The Official Receiver v Christopher James Hatton

The Official Receiver applied for a bankruptcy restrictions order under paragraph 2(1) of Schedule 4A to the Insolvency Act 1986, relying on alleged deliberate steps by the respondent to put assets beyond the reach of creditors, including transfers said to fall within the ambit of section 423 of the Insolvency Act 1986. The court analysed three categories of transactions: the transfer of shares in Danton Estates Limited (the DEL Share Transfer), the application of net proceeds from the sale of Appletree House, and an attempted variation of a will. The judge concluded that the purchaser funds for the DEL acquisition were provided by Danton Partners Limited (DPL) and therefore reduced any effective value gifted; there was insufficient evidence that the DEL transfer was intended to put assets beyond the reach of creditors. The net proceeds from Appletree House were overreached by the second-charge lender (Lloyds Bank) and re-lent to DPL, so the proceeds were never available to the respondent to defeat creditors. Allegations about seeking a will variation engaged issues of immunity and the possible operation of a secret trust; the Official Receiver did not prove on the balance of probability that the will-related conduct was undertaken to defeat creditors. The application was dismissed.

Background and nature of the application: The Official Receiver sought a bankruptcy restrictions order (BRO) under paragraph 2(1) of Schedule 4A to the Insolvency Act 1986 against Mr Christopher Hatton. The OR relied on three categories of conduct between April 2017 and November 2018 which, it was alleged, were intended to put assets beyond the reach of creditors (principally Mr and Mrs Watson), namely: (i) a transfer of shares in Danton Estates Limited (DEL) which owned a Portuguese villa (Periquita); (ii) disposition of net proceeds from the sale of Appletree House; and (iii) attempted variation of a deceased relative's will.

Parties and procedural posture: The respondent was bankrupt (bankruptcy order 13 February 2019) following litigation and judgment in favour of Mr and Mrs Watson ([2019] EWHC 349 (Ch)). The OR relied upon the prior litigation to show the respondent knew of a claim and potential liability. The court heard evidence and submissions at first instance in the Insolvency and Companies List.

Issues for decision:

• Whether the three Transactions were carried out with the intention of placing assets beyond the reach of creditors (relevant to a BRO under Sch 4A and, factually, to the concepts encompassed by s.423 IA 1986).
• What the proper approach to the evidential burden and valuation of the transferred assets should be, and whether the OR had proved the requisite motive.
• Whether statements allegedly made in court or attempts to vary a will could properly be relied upon as conduct justifying a BRO.

Court's reasoning and findings:

• DEL Share Transfer: bank records and DPL's abbreviated accounts established that DPL funded the purchase of the company owning Periquita, so any gift of DEL shares was offset by a loan from DPL. On the shifted evidential burden the judge found the loan existed and reduced the effective value of the asset transferred. The OR had not proved on the balance of probability that the transfer was intended to defeat creditors; any effective value was modest and the respondent had a genuine (and at least initially believed) defence to the Watson claim and considered himself solvent at the time.
• Sale of Appletree House: the net proceeds were overreached by the secured lender (Lloyds Bank) and effectively re-lent to DPL; the respondent never had an unfettered beneficial entitlement to those funds which could have been applied to defeat creditors. The transaction did not amount to conduct justifying a BRO.
• Will variation: the court declined to treat a statement made in open court as conduct for the purposes of a BRO (immunity considerations). As to the underlying conduct, the evidence left open the possibility that the respondent was implementing a secret trust or honouring a dying wish; the OR did not prove intent to defeat creditors on the balance of probability.
• The judge applied a careful credibility analysis, including a restricted bad-character direction and caution in assessing the respondent's evidence, but ultimately concluded the OR had not discharged the necessary evidential burden to make a BRO appropriate.

Outcome: The application for a bankruptcy restrictions order was dismissed.

The Official Receiver's application for a bankruptcy restrictions order under paragraph 2(1) of Schedule 4A to the Insolvency Act 1986 is dismissed. The judge held that (i) the purchase of the company owning the Portuguese property was funded by a loan from Danton Partners Limited, substantially reducing any effective gift value; (ii) the net proceeds of the sale of Appletree House were overreached by the secured lender and re-lent, so were not available to be hidden from creditors; and (iii) alleged will-related conduct could not be relied upon for a BRO and might reflect a secret trust or the honoring of a dying wish. On the evidence the OR did not prove the requisite intent to put assets beyond the reach of creditors and public protection by a BRO was not shown to be appropriate.