Disposition of property of company in liquidation found to have been backdated (Barons Finance Ltd (in liquidation) v Barons Bridging Finance 1 Ltd and others)

Sarah Phillips, a senior associate in Insolvency & Business Turnaround at Verisona Law, examines a Chancery Division decision that the purported assignment by the third defendant, who carried out money-lending activity through the claimant company, of the claimant’s loan book to the first and second defendant companies, which he also controlled, was void. This was due to a disposition made after the commencement of the claimant’s winding-up, as an undervalue transaction and as a transaction to defraud creditors.
Barons Finance Ltd (in liquidation) (acting by its liquidator Coleman) v Barons Bridging Finance 1 Ltd and others [2018] EWHC 496 (Ch), [2018] All ER (D) 155 (Mar)

What are the practical implications of the judgment?

The court’s decision in this case, which concerned a purported assignment that was found, due to its timing, to be void, was unsurprising. What may be of more interest to practitioners is the background to the decision and the way in which the court approached the matter.

The case had been remitted back to the High Court by the Court of Appeal, following a successful appeal by the third defendant ([2016] EWCA Civ 550, [2016] All ER (D) 79 (Jun)) from an earlier High Court decision ([2015] EWHC 2007 (Ch), [2015] All ER (D) 126 (Jul)), which was set aside. The Court of Appeal had found that the judge at the initial High Court hearing had mistakenly inferred fraud on the part of the defendants, on the basis of the third defendant’s ‘chequered career in the courts’. In addition, the third defendant had not been given an opportunity to respond to the claim at the initial hearing.

While it was the judge who had erred in this regard, the case serves as a useful reminder to insolvency practitioners and their advisors to consider all of the evidence in a matter, and to ensure that defendants are afforded sufficient opportunity to respond to the allegations made against them. It is of note that although the third defendant did not attend the present High Court hearing and was not represented, the court was nevertheless, the High Court in the present hearing was mindful of the Court of Appeal’s comments and took his evidence into account, even though it was not required to do so.

A further issue for the liquidator was that a key allegation, that the deed effecting the purported assignment had been backdated, had not been expressly pleaded. Practitioners should ensure that each allegation is pleaded fully in the claimant’s statements of case.

The result of these issues in the present case was that, while the court effectively reached the same decision as had been made by the initial High Court judge, more than two years had passed, in which time the first and second defendants had entered into liquidation and the third defendant had been imprisoned.

A final point of note is the significant role played by the official receiver (OR), who had been appointed to manage the affairs of the first and second defendants. His evidence, which followed a review of documentation relevant to the dispute, greatly assisted the court.

What was the background?

The third defendant had carried out unlicensed money-lending activity through the claimant. The loans were generally made to individuals facing severe financial pressure, at high rates of interest, and were usually secured by charges over the borrowers’ homes, in which the claimant would take a registered interest. The third defendant had been involved in various proceedings relating to the claimant and other money-lending entities he controlled.

On 9 May 2012, a winding-up petition was presented against the claimant and on 19 September 2012 it was wound up. A liquidator was appointed with effect from 26 November 2012.

On 26 February 2013, the third defendant presented the liquidator with a deed of assignment dated 31 March 2012, which purported to have assigned the claimant’s loan book to the first and second defendants.

On 15 December 2014 the liquidator (on behalf of the claimant) commenced proceedings against the defendants, alleging that the deed had been made not on 31 March 2012 but later, such that the purported assignment was a void disposition pursuant to section 127 of the Insolvency Act 1986 (IA 1986). The liquidator also alleged that the deed represented:

  • a transaction at an undervalue pursuant to IA 1986, s 238
  • a preference pursuant to IA 1986, s 239
  • a transaction defrauding creditors pursuant to IA 1986, s 423

The liquidator’s application was initially heard on 10 July 2015. The judge found that the deed was void, a transaction at an undervalue and a transaction defrauding creditors.

The third defendant appealed against the judge’s decision to the Court of Appeal, which allowed the appeal on the ground that he had not received a fair trial. The Court of Appeal set aside the judge’s judgment and remitted the matter to the High Court to be determined by another judge.

Accordingly, the present hearing was de novo, as if the initial hearing had not taken place. The preference claim under IA 1986, s 239 was not pursued.

