11 September 2006
4 February 2008
12 July 2010
26 July 2010
8 May 1997
21 January 1997
There have been a number of interesting decisions under Section 423 of the Insolvency Act 1986 in recent years. The section empowers the court to set aside transactions entered into at any time if made by a person at an under- value and with the purpose of prejudicing their creditors. This can apply even if the debtor is not in any formal form of insolvency procedure.
Hill v Spread Trustee Company (2006) explored the scope of the section and the law of limitation applicable to claims brought under it.
In 1989 Henry Nurkowski settled one of two connected fields that he owned upon trust for his infant daughter, then aged two. He took professional advice from accountants Spicer & Oppenheim on the structure of the settlement and chose Guernsey-based Spread Trustee Company.
Not long afterwards planning permission was granted to a developer for an area of land adjoining the two fields. The developer was interested in acquiring both fields and a deal was negotiated for the sale of the settled field and the retained field, which was concluded successfully, albeit on terms that provided for payment to be partly deferred.
The Inland Revenue then sought to agree a value for the settled field at the date of the settlement, with a view to fixing the amount of capital gains tax (CGT). Solicitors acting for Nurkowski engaged a professional valuer from Carter Jonas who advised that the open market value at the date of the settlement was £35,000.
The Inland Revenue did not accept that valuation: it argued that the value of the land at the date of the gift was £740,000, the sum for which it was sold to the developer, or a sum very close to that. Negotiations followed and, in March 1993, they agreed to accept £160,000 in tax from Nurkowski. That tax was duly paid.
Following receipt of the sale consideration from the developer, the trustees made a number of loans to Nurkowski and he executed charges giving the trustees security for the loans. The last of these loans was made in June 1993, but charges continued to be executed until November 1997. In January 1999 Nurkowski was adjudged bankrupt on the Inland Revenue's petition for unpaid CGT of more than £430,000 in respect of the sale of his retained field.
Applications to the court
In December 2002 the bankruptcy trustee issued an application seeking declarations setting aside the settlement as a sham. This primary case failed at the trial in 2005. The bankruptcy trustee also sought to have the charges set aside as shams, and this too failed. The trustees' alternative case was that the gift into settlement and the charges fell foul of Section 423.
The trial judge found that, at the date of the settlement, Nurkowski not only had in mind the lawful and proper purpose of conferring a benefit on his daughter, but also had in mind an unlawful purpose to deceive the Inland Revenue about the true value of the land.
There was evidence that, prior to making the gift, Nurkowski had told Spicer & Oppenheim that he had received an offer of £700,000 for the land. The developer's files contained no reference to any such offer; their agent knew nothing of it and their witness mysteriously failed to attend to be cross-examined and his witness statement was excluded.
Nurkowski gave evidence that he had not received any such offer. Nevertheless, the trial judge found that he had concealed such an offer from his solicitor, and thus from the valuer.
Although the valuer gave evidence that it would not be proper to include an offer from a special purchaser when considering market value, the judge held that it was Nurkowski's intention to conceal the offer and induce the Inland Revenue to make a wrong assessment of CGT. However, he did not find that the Inland Revenue had been so induced; that, he held, would have to be decided in separate proceedings should the Inland Revenue wish to pursue it.
Leave to appeal
Both the trustee and the bankruptcy trustee were dissatisfied with this aspect of the ruling and were given leave to appeal. The bankruptcy trustee was dissatisfied because the settlement was not set aside and the trustee was dissatisfied because the ruling encouraged further litigation on matters about which the judge had in fact heard extensive evidence.
The judge also held that the last three charges granted to the trustees by Nurkowski were given for no consideration and he set them aside.
The Court of Appeal declined to interfere with the judge's findings as to Nurkowksi's purpose, the existence of an earlier offer of £700,000 or the later charges. A hearing in November will deal with the appeal and cross appeal on the question of appropriate relief.
The case raised questions about limitation. The gift into settlement was made in 1989 and the compromise arrangement with the Inland Revenue in 1993. The proceedings were commenced in 2002. Were they statute-barred?
The judge held that the claim under Section 423 was a specialty. The Court of Appeal agreed insofar as a claim was not one for the recovery of a sum of money. Under the section, proceedings may be commenced not only by a victim, but also by a bankruptcy trustee.
Lady Justice Arden held that the statutory limitation period did not begin to run until there was a victim within the statutory definition, and although there could be many victims of one transaction, limitation questions had to be decided by reference to the Section 423 claim actually being made. The claim in Hill v Spread arose in respect of the compromise made in 1993. She was therefore of the view that, as questions of relief had yet to be argued, no final conclusion could be reached on limitation.
Lord Justice Nourse disagreed with Arden LJ. He held that there could be separate limitation periods for different applicants, and the appointment of a bankruptcy trustee was a vital ingredient of the cause of action vested in him. Lord Justice Waller agreed with Nourse LJ.
As the six or 12-year limitation period only begins on appointment, Hill v Spread extends the ability of a bankruptcy trustee or office-holder to challenge ancient transactions, which has considerable significance for gifts and all transactions with any element of undervalue.