond a claimant's reach, or otherwise prejudicing the claimant's interests, substantially motivated the transferor. That purpose may coexist with family provision or another legitimate purpose. It need not be the sole or dominant purpose.

The claimant must establish a real, substantial purpose. A consequence, incidental by-product or trivial consideration is insufficient. The transaction may fall within the section even if it would have been undertaken without the statutory purpose. Purpose may be inferred from the evidence. An appellate court should interfere with the trial judge's factual evaluation only where it is plainly wrong.

Mr Ghauri bought the freehold of premises used for his restaurant business and, on the same day, declared that he held the beneficial interest on trust for his 16-year-old son, Omar. The declaration was expressed to be in consideration of natural love and affection. Mr Ghauri subsequently continued to receive rent from the premises and disclosed them to the Inland Revenue as apparently unencumbered property.

A Revenue investigation revealed substantial undeclared business profits and resulted in a settlement of unpaid tax, interest and penalties. After Mr Ghauri's death, the declaration of trust was disclosed. The Revenue brought proceedings under section 423 of the Insolvency Act 1986 against Mohamed Akram Hashmi, the executor of Mr Ghauri's estate, and Omar.

Hart J set aside the declaration. He found that Mr Ghauri intended both to provide for Omar and to put the property beyond creditors' reach, with the latter purpose dominant. Omar appealed with the judge's permission. The issues were whether the statutory purpose had to be dominant and whether the evidence supported the inference that Mr Ghauri possessed that purpose.

The appeal was dismissed unanimously. The evidence entitled Hart J to find that putting the property beyond the Revenue's reach was a substantial purpose of the declaration of trust. It was unnecessary to establish that this purpose was dominant.

1. Arden LJ, Laws LJ and Simon Brown LJ agreed that section 423(3) of the Insolvency Act 1986 required neither a sole nor a dominant statutory purpose. The section contained no qualification requiring dominance. Its operation could extend to transactions motivated by two purposes of equal strength. Family provision and protection against creditors could coexist without either being identifiable as the stronger motive.

2. Arden LJ explained that the statutory purpose must be real and substantial. A result, by-product or consideration making no important contribution to the transferor's decision would be insufficient. Laws LJ expressed the requirement as substantial motivation by one of the aims in section 423(3)(a) or (b). The claimant bore the burden of establishing that motivation. The distinction between purpose and consequence had to be maintained.

3. Laws LJ and Simon Brown LJ expressly rejected a necessary causal requirement that the transaction would have been withheld without the statutory purpose. A gift could be set aside even where the transferor would have made it in any event for family provision or another reason. Simon Brown LJ added that, where the transaction might have occurred anyway, the judge should exercise care before inferring an additional substantial purpose of escaping liabilities.

4. Arden LJ held that purpose could be established by inference. Applying the appellate restraint discussed in Pehrsson v von Greyerz, the court should be slow to differ from a trial judge who had heard the evidence, particularly oral evidence tested by cross-examination. The factual evaluation justified interference only if plainly wrong.

5. The sustained, considerable under-declaration of profits supported an inference that the potential Revenue liability had been present in Mr Ghauri's mind. The judge could assess his financial position from the available evidence and attach significance to his continued treatment of the property as his own. Arden LJ found sufficient material to sustain the decision. Laws LJ regarded the inference of statutory purpose as readily available. Simon Brown LJ questioned whether dominance had been established, but accepted that escaping liability was a substantial, non-negligible purpose.

The appeal was dismissed with costs, subject to detailed assessment.

• Court of Appeal (Civil Division): In [2002] EWCA Civ 981 , unanimously dismissed Omar's appeal and upheld the order setting aside the declaration of trust.
• High Court, Chancery Division: Hart J, by order dated 4 October 2001, set aside the declaration under section 423 of the Insolvency Act 1986. He granted permission to appeal. No citation for that decision was supplied.