By the time of the hearing, the third defendant was in prison and the affairs of the first and second defendants were being managed by the OR.

The purpose of the proceedings was to determine whether the purported assignment effected by the deed was valid. Until that issue was determined, the individuals who had borrowed money from the claimant could not properly deal with their homes, due to the registered interests held by it. The liquidator asserted that the deed was invalid. If the liquidator was correct, then he could deal with the charges on the borrowers’ homes and release the registered interests on the basis that the loans were invalid (as neither the third defendant nor the claimant were licensed to lend money) or had been fully repaid. If the deed was valid, however, then those matters would fall to be dealt with by the OR on behalf of the first and second defendants.

The OR took a neutral stance to the proceedings, provided that no costs order was sought against the first and second defendants.

What did the court decide?

The court granted the claimant’s application for permission to continue the claim against the first and second defendants and for the stay of proceedings imposed by IA 1986, s 130 to be lifted accordingly. In light of the OR’s neutrality, and given the importance of the matter to a large number of individuals, the court had no hesitation in lifting the stay, because, in all the circumstances, it was right and fair to do so.

As to the central issue of the validity of the deed, the court considered that the claimant had adduced cogent evidence to suggest that the deed had not been made on 31 March 2012. In addition, the OR had found no evidence that the deed was made, relied or acted on before September 2012. Only the date on the deed suggested that it had been made on 31 March 2012, and the evidence that it had been backdated was overwhelming.

Having reviewed the documentary evidence provided by the OR, the court found that the deed had been made on or around 17 September 2012. That was the only position consistent with the documents created by the claimant and the first and second defendants while under the third defendant’s control. Accordingly, the court also found that the deed had been created after the presentation of the winding-up petition and was therefore void pursuant to IA 1986, s 127.

While it was not strictly necessary for the court to consider the claimant’s other grounds for invalidating the deed, given the circumstances, the court also set out its findings on the other heads of claim.

In relation to the undervalue claim, the court found that the value of the book was considerably higher than the consideration the claimant had received for it. In particular, the claimant was pursuing a significant debt (which far exceeded the sum paid for the book), and efforts were being made to enforce other loans. In addition, there was no genuine commercial rationale for the deed nor were there any reasonable grounds for believing it would benefit the claimant, and it had been made at an undervalue. In the event that its assessment as to the date of the deed was found to be wrong, the court also considered the position as at 30 March 2012, and reached the same conclusion.

The court was also satisfied that the deed was entered into for the purposes of putting assets beyond the reach of individuals who had obtained costs awards against the claimant or its creditors. There was no reasonable explanation in the papers for the transfer of the loan book from one entity controlled by the third defendant to another, and he had offered no explanation for doing so.

It is clear from the judgment that the court was mindful, when reaching its decision, of the Court of Appeal’s comments on the initial hearing. The Court of Appeal’s views in light of those comments, may be of more interest to practitioners than the decision itself.

The court heard that the Court of Appeal had expressed two key concerns with the conduct of the initial hearing:

  • the allegation that the deed had been backdated had not been specifically pleaded
  • the third defendant had not been given the opportunity to respond, either through his witness statement (which the judge did not admit into evidence) or by being questioned in the witness box

Circumstances had changed by the time of the present hearing. In particular, the claimant had filed amended particulars of claim, specifically pleading that the deed had been backdated. The third defendant had been provided with an opportunity by the court to set out in full the background to the deed, but had failed to do so. In addition, the first and second defendants had been wound up and were now under the control of the OR (who had filed a witness statement setting out the results of a review of documentation relevant to the dispute), and the proceedings against the third defendant had been discontinued.

Nonetheless, the court was clearly still mindful of the Court of Appeal’s decision in its reasoning. In reaching its conclusion on the date of the deed, for example, the court stated while the third defendant had not been called by any party, or cross-examined and no party had sought to rely on his evidence. On that basis, the third defendant’s evidence could be ignored, but in light of the Court of Appeal’s judgment, the court took into account the third defendant’s witness statements and pleadings, as well as the arguments he had raised at the initial High Court hearing.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on antecedent transactions:

Transactions defrauding creditors—claims under section 423 of the Insolvency Act 1986 (Subscriber access only)

Can a liquidator or an administrator challenge or unwind transactions entered into by the company before it was wound up or entered into administration? (Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Interviewed by Robert Matthews

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

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