Kremen v Agrest

Under section 23 of the Matrimonial and Family Proceedings Act 1984, a transaction may be set aside where a material, though subsidiary, intention was to defeat a claim for financial relief and the transaction has that effect. Constructive knowledge includes knowledge which ought to have prompted further inquiry. A third-party exception requires valuable consideration, good faith and absence of notice, and each element must be established.

A sham requires a common intention that the document should create rights different from those it appears to create, together with an intention to give that false impression. An uncommercial or artificial transaction is not necessarily a sham. Serious allegations of sham remain subject to the civil standard, but require clear evidence.

The applicant sought to set aside a charge over the former matrimonial home under section 23 of the Matrimonial and Family Proceedings Act 1984, or alternatively to establish that the underlying agreements and charge were shams. The charge secured an alleged debt of US$5 million in favour of the second respondent and ranked behind earlier bank charges. Following sale of the property, the proceeds were held in court.

The first respondent did not attend and was unrepresented. The second respondent sought payment of the funds. The central issues were whether the statutory requirements for avoidance were met, whether the third-party exception applied, and whether the transaction was a sham.

1. Statutory application. The charge was liable to be set aside under section 23 of the Matrimonial and Family Proceedings Act 1984. The first respondent was presumed to have intended to defeat the applicant’s claim, and had not rebutted that presumption. The intention need only be a material subsidiary motive. The charge had frustrated or impeded enforcement of any financial relief order.
2. Third-party exception. The second respondent did not establish the statutory requirements for protection. He knew, or was fixed with constructive knowledge, that the first respondent intended at least in part to defeat the applicant’s claims. The exception therefore failed. The evidential burden had shifted to the second respondent because the relevant matters involved proving absence of knowledge.
3. Sham. The court applied the principles restated in A v A, including the requirement for a common intention that the transaction should create different rights from those appearing on its face. The surrounding evidence raised substantial suspicions about the agreements and the charge. However, the evidence did not reach the high threshold required to establish a sham, notwithstanding that the civil standard remained the balance of probabilities.
4. The applicant’s application was granted under the statutory ground and refused on the sham ground. The other applications were dismissed. The applicant was to receive specified maintenance, school-fee and costs payments from the funds in court, with the balance remaining frozen pending the final hearing. Applications by the second respondent concerning the alleged debts or a charging order were transferred to the Family Division.

The judgment records earlier decisions by Her Honour Judge Hughes QC, Mr Jonathan Cohen QC and Thorpe LJ, together with the dismissal of the first respondent’s appeal against a later judgment summons decision. No appellate history of the present applications is stated.