AC v DC & Ors (Financial Remedy: Effect of s37 Avoidance Order) (No 1)

An order under Matrimonial Causes Act 1973, s 37, setting aside a transaction intended to defeat a financial-relief claim operates retrospectively. The transaction is annulled ab initio for legal and fiscal purposes. This does not ordinarily prejudice a subsequent purchaser who acquired the property for value, in good faith and without notice. The court may also reverse subsequent dealings under s 37(3), subject to protecting such innocent third-party transactions. The provision is a bespoke statutory avoidance remedy, distinct from the power under the Inheritance (Provision for Family and Dependants) Act 1975, s 10, which imposes repayment or provision obligations without avoiding the original transaction.

The applicant wife sought financial relief from the first respondent husband. Before the financial-relief proceedings were resolved, the husband transferred his substantial shareholding in a holding company to a corporate trustee, followed by transfers to associated companies. The transactions were not opposed by the respondents.

The court had already made orders setting aside the transactions under Matrimonial Causes Act 1973, s 37. The remaining issue was whether setting aside operated retrospectively for all legal and fiscal purposes, including capital gains tax, or merely required a later re-vesting of the property in the husband.

1. The court confirmed that the statutory criteria for an avoidance order were satisfied. The transactions defeated or reduced the wife’s financial-relief claims; the husband had not displaced the presumed intention to defeat those claims; the recipient had not established valuable consideration, good faith and absence of actual or constructive notice; and setting aside was a fair and just exercise of discretion.

2. The expression “avoidance” in s 37, together with the power to make an order “setting aside the disposition”, denotes nullity rather than repayment or re-vesting. An order under s 37 therefore annuls the impugned transaction ab initio. The conclusion was supported by Kemmis v Kemmis [1988] 1 WLR 1307 and the reasoning concerning restoration in Newlon Housing Trust v Alsulaimen [1999] 1 AC 313.

3. Retrospective avoidance may coexist with the preservation of a later transaction made by an innocent purchaser for value and in good faith without notice. Section 37(3) should not be used to disturb such a transaction. The approach in Ansari v Ansari [2010] Fam 1 was endorsed.

4. The general-law effect of the order governs its tax consequences unless a taxing statute provides otherwise. The transaction was therefore to be treated retrospectively as never having occurred for capital gains tax purposes. IRC v Spence (1941) 24 TC 312 supported that conclusion. The express inheritance-tax machinery in s 150 of the Inheritance Tax Act 1984 did not imply a different rule for capital gains tax.

5. Morley-Clark v Jones [1986] Ch 311 was distinguishable. It concerned a retrospective variation of a valid maintenance order, not the avoidance of a transaction subject to a vitiating purpose from its inception.

6. The order did not bind HMRC because it had not participated in the proceedings. Nevertheless, there was no policy reason for the Treasury to benefit from transactions which had been set aside for all other purposes.

This was a first-instance decision of the High Court (Family Division) concerning the fiscal and legal effect of earlier orders made under Matrimonial Causes Act 1973, s 37. No appeal was stated in the judgment.