Papanicola v Fagan

For the purposes of Insolvency Act 1986, a transaction expressed to be a gift is not necessarily a transaction at an undervalue. The court must determine whether the recipient gave consideration in substance. Forbearance from pursuing divorce and a property adjustment claim may constitute valuable consideration.

Under section 423, the statutory purpose must be a real and substantial purpose of the debtor in entering the transaction. It is insufficient that putting assets beyond creditors’ reach was merely a consequence. A transaction entered into to preserve a marriage therefore does not satisfy section 423 merely because it subsequently prejudices creditors.

The trustee in bankruptcy of Raymond Paul Fagan applied under sections 339 and 423 of the Insolvency Act 1986 to set aside a 1998 declaration of trust transferring Mr Fagan’s beneficial interest in the matrimonial home to his wife, Pamela Fagan.

The trustee alleged that the declaration was a gift at an undervalue and was made to put assets beyond the reach of potential creditors. The central issues were whether the transaction was for no consideration, whether Mr Fagan entered into it for a statutory purpose under section 423, and whether relief should be granted.

1. The applications under sections 339 and 423 of the Insolvency Act 1986 failed.
2. The fact that the declaration described the transfer as a gift was not conclusive. The court had to examine the substance of the transaction. Mrs Fagan had threatened, or promised, to commence divorce proceedings and seek ancillary relief if the transfer was not made. Her forbearance from pursuing that valid claim constituted valuable consideration. The transaction was therefore outside section 423(1)(a), and was not a gift for the purposes of section 339(3)(a).
3. For section 423(3), the relevant purpose need not be dominant, but it must be a real and substantial purpose rather than a mere consequence. Mr Fagan entered into the declaration principally to preserve the marriage. Although the transfer consequently placed his interest beyond the reach of creditors who later emerged, that consequence did not establish the required statutory purpose.
4. The court found that Mr Fagan was solvent when the declaration was made and did not become insolvent by reason of it. The section 339 application therefore also failed on insolvency grounds.
5. The court made no determination based on the discretionary relief under section 423(2). The judge observed that significant hardship to the respondent would have justified refusing relief, but no such evidence had been adduced and the statutory conditions were not satisfied.

First-instance decision. The judgment states that the trustee’s applications under sections 339 and 423 of the Insolvency Act 1986 failed.