Beckenham MC Ltd v Centralex Ltd & Ors

A transfer of trust property by a trustee for no consideration can constitute a transaction at an undervalue under Insolvency Act 1986, even where the trustee transfers only the bare legal estate. The transaction is ordinarily protected unless the statutory conditions are met and a creditor is prejudiced. Prejudice may arise where the creditor can enforce against the trust property through the trustee’s right of indemnity or under Charging Orders Act 1979. A liability incurred because of legal ownership and the rights enjoyed with it may be a liability incurred on behalf of the trust, irrespective of private arrangements excluding the trustee’s indemnity. The statutory purpose is established where asset transfers are substantially motivated by preventing enforcement of a judgment.

The applicant, a management company, obtained county court judgments for unpaid service charges against Centralex Ltd and Karlton London Ltd. During and after those proceedings, the companies transferred two business units between themselves and then to Congress and Mortimer for no consideration.

The respondents contended that the units were held on trust for Pasonic International Corporation, that the transfers were therefore not transactions at an undervalue, and that the applicant suffered no prejudice because the trust excluded recourse to the trust property for service charges. The central issues were whether section 423 applied to the transfers, whether the applicant was prejudiced, and whether the transfers were made for the statutory purpose.

1. The application under section 423 of the Insolvency Act 1986 succeeded in principle. The court was satisfied that the transfers were transactions at an undervalue, that the applicant was prejudiced, and that the statutory purpose existed. The precise form of relief was deferred because Centralex had been dissolved.

2. On a literal construction of section 423(1), a trustee entering into a transfer with a third party on terms that provide for no consideration enters into a transaction at an undervalue. The fact that the trustee transfers only the bare legal estate does not prevent section 423 from applying. The statutory conditions ordinarily protect the transaction where the creditor has no right to enforce against the trust property.

3. A creditor may have such a right where the trustee has a right of indemnity against the trust property, enabling the creditor to claim by subrogation, or where section 2(1)(b)(i) of the Charging Orders Act 1979 applies.

4. The judgment for service charges was incurred by Centralex and Karlton as trustees within section 2(1)(b)(i). The liability arose from bare legal ownership of the units and the concomitant rights necessary for their enjoyment. It was therefore incurred on behalf of the trust, regardless of any private arrangement excluding the trustee’s right of indemnity.

5. The correct application of the principle in Halsall v Brizell [1957] Ch 169 depends on the existence of the relevant benefit as a matter of entitlement, not on whether the benefit was actually exploited. Centralex could not take the benefit of rights granted by the original transfers without accepting the corresponding covenants.

6. The transfers to Congress and Mortimer were substantially motivated by the desire to prevent enforcement against the units. The transfer to Karlton London had the same purpose. An additional alleged purpose did not prevent the statutory purpose from being established.

First-instance decision. No prior appellate decision is stated in the judgment.