The meaning of knowledge in respect of after-acquired property—Viscount St Davids v Lewis

What is the meaning of ‘knowledge’ in the Insolvency Act 1986 (IA 1986)? Tina Kyriakides of Radcliffe Chambers and winning barrister in the case considers the issues raised in Viscount St Davids v Lewis.

Original news

Viscount St Davids v Lewis [2015] EWHC 2826 (Ch), [2015] All ER (D) 73 (Oct)

A registrar had dismissed a bankrupt’s application for a declaration that a notice claiming ‘after-acquired property’ had not been served on him by the trustee in bankruptcy (trustee) within the statutory time limits, under IA 1986, s 307(1), and that it was, accordingly, of no effect. The Chancery Division, in dismissing the bankrupt’s appeal, considered the meaning of ‘knowledge’ in respect of the date on which the trustee had become aware that the property in question had been acquired by, or had devolved on, the bankrupt. It ruled that the term ‘knowledge’ under IA 1986, ss 307 and 309 denoted actual knowledge and had to be knowledge of facts and not of mere claims or allegations and that the registrar had not erred in law in relation to the test of knowledge, under those sections of IA 1986, and had made findings of fact that had been open to her.

What were the facts of the case?

Lord St Davids was made bankrupt on 17 June 2002. He did not co-operate with the Official Receiver and, as a result, his discharge from bankruptcy was suspended.

In 2003, with the assistance of a Mr Jonathan Shaw, who held himself out as a specialist offshore tax adviser, Lord St Davids set up what was known as the Aubach group of companies. This was an elaborate corporate and trust structure involving a number of companies incorporated in different jurisdictions. The structure was designed, according to Lord St Davids, on the basis that he would not be a beneficiary. The holding company of the group was Aubach Holdings Ltd (AHL), a company incorporated in Mauritius. It owned a company incorporated in Germany called Hans Brochier KG & Co GmbH (Hans Brochier), which went into administration in August 2006. Optional Systems Ltd (Optional) was incorporated on 28 February 2003 with one issued share (the Optional share), which was held by Corporate & Chancery Nominees Limited (CCN) and, according to the evidence of Lord St Davids, was a management company responsible for paying all expenses and providing finance for the trading subsidiaries within the Aubach group until about June 2006 when its role was taken over by another company.

In February 2005 and subsequently in January 2006, Lord St Davids finally completed two bankruptcy questionnaires. In both of them he declared that he was not in receipt of any income and that he had not acquired any assets since he had been made bankrupt. Both bankruptcy questionnaires warned Lord St Davids of potential criminal consequences if he did not disclose any property. The declaration signed by Lord St Davids confirmed that he had read the notes, that he understood his duty to assist the trustee in carrying out his duties and to make full disclosure to him of all his affairs and that to the best of his knowledge and belief the information given was correct.

On 22 November 2006, at the request of the administrators of Hans Brochier, a meeting was held at the offices of their solicitors, Cameron McKenna LLP, attended by a partner and a trainee from Cameron McKenna and two representatives for the trustee. A note of this meeting was prepared by Cameron McKenna, which Lord St Davids relied upon as evidence that, by the time of the meeting, the trustee knew of his interest in the Optional share.

Little progress was made in Lord St David’s bankruptcy between 2006 and 2008 and by January 2008, the trustee was considering closing his bankruptcy. However, matters changed in June 2008 when the trustee discovered that a substantial commission payment had been made to Lord St Davids. A few months later, in November 2008, the trustee discovered that Lord St Davids had issued proceedings in Mauritius against CCN claiming beneficial ownership of the Aubach group, in which Lord St Davids had sworn an affidavit claiming that Optional was part of the Aubach structure. According to Lord St Davids, this was the second point in time at which the trustee had acquired knowledge that he was the beneficial owner of the Optional share.

The trustee then took legal advice and concluded that CCN might have documents either showing that the Aubach companies were owned by Lord St Davids or that they held assets on trust for him. At the trustee’s request, on 18 December 2008, a ‘without prejudice’ meeting was held between Jonathan Shaw of CCN, his colleague, Gordon Fisher, CCN’s solicitor, a representative of the trustee and a solicitor for the trustee. During cross-examination, the trustee’s solicitor said that he was informed at the meeting that Lord St Davids was the beneficial owner of the Optional share, but Mr Shaw made it clear that the trustee would have to apply for an order before any documents were produced. Lords St Davids contended that this was the final date when the trustee knew that he was the beneficial owner of the Optional share.

On 2 February 2009, an application for production of documents was made by the trustee against CCN. An order was made on 11 March 2009, which was complied with on 9 April 2009. After having considered the documents produced, on 19 May 2009 the notice was served.

What were the legal issues that Henderson J had to decide?

The court first had to decide what ‘knowledge’ meant as a matter of law. IA 1986, ss 307 and 309 were new provisions, which changed the law under the previous Bankruptcy Act 1914 (BA 1914).

IA 1986, s 307(1) provides that, subject to that section and to s 309:

...the trustee may by notice in writing claim for the bankrupt’s estate any property which has been acquired by, or has devolved upon, the bankrupt since the commencement of the bankruptcy.

IA 1986, s 309(1) provides that:

Except with the leave of the court, a notice shall not be served—

(a) under s 307, after the end of the period of 42 days beginning with the day on which it first came to the knowledge of the trustee that the property in question had been acquired by, or devolved upon the bankrupt…

IA 1986, s 307(3) provides that upon the service of a notice complying with IA 1986:

...the property to which the notice relates shall vest in the trustee as part of the bankrupt’s estate; and the trustee’s title to that property has relation back to the time at which the property was acquired by, or devolved upon, the bankrupt.

Under BA 1914, after-acquired property automatically vested in the trustee in bankruptcy. The purpose of the change was to enable the trustee to choose whether or not he wanted particular property to vest in the bankrupt’s estate. There might be good reason why he would not want to acquire any property, for example, because it was onerous or had no value.

The scheme devised by IA 1986 in relation to after-acquired property was to impose upon the bankrupt a duty to notify the trustee of any property which he acquired, or which devolved upon him, after his bankruptcy with 21 days of his becoming aware of the relevant facts (see: IA 1986, s 333(2) and rule 6.200(1) of the Insolvency Rules 1986, SI 1986/1925). In this way, the trustee would normally acquire knowledge of any after-acquired property from the bankrupt himself and would then have 42 days to decide whether or not he wanted to acquire it for the estate.

The difficulty arises when the bankrupt does not comply with his duty of disclosure. In this case, this was further complicated by the fact that Lord St Davids had expressly denied in two questionnaires the existence of any after-acquired property. The court held that in a case such is this:

...it should be slow to accede to a self-serving claim by the bankrupt that his trustee first obtained knowledge at a significantly earlier date of the acquisition by the bankrupt of property, with the convenient result (if the claim is upheld) that the s 307 notice served by the trustee would be out of time.

The court then considered what was meant by ‘knowledge’ in s 309. It accepted that knowledge had to be actual knowledge, but in considering when a trustee has such actual knowledge, Henderson J stated:

In practical terms, it seems to me that in such cases a trustee should normally be held to have first obtained relevant knowledge for the purpose of s 309(1) only when it has first become clear