Delaney v Chen & Anor

For a sale and lease back to be a transaction at an undervalue under Insolvency Act 1986, the court must compare the value transferred by the sellers with the total consideration they received. That consideration may include the premium or surrender value of the tenancy granted back to them. An unassignable tenancy is not necessarily valueless. The party alleging undervalue bears the legal burden of proving it. A transaction is not at an undervalue merely because it depletes assets if the transferor receives full value. The requisite statutory purpose concerns the sellers’ purpose, and harming creditors generally may suffice even where that is not the predominant purpose. The appeal was allowed because undervalue was not established.

The sellers transferred their home to the appellant for £210,000 and received a tenancy back for a term exceeding 21 years. The property had an unencumbered freehold value of £275,000. Judgment creditors of the sellers alleged that the transaction was at an undervalue and had been entered into to prejudice their interests under section 423 of the Insolvency Act 1986.

The District Judge found both an undervalue and the requisite purpose, declared the transfer void against the creditors and ordered retransfer subject to a charge securing repayment of the mortgage. The buyer appealed, contending that the tenancy had substantial value and that the transaction was therefore not at an undervalue. The central issues were how the consideration should be valued and whether the statutory purpose was established.

1. The appeal was allowed. Although the sellers’ purpose to prejudice creditors was established, the creditors had not proved that the transaction was at an undervalue.

2. Under section 423 of the Insolvency Act 1986, the comparison is between the value of the consideration provided by the sellers and the value of the consideration they received. The tenancy granted back forms part of the consideration. Its premium or surrender value is capable of being consideration in money or money’s worth.

3. The sellers had transferred an unencumbered freehold worth £275,000, but received £210,000 and a tenancy. The tenancy’s non-assignability did not make it valueless. The evidence, including comparable sale and lease back quotations and the low fixed rent, supported the conclusion that it had a premium value. The creditors had to prove that the tenancy’s value was less than the £65,000 difference. They failed to do so.

4. The burden of proving undervalue rested on the creditors. Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143 did not shift that burden because the tenancy was not precarious in the relevant sense.

5. The statutory purpose was the sellers’ purpose, and it was sufficient that prejudicing creditors generally was a substantial purpose: Moon v Franklin [1996] BPIR 196; IRC v Hashimi [2002] 2 BCLC 489. The evidence justified that conclusion even if the sellers were unaware of the charging order before completion and had other reasons for completing on that date.

6. The court did not decide whether an incidental diminution in value is outside section 423, an issue left open in Agricultural Mortgage Corporation Plc v Woodward [1995] 1 BCLC 1. It also expressed, without deciding, doubts about the District Judge’s proposed remedy and the absence of provision for repayment of the buyer’s surplus purchase money.

• High Court (Chancery Division): allowed the appeal from the order of District Judge Ingram dated 9 July 2009.
• District Judge Ingram: found a transaction at an undervalue and the requisite purpose, declared the transfer void against the creditors, and ordered retransfer subject to a charge.