Summary

One of the purposes of making a settlement of land on trust was to prejudice the interests of the Inland Revenue within the Insolvency Act 1986 s.423.

Facts

The applicant trustee in bankruptcy (H) applied to set aside a settlement made by the bankrupt as a sham or as a transaction defrauding the Inland Revenue as a potential creditor under the Insolvency Act 1986 s.423, and to set aside under s.423 certain charges made by the bankrupt in favour of the trustees to secure loans made by them to him and the assignment to them of the bankrupt's loan account with his company in partial satisfaction of that indebtedness. The bankrupt had acquired land which had development potential. He had settled part of the land on an accumulation and maintenance settlement for his infant daughter. Guernsey trustees were appointed. They agreed to sell the settled land and the bankrupt agreed to sell the remainder of the land to a house builder. The bankrupt had obtained and put forward to the Inland Revenue a valuation of the settled land of £35,000 after he had received an offer for it of £700,000. The bankrupt agreed to pay the Revenue £160,000 to settle all liabilities arising on the disposal of the settled land and certain other land. The bankrupt eventually could not pay the capital gains tax on his disposal and was made bankrupt by the Inland Revenue. The respondent trustees submitted that H's claim under s.423 was statute barred under the Limitation Act 1980 s.8(1) and s.9(1) and that there was no victim of the transaction for the purposes of s.423 because the Inland Revenue took its own advice from the district valuer and, in full knowledge of his valuation, settled its claim for tax against the bankrupt and so was not prejudiced by the transaction within s.423(5).

Held

(1) The bankrupt intended when he executed the settlement to make a settlement for his daughter and did not intend to retain beneficial ownership of the settled property. On the other hand the bankrupt intended to have an influence, perhaps even a decisive influence, on the administrative decisions of the trust such as when the property was sold, to whom, at what price and how the proceeds were invested. None of the trustees intended to participate in a sham and the claim to set aside the settlement as a sham failed. Loans made by the trustees to the bankrupt were all breaches of trust because the settlement expressly prohibited the exercise of any power so that any part of the capital became payable to the settlor and that prevented any loan being made to the bankrupt. (2) The claim under s.423 of the 1986 Act was an action on a specialty and not an action to recover any sum recoverable by virtue of an enactment, so that s.8(1) of the 1980 Act applied but s.9(1) did not. The limitation period was therefore 12 years from the date on which the cause of action accrued. The cause of action under s.424(1)(a) of the 1986 Act did not accrue before the bankruptcy order was made in 1999 and therefore the application was not statute-barred, Re Priory Garage (Walthamstow) [2001] BPIR 144 followed. (3) For the purposes of prejudice under s.423(3) of the 1986 Act, the question to be considered, as at the time the transaction was entered into, was whether the purpose was to prejudice the interests of an actual or potential creditor. Such a person was referred to as a victim, whether or not he had actually been prejudiced. If he had not actually been prejudiced, it might be that his interests did not need protecting under s.423(2). That was a matter for the form of relief. For similar reasons, the settlement reached with the Inland Revenue was not material to the decision under s.423(3). (4) The bankrupt made the settlement for three purposes: to provide for his daughter, to defer tax on the difference between the value of the land when it entered the settlement and the price when it was sold, and to evade tax by pretending that there was little difference between the cost of acquiring the land and its value when it entered the settlement. Therefore one of the purposes of making the settlement was to prejudice the interests of the Inland Revenue under s.423. (5) Two charges granted by the bankrupt to the trustees for no consideration were within s.423(1)(a) of the 1986 Act. The purpose of the charges was to put assets beyond the reach of the Inland Revenue which was making a claim against the bankrupt at the time. Therefore those charges were transactions defrauding creditors within s.423 and were set aside. The assignment to the trustees of the bankrupt's loan account with his company was also for no consideration and for the purpose of putting that asset beyond the reach of the Inland Revenue and was set aside.

Application granted.