Sands v Singh & Ors

A charge is a sham only where the parties share an intention to create rights different from those appearing on the document and to give third parties a false impression. An uncommercial or artificial transaction is not necessarily a sham. Security granted for a contemporaneous advance is not a preference for a pre-existing debt.

A court-approved matrimonial ancillary-relief order normally provides consideration equivalent to the property or money transferred. It may be challenged under Insolvency Act 1986 only on an exceptional or other vitiating ground, such as collusion, fraud, mistake, misrepresentation or material non-disclosure.

The trustee in bankruptcy of Mr Tarlochan Singh challenged two charges over Priors Croft and a matrimonial settlement consisting of a trust deed and consent order. He alleged that the January charge in favour of Mr Singh’s father was a sham, that the April charge in favour of Mr Singh’s sister was a sham or preference, and that the trust deed and consent order were transactions at an undervalue or transactions defrauding creditors.

The court considered the parties’ intentions and the relationship between bankruptcy legislation and a consent order made under Part II of the Matrimonial Causes Act 1973. The central issues were whether the charges were legally effective and whether the matrimonial settlement could be reopened under sections 339 or 423 of the Insolvency Act 1986.

1. The January Charge was a sham and a nullity. The court applied the subjective common-intention test and considered external evidence, including the parties’ explanations and subsequent conduct. The evidence established an intention to create the appearance of a £506,000 loan and security when no such indebtedness existed.
2. The April Charge was not proved to be a sham. The evidence showed that £70,000 had been paid into an account in Mr Singh’s name and probably represented a loan. Nor was it a preference: the security was granted as part of the contemporaneous advance, rather than to improve recovery of a pre-existing debt.
3. Section 423 added nothing material because both section 423 and section 339 required a transaction at an undervalue, while section 423 additionally required the statutory purpose. Giving up a claim for ancillary relief under Part II of the Matrimonial Causes Act 1973 constitutes consideration for section 339 purposes. Ordinarily, its value is treated as equivalent to the money or property transferred, whether the order follows contested proceedings or consent.
4. An ancillary-relief order may nevertheless be challenged where a vitiating factor is proved, including collusion, fraud, mistake, misrepresentation, concealment or material non-disclosure. The court will be slow to set aside a non-collusive order merely because later information suggests that greater provision might have been made. A separate section 339 claim may be brought in the Chancery Division or, where appropriate, the County Court.
5. The evidence did not establish collusion. The settlement did not appear excessive on the information available to Mrs Kaur. Even on the basis of the later findings about the January Charge and other assets, it was not shown that the consent order could never have been approved under the 1973 Act.
6. The January Charge was declared a sham and nullity. The challenges to the April Charge and to the Trust Deed and Consent Order failed.