01 December 2006

Transactions at an Undervalue

Facts of the Case

This was an appeal by Spread Trustee Company Limited and Mr David John Warr, (‘the Trustees’) of the Henry Stanley Nurkowski Maintenance and Settlement Trust dated 10 March 1989 (“the Settlement”) against the Order of H.H.J. Weeks QC in the Chancery Division.   By his Order it was declared, on the application of Mr Nurkowski’s trustees in bankruptcy, that the Settlement by which two Legal Charges dated 17 April 1996 and 12 August 1996 (‘the Charges’) and an Assignment dated 2 November 1997 in favour of the Trustees of the Settlement of a loan account owed to Mr Nurkowski by his company (‘the Assignment’) were all transactions within section 423(3) of the Insolvency Act 1986 (‘the Act’) ie they were transactions defrauding creditors.  It was ordered by way of relief in respect of these transactions, (1) that the Trustees should indemnify the estate of Mr Nurkowski in bankruptcy against any claim by Her Majesty’s Revenue and Customs (‘the Revenue’) to set aside a compromise of tax liabilities made with Mr Nurkowski on 30 March 1993 (2) that the Charges should be set aside and (3) that the Trustees should repay the sum of £162,051 plus interest that Mr Nurkowski paid to them under the Assignment, such sum to be re-credited to the amounts owed by him to the Trustees.

Mr Nurkowski owned two fields called respectively OS149 (3 1/2 acres) and OS160 (4 1/2 acres). These fields abutted an area of some 200 acres for which a developer, Gallagher Limited made an application for planning permission.  Mr Nurkowski made a gift into the Settlement of OS160.  His representatives advised the Revenue that OS160 was worth only £35,000 on its settlement in March 1989.  The Revenue did not accept the valuation of £35,000 for OS160 put forward by Mr Nurkowski’s advisors.  On 30 March 1993, the Revenue agreed to compromise its claim (the 1993 Compromise Agreement) against Mr Nurkowski in the sum of £160,000.  H.H.J. Weeks QC found that Mr Nurkowski already had received an offer for this field of £700,000 from Gallagher and that Mr Nurkowski knew that £700,000 was the minimum value of OS160.  OS149 and OS160 were sold some five months later for £2m.

The Court of Appeal considered that the trial Judge could not have concluded that the Settlement was a transaction to which section 423 of the Act applied unless he had found that one of Mr Nurkowski’s purposes in entering into it on 10 March 1989 was to prejudice the interests of the Revenue.  If therefore Mr Nurkowski only formed that intention at a later date, for example when he saw Mr Nicholson’s valuation of OS 160, or if he had never formed anything that might be described in law as a ‘purpose’, the settlement could not be avoided under section 423 of the Act.

An unusual feature of this case was that the settlement alone could not prejudice the Revenue.  It was the failure to reveal the offer of £700,000 made in December 1988 (if made) for the purposes of valuing the land vested in the settlement that was capable of prejudicing the Revenue.  However, the position was further complicated by the fact that the Revenue did not rely on Mr Nicholson’s valuation but on internal advice as to the value of OS 160.

These problems raised, amongst others, the following issues of law:

  1. Was the trustee in bankruptcy’s application statute barred?
  2. Was Mr Nurkowski’s intention as found by the judge sufficient in law of being a purpose for the purposes of Section 423(3)(b) of the Act [Section 423(3) provides that “an order shall only be made if the Court is satisfied that it was entered into for the purpose… (b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make”], ie was it prejudicial?  Was it sufficiently realistic?  Did it cause prejudice?
  3. Was the Revenue a victim for the purposes of section 423(5) of the Act, ie did the applicant have to prove that the Revenue was a victim at the date of the trial?

The Decision

Taking each in turn:

  1. There was some considerable difficulty in dealing with limitation issues, not least because the Inland Revenue who might raise a new claim under s29 or 36 of the Taxes Management Act 1970 were not before the Court.  Whilst there was disagreement between the LJJ as to when time began to run, it was agreed that s8 of the Limitation Act  of 1986 applied to the claim which provided a limitation period of “twelve years from the date on which the cause of action accrued”.  The result was that the Claim was brought in time;
  2. The Court decided that the strength of the trial Judge’s findings “makes the distinction [between hopes and purposes] irrelevant since he found that inducing the Revenue to make a wrong assessment of the capital gains was something that Mr Nurkowski positively intended and was a factor which ‘substantially motivated’ him”.  In the judgment of the Court this was enough to show that Mr Nurkowski acted with what was in law a purpose;
  3. The Court held the Revenue was a victim as “the Revenue has grounds for saying that they were deceived as to Mr Nurkowski’s means and as to his ability to raise loans for the settlement”. But it seems the Court did not regard the Revenue as a party to the transaction in question and as a victim at the same time.  As Arden LJ explained “However I see no reason why a person cannot cease to be the person within Section 423(3) but become a victim for the purposes of Section 423(5)… before the court makes its order so as to be the person whose interests may be protected by such order.  Section 423 is sufficiently flexible to allow that.”

The appeal was dismissed.

Points of Interest

This case demonstrates the wide ranging jurisdiction of s423 of the Insolvency Act 1986.  A victim who can apply for an order, is someone who is or is capable of being prejudiced by the transaction in question and the purpose of the transaction can be simply prejudicing the interests of a person in relation to the claim which he may make (s423(3)(b)).  The fact that the Revenue, which had not made a claim, had been separately advised on a value of OS160 and would not normally be regarded as a victim in any transaction which it had entered into (such as the 1993 Compromise Agreement) but might be entitled to bring a claim under s29 or s36 of the Taxes Management Act gave sufficient standing to invoke the jurisdiction of the Court under this section.

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