Deeds in the drawer—Swift Advances plc v Ahmed

How will the courts approach the ‘deeds in the drawer’ phenomenon? Josephine Hayes of Gough Square Chambers comments on the decision in Swift Advances plc v Ahmed where the court considered fresh evidence at a late stage in the proceedings and set aside a transaction which was not recorded on any public register.

Original news

Swift Advances plc v Ahmed and another [2015] EWHC 3265 (Ch), [2015] All ER (D) 177 (Nov)

The Chancery Division set aside a deed purporting to place property into trust for the first respondent’s wife. If the deed had been effective it would have defeated the claimant loan company’s possession proceedings against the first respondent. The court made an order restoring the position to what it would have been if the deed had not been made.

Briefly, what was the background to the application?

The debtor, Mr Ahmed, was sole registered proprietor of two houses. In May and October 2007 the creditor, Swift, made him two loans each secured by a legal charge over one of the houses. After the debtor defaulted and Swift commenced claims in the county court for possession of the properties, the debtor’s wife, Mrs Ahmed, produced a deed of trust dated December 2006 between the debtor and herself whereby she asserted that the debtor had transferred to her the entire beneficial ownership of both properties. Subsequently she produced a previous deed of trust in almost identical terms made in 1996, which related to one of the properties.

What were the legal issues the judge had to decide in this application?

The application was under section 423 of the Insolvency Act 1986 (transactions defrauding creditors). The main issues were whether the debtor’s purpose in entering into the transactions had been to place the assets beyond the reach of those who might have a claim against him. If so, then what relief should the judge grant to restore the position to what it would have been if the transaction had not been entered into? A subsidiary issue arose as to whether a transfer of the legal and beneficial interest in one of the properties to the debtor alone made in November 2006 by the debtor and his wife as joint proprietors, which the creditor found after the judge had reserved his judgment, should be admitted into evidence.

What were the main legal arguments put forward?

It was common ground that the transaction was at an undervalue and that the debtor’s purpose need not be the dominant purpose so long as it was substantial (IRC v Hashmi [2002] EWCA Civ 981, [2002] All ER (D) 71 (May)). The respondents relied on Papanicola v Fagan [2008] EWHC 3348 (Ch) and contended that the debtor’s purpose was merely to provide financial security for his wife and family. Regarding admission of the transfer into evidence, Swift argued that the respondents were under a continuing duty of disclosure and relied on an order for specific disclosure which had been made, on CPR 31.11 and on Vernon v Bosley (No 2) [1999] QB 18, [1997] 1 All ER 614. The respondents argued that the fresh evidence should not be admitted as the trial had concluded. They declined to offer themselves for further cross-examination.

What did the judge decide, and why?

The transfer should be admitted into evidence. The trial had not concluded. It would be an affront to common sense and to any sense of justice to exclude it (Mulholland v Mitchell [1971] AC 666, [1971] 1 All ER 307). The respondents could not properly object to its being adduced. Their evidence was liable to mislead and litigants had a continuing duty, having led the court to believe a fact was true, to correct it when they discovered it to be false (Vernon v Bosley (No 2)). The judge inferred from the evidence that the debtor understood the importance of being the beneficial owner but intended to keep the transaction private and control to whom it was disclosed. That gave rise to the inference that the substantial purpose test was satisfied.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment contains useful guidance as to the inferences which may be drawn where a debtor chooses to undertake such a transaction without using a conveyancing solicitor and without recording the transaction in any public register, keeping the information under his control. It reaffirms that the debtor’s purpose need not be the dominant purpose. It reaffirms that a trial is not concluded until judgment is delivered and that litigants are under a continuing duty of disclosure and a duty to correct their evidence if they subsequently discover it is liable to mislead the court.

What practical lessons can those advising take away from this case?

The courts are unsympathetic to the ‘deed in the drawer’ phenomenon. Compelling evidence is likely to be needed to rebut the inference that a transaction at an undervalue which was not recorded on any public register when it might have been was for the purpose of prejudicing creditors. The courts also do not like to be misled. If while the court is considering its judgment it emerges that litigants have failed to comply with their continuing duty of disclosure or have failed to correct misleading evidence they have given, then the court should be informed immediately.

Interviewed by Anne Bruce.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Property that vests in the trustee in bankruptcy on bankruptcy and how the trustee in bankruptcy ascertains the extent of his interest in it

Unwinding unlawful transactions in bankruptcy

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First published on LexisPSL Restructuring and Insolvency

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