Delaney v Chen & Anor

For the purposes of section 423(1)(c) of the Insolvency Act 1986, value is assessed from the debtor’s perspective by comparing the consideration given with the whole consideration received. In a sale-and-leaseback transaction, that consideration may include both the cash payment and the value of the leaseback.

An unassignable lease is not necessarily valueless. Its surrender value may constitute valuable consideration. Where unchallenged valuation evidence shows that the debtor received consideration at least equal to the value of the asset transferred, the transaction is not at an undervalue, even if it was unattractive to creditors.

Chen and Du had obtained judgment against two former business partners. Shortly before they would have obtained a charging order, the debtors sold their mortgaged home to Delaney for £210,000 and received a long, fixed-rent, unassignable leaseback.

The creditors sought to set aside the transaction under section 423 of the Insolvency Act 1986. The District Judge held that the transaction fell within section 423(1)(c). Judge Purle QC allowed Delaney’s appeal. The creditors appealed to the Court of Appeal.

The central issue was whether the debtors had received consideration significantly less than the value they had given, and in particular whether the leaseback had value despite being unassignable.

1. Appeal dismissed unanimously. The court held that the transaction was not entered into at an undervalue within section 423(1)(c) of the Insolvency Act 1986. Judge Purle QC was therefore correct to allow Delaney’s appeal from the District Judge.

2. The court assumed, without finally deciding, that the purpose condition in section 423(3) was met. There were concurrent findings that, although the debtors wished to protect their home, one purpose was to prejudice the creditors’ interests. That could not assist the creditors unless the separate undervalue condition was also established.

3. Whether the transaction was analysed as a sale of the freehold subject to the lease, or as a sale of the freehold in exchange for cash and a leaseback, the evidence did not establish an undervalue. The property was valued at £275,000 with vacant possession and £115,000 subject to the lease. Even assuming that the lease initially had no inherent value, the £160,000 marriage value could, absent contrary evidence, be divided equally. The lease was therefore worth £80,000, so the debtors received £290,000 in total consideration.

4. The court further held, although it might not have been necessary to do so, that unassignability did not require the lease to be treated as valueless. It had a surrender value. That conclusion was supported by Re (Thoars) (deceased) (No 2) Reid v Ramlort [2005] 1 BCLC 331.

5. The court also rejected suggestions that the transaction was improper. In the face of clear denials, and without cross-examination or other hard evidence, it would be very unusual to find wrongdoing proved.

• Court of Appeal (Civil Division): Dismissed the creditors’ appeal and upheld Judge Purle QC’s conclusion that the transaction was not at an undervalue.

• Chancery Division, Birmingham District Registry: Judge Purle QC allowed Delaney’s appeal from the District Judge, who had found that the transaction fell within section 423(1)(c) of the Insolvency Act 1986.