Carman (The Trustee In Bankruptcy of Hollier) v Letchford

A transaction is at an undervalue where the value transferred by a bankrupt is significantly greater than the value received, assessed by comparing outgoing and incoming value. Expert valuation evidence is not essential; the court may adopt a common-sense assessment and the range most favourable to the transaction. A transaction may also involve a gift where it confers an entitlement on another person for no consideration. The court may set aside such a transaction under Insolvency Act 1986, even without proof of insolvency. Alternatively, a preference requires insolvency, a better position for the creditor, and the requisite desire to prefer. Relief restores the position as if the transaction had not occurred.

The trustee in bankruptcy of Jayson Wayne Hollier challenged an agreement made in June 2006 between the bankrupt, Bentley Group Ltd and its director. The agreement reduced Bentley’s liability to the bankrupt under an earlier business-sale agreement and directed most of the available income stream to the bankrupt’s mother, the respondent, before any payment to the bankrupt.

The trustee sought relief under sections 339 and 340 of the Insolvency Act 1986. The respondent denied that the bankrupt had owned the business beneficially and disputed both the transaction’s economic effect and the sums she had received. The central issues were whether the agreement was a transaction at an undervalue, and, alternatively, whether it was a preference.

1. Transaction at an undervalue. The court applied the comparison required by s 339 of the Insolvency Act 1986. The relevant inquiry was the value of the consideration transferred by the bankrupt compared with the value received by him. Following Re Thoars Decd (No 2), Reid v Ramlort Ltd [2004] EWCA Civ 800, expert valuation evidence was unnecessary where a common-sense assessment could be made.
2. The bankrupt’s claim against Bentley was worth at least £1.25 million, whereas the agreement left him with a deferred claim of only £833,333.20. The agreement also created a liability to the respondent of £1,666,666.40, although she had no beneficial interest in the business or its sale proceeds. The payment provision therefore operated as a gift and the agreement fell within s 339.
3. The respondent’s reliance on the resulting-trust principle in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 failed. The facts involved payments made in the hope of avoiding bankruptcy, not money received for a specific purpose that had failed.
4. Alternative preference. The court found, obiter, that the bankrupt was insolvent when the agreement was made. If the respondent had been a creditor, the agreement would have improved her position and the statutory presumption of a desire to prefer would not have been rebutted. The relevant circumstances included the close family relationship, cooperation, the bankrupt’s financial position, the respondent’s wish to be paid first, the absence of commercial justification and steps apparently taken to conceal the payment destination.
5. Relief. The agreement was set aside. The respondent was required to restore £516,500 received for her own benefit under it. The court invited the parties to agree the consequential order.