Brown v Brown & Anor

Under Insolvency Act 1986, s.339, a transaction must be assessed according to the documents’ legal effect unless rectification has been claimed and granted. A transfer made to reflect an unproved or unimplemented intention does not avoid the statutory provisions. Consideration has its contractual meaning; a later legal characterisation cannot create consideration that was never promised or agreed.

Although the court is directed to make an order restoring the pre-transaction position, the wording confers an overall discretion. In an exceptional case, justice may require no order at all. The discretion is not confined to cases involving foreign or territorial considerations.

The claimant, the trustee in bankruptcy of Mr Brown, applied under s.339 of the Insolvency Act 1986 to set aside a notice of severance and receipt under which Mr Brown’s beneficial interest in a property was reduced from 50 per cent to 1 per cent.

In earlier proceedings, Lloyd J had found that the documents were genuine and effective, and that Mr Brown held only a 1 per cent beneficial interest. The trustee was bound by findings necessary to that decision, but Lloyd J had made no clear and necessary finding that the parties originally shared an intention that Mr Brown should have only a nominal interest.

The issues were whether the transaction was at an undervalue and, if so, whether the court could decline to make an order under s.339.

1. The notice of severance and receipt transferred 49 per cent of the beneficial interest. Unless and until the original conveyance was rectified by the court, it took effect according to its terms. No rectification claim had been made. The transaction therefore fell within s.339.

2. The potential value of a rectification claim could not constitute consideration. The parties had not agreed that Mrs Malden-Browne would surrender such a claim in return for the transfer. Consideration under s.339 had its contractual meaning, and the suggested bargain was an ex post facto legal rationalisation.

3. Findings in the earlier proceedings which were necessary to the decision, including the authenticity and date of the documents, bound Mr Brown and his trustee in bankruptcy as privies. The earlier judgment did not, however, contain a clear and necessary finding of a common intention that Mr Brown should have only a nominal interest.

4. Section 339(2), despite using the word “shall”, conferred an overall discretion as to the order to be made. Following Re Paramount Airways Ltd [1993] Ch 223, that discretion was wide enough, where justice so required, to make no order. It was not confined to territorial or foreign-element cases.

5. Ramlort Ltd v Reid [2004] EWCA IV 800 was consistent with that approach. Its discussion concerned the form of the remedy where an order was to be made, rather than eliminating the separate discretion not to make an order.

6. This was an exceptional case. The severance merely removed a windfall which had arisen because the property had been acquired at a substantial discount obtained through Mrs Malden-Browne’s protected tenancy. She had made the relevant mortgage and household payments, and the original intention was that Mr Brown should have only a nominal interest. Justice therefore required that no order be made.

The application was dismissed in substance: no restorative order was made.

This was a first-instance application in the High Court. The judgment records earlier proceedings before Lloyd J, in which claims concerning the property and the authenticity of the notice of severance were dismissed, but no appeal was identified.