Examining the correct basis of valuation—Ingram v Ahmed

Where a debtor’s share transfer is void and the shares are returned but now have a lower value, is the trustee in bankruptcy entitled to the value of shares as per the date of the transfer? Francis Collaço Moraes, barrister at Three Stone, explores the Chancery Division’s decision in Ingram v Ahmed.

Original news

Ingram v Ahmed [2016] EWHC 1536 (Ch), [2016] All ER (D) 11 (Jul)

Following the respondents’ acceptance that the transfers of the first respondent’s minority shares in three companies to the other respondents (his siblings) were void because they were effected after he had been presented with a bankruptcy petition, the Chancery Division held that the applicant trustees in the bankruptcy were entitled to the value of shares as at the date of the transfers. The respondents had argued that such relief would be unprecedented where the shares had been returned and that the trustees had not pleaded or proved actual loss. The court held that the trustees had not been required to plead actual loss, but had proved it, and that the second to the fifth respondents had not acted in good faith and were jointly liable for the loss caused by the fall in value of the shares.

What was the background to the case?

After the presentation of the bankruptcy petition on 23 January 2007, the first respondent had entered an individual voluntary arrangement that was passed as a result of the votes of family members, who claimed to be creditors. That arrangement was successfully challenged in prior proceedings and a bankruptcy order was made on 21 April 2009. Following the appointment of the trustees in bankruptcy, it was asserted that certain shares owned by the bankrupt had been transferred in 2007 to his brother after the presentation of the petition. Some of the shares were subsequently transferred to the other siblings and then transferred back to the brother. It was asserted by the applicants that the shares had fallen in value since their appropriation. The applicants requested a declaration under section 284 of the Insolvency Act 1986 (IA 1986) that the transfers were void and sought to recover the loss in value of the shares. The respondents applied for a validation order. On the eve of the trial, eight years after the appropriation, the respondents returned the shares and discontinued their application for a validation order and accepted that the transfers were void.

What were the issues before the Chancery Division?

It was asked to decide whether:

  • the applicants had to plead the actual loss suffered for the claim to succeed
  • IA 1986, s 284 gave the applicants a free-standing right to recover any loss suffered
  • the loss could be recovered on the basis of a breach of trust
  • the return of the shares meant that the estate of the bankrupt had suffered no loss as the asset had been returned in specie
  • the correct date for ascertaining the loss was the date of the void disposition, the date of the bankruptcy order or the date when the applicants would have sold the shares
  • the value of the shares was a market value or a fair value, and
  • simple or compound interest was recoverable

What were the main legal arguments put forward?

The applicants argued that:

  • the authorities decided under IA 1986, ss 127 and 284 showed that the courts had recognised a free-standing right to recover loss—see Gray’s Inn Construction Co Ltd, Re [1980] 1 All ER 814
  • in any event, the loss was recoverable as the transfers were void and the recipients held them on trust for the estate, see AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] 1 All ER 747 and Malkins Nominees Limited v Societe Financiere Mirelis SA [2004] EWHC 2631, [2004] All ER (D) 336 (Nov)
  • as the applicants were under an obligation to realise the assets of the bankrupt’s estate, this was a case where the shares would have been realised
  • this case was not a case of a temporary deprivation, but a permanent deprivation and consequently the applicants were entitled to the loss in value of the shares
  • the loss was that value required to restore the bankrupt’s estate at the date of the void transfer, for the title of the applicants related back to the date of the petition and as a matter of common sense and hindsight that was the loss suffered by reason of the wrongful transfers
  • the correct basis of valuation was a fair value, as this had been a disposition to family members who were shareholders and directors of the companies whose shares were the subject of the dispute
  • as the recipients held the shares as fiduciaries, interest should be compounded

What did the court decide, and why?

The court held that the applicants did not have to plead the actual loss they had suffered because they had not been afforded the opportunity to sell the shares appropriated. It found that a loss had in fact been suffered by the bankrupt’s estate and ‘using hindsight and common sense, such loss can be seen to have been caused by the breach of trust’.

The authorities did not limit the remedies available to the applicants to simply a return of the asset. They were entitled to recovery of the loss in value of the shares.

This was not a case of temporary deprivation, and in any event the rule in Brandeis Goldschmidt & Co Ltd v Western Transport Ltd [1982] 1 All ER 28 was not a rule of general application and could be distinguished. The court found that the instant case was not one where specific restitution of the shares—the trust property—was possible and anyway the applicants were under a duty to sell.

The correct date to value the loss was the date of the void disposition as the title of the applicants related back to that date and consequently the trusteeship of the wrongdoer began on that date.

The shares had value, as even the respondents’ expert accepted. The correct basis of valuation was a fair value, for this had been a disposition to family members who were shareholders and directors of the companies whose shares were the subject of the dispute. This was not a transfer to a third party.

As the recipients had not benefited from the payment of any dividends, only simple interest was recoverable.

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

While it was not necessary for the court to decide whether IA 1986, s 284 provided a free-standing remedy, it clarified that a trustee in bankruptcy was entitled to more than simply a return in specie of an asset and an account of the sum the recipient of the asset actually received. The bankrupt’s estate is entitled to recover the loss suffered by the estate by reason of the wrongful act. In effect, the court clarified that there was an entitlement to have the estate restored to its value at the date of wrongful disposition.

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

The practical lessons are:

  • that it is important to identify the loss suffered by the bankrupt’s estate and obtain expert evidence—if you assert that the asset has no value, then resist any directions for expert evidence
  • it is important to identify the dates when it is asserted the loss arises to ensure that the valuation evidence is relevant to the dates in issue
  • if a validation order is sought the application should be made promptly to avoid what could be a substantial claim for loss—the value of the shares at the date of the wrongful transfer was determined to be in excess of £2m.

Francis Collaço Moraes appeared for the applicants in this case.

Interviewed by Robert Matthews.

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

Further Reading

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Unwinding unlawful transactions in bankruptcy

Restrictions on dispositions of property once a winding-up or bankruptcy petition has been presented

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First published on LexisPSL Restructuring and Insolvency

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