Claridge, Re The Trustee In Bankruptcy of

The court considered an appeal by the trustee in bankruptcy seeking a declaration that a payment of part of a joint re-mortgage advance constituted a transaction at an undervalue under section 339 of the Insolvency Act 1986. The court analysed whether the spouse who received the monies provided consideration at the time of the transaction (s339(3)(a)) and, alternatively, whether any consideration she gave was significantly less in money or money's worth than the benefit conferred (s339(3)(c)).

The court concluded that, objectively, the bankrupt had a half-share in the contractual rights to the loan monies and joined with his wife in directing the client account holder to pay the funds such that he conferred a benefit on his wife. The court held that the wife had provided some consideration in agreeing with the husband to obtain and spend the loan on renovating the family home, so s339(3)(a) was not made out. However, the court found the value of the consideration to the husband at the date of the transaction to be negligible and therefore s339(3)(c) was made out.

Despite this finding of a transaction at an undervalue, the court exercised its discretion under section 339(2) and declined to order restitution or payment by the wife, having regard to the wider context, the parties' agreement to use the funds to repair the family home, the wife's change of position in good faith, proportionality of further proceedings and that the wife remained liable to repay the lender.

Background and parties: The trustee (appellant) of the bankrupt, Mr Claridge, appealed from an order of District Judge Henry refusing a declaration that a transfer of part of a joint mortgage advance (£26,689.50) to Mrs Claridge was a transaction at an undervalue under section 339 of the Insolvency Act 1986. The respondents were Mr and Mrs Claridge. The property had originally been held in both names; following the trustee's sale of the bankrupt’s beneficial half in 1998, Mrs Claridge was the sole beneficial owner although register and mortgage documents continued to show joint ownership.

Nature of the application: The Trustee sought (i) a declaration that the transfer of part of the KMC loan to the wife on or about 30 January 2003 was a transaction at an undervalue under section 339, and (ii) an order that the wife pay the Trustee that sum or such other sum as the court thought fit with interest. The Deputy Judge below dismissed the primary claim that the bankrupt retained a beneficial half-share in the property and rejected the trustee’s s339 claim. The trustee appealed.

Issues before the court: (i) whether the transaction amounted to a transaction at an undervalue under s339(3)(a) (no consideration) or s339(3)(c) (consideration significantly less in money or money’s worth); (ii) whether any maintenance obligation under the Domestic Proceedings and Magistrates Courts Act 1978 (sections 1 and 2) or the fact that the loan proceeds were paid into the wife’s account could supply consideration; and (iii) what relief, if any, should be granted and whether the matter should be remitted for further fact-finding.

Reasoning and legal analysis: The court held that (a) objectively the loan contract and the client account created joint contractual rights in the loan monies such that the bankrupt had a half-share which he, by joint directions, caused to be applied for the wife's sole benefit; (b) consideration for s339 must be assessed at the date of the transaction and be given at that time; (c) the statutory/domestic-maintenance argument failed because no enforceable or quantifiable agreement or claim under the 1978 Act had been made or relied on at the time and any such obligation was inchoate; (d) the wife did give consideration in that the parties agreed jointly to obtain and use the loan to renovate their family home (so s339(3)(a) failed), but the value of what the wife provided to the husband at the date of the transaction (eg a licence to reside or future goodwill) was negligible for the purposes of s339(3)(c), so that limb was made out; (e) in assessing relief under s339(2) the court must focus on restoration but may take into account the wider context and the legitimate interests of all parties, including creditors and the recipient's change of position; and (f) on the facts and given proportionality and lack of evidence as to the value added to the property, the court exercised its discretion not to order payment or other relief.

Disposition: The court declared the transaction to be at an undervalue but refused to make an order under s339(2) for payment or other relief, effectively allowing the appeal in part.

Appeal allowed in part. The court held that the joint directions which resulted in payment of the KMC loan monies to the wife constituted a transaction in which the bankrupt conferred a benefit on his wife and, assessed at the date of the transaction, the consideration the wife provided to the bankrupt had negligible value so that section 339(3)(c) was satisfied. Section 339(3)(a) was not established because the parties had agreed to obtain and spend the loan on renovating the family home. Nevertheless, the court exercised its discretion under section 339(2) and declined to order repayment or other relief, having regard to the contextual factors, the wife’s change of position in good faith, her continuing liability to the lender and proportionality of further proceedings.

Appeal from the order of District Judge Henry dated 8 March 2010 in the Reading County Court refusing the Trustee's application; heard in the High Court, Chancery Division, Sales J, resulting in [2011] EWHC 2047 (Ch).