Delaney v Chen

The Court of Appeal dismissed an appeal against a Chancery Division decision refusing to set aside a sale and leaseback under section 423 of the Insolvency Act 1986. The court considered both whether the transaction was a "transaction entered into at an undervalue" under section 423(1)(c) and whether it was entered into for the proscribed purpose in section 423(3). The judge accepted the lower court's finding as to purpose but held that, on the uncontested valuation evidence, there was no sale at an undervalue.

The court analysed two possible ways of characterising the transaction (sale of the freehold subject to a lease, or sale of the freehold together with the grant of the lease), and concluded that, on either analysis and on the expert figures before the court, there was no shortfall in value once the marriage value between freehold and leasehold was accounted for. The court also held that the lease had surrender value despite being unassignable and that in assessing value for section 423 one looks at value from the debtor's perspective. The absence of cross-examination and absence of contradictory evidence undermined allegations of impropriety. Appeal dismissed.

Background and parties: The appellants, Mrs Chen and Mr Du, had obtained judgment against two co-owners of a property (the debtors). Shortly before a charging order could be obtained, the debtors sold their home at 10 Pioneer Close to Mr Paul Delaney for £210,000 and took a leaseback. The appellants sought to set aside that transaction under section 423 of the Insolvency Act 1986.

Nature of the application: The claim sought orders under section 423 to undo a transaction entered into at an undervalue and intended to put assets beyond or prejudice the reach of creditors.

Issues framed:

• Whether section 423(1)(c) was satisfied, that is whether the consideration received by the debtors was significantly less than the value given by them.
• Whether, under section 423(3), the transaction was entered into for the purpose of putting assets beyond the reach of, or otherwise prejudicing, a person making or who may make a claim.

Procedural posture: Appeal from the Chancery Division, Birmingham District Registry (His Honour Judge Purle QC), to the Court of Appeal.

Evidence and valuation: The appellants relied on a vacant possession valuation of about £350,000 (or £275,000 in expert evidence relied on by the respondents). The defendants produced a surveyor's report valuing the property with vacant possession at about £275,000 and the property subject to the May 2008 tenancy at about £115,000. The leaseback provided fixed rent, a long term and an absolute bar on assignment.

Court's reasoning: The court accepted the lower court's finding under section 423(3) that one purpose was to prejudice the appellants, but focussed on section 423(1)(c). It considered two analytical approaches to valuation but concluded that both were defensible and that, on the unchallenged expert figures, there was no undervalue. The court explained the concept of marriage value: if the freehold with vacant possession was valued at £275,000 and the tenanted value at £115,000, the marriage value of £160,000 would, in the absence of contrary evidence, be split between freehold and leasehold (giving the lease a notional value of £80,000). The court held that an unassignable lease nevertheless has surrender value and that value for section 423 is assessed from the debtor's point of view. The absence of cross-examination and lack of hard contrary evidence made allegations of impropriety unsustainable. Precedents such as Re (Thoars) (deceased) (No 2) Reid v Ramlort and other authorities were applied to support these points.

Conclusion: The appeal was dismissed because the transaction was not shown to be at an undervalue on the evidence before the court, and therefore no order under section 423 was appropriate.

Appeal dismissed. The Court of Appeal upheld the conclusion that, on the unchallenged valuation evidence and on either permissible analysis of the sale and leaseback, the debtors did not sell at an undervalue for the purposes of section 423(1)(c). The lease had a surrender value and marriage value should be apportioned in the absence of contrary evidence; additionally, allegations of impropriety were not proved in the absence of cross-examination or hard contrary evidence.

Appeal to the Court of Appeal (Civil Division), neutral citation [2010] EWCA Civ 1455, from the Chancery Division, Birmingham District Registry (His Honour Judge Purle QC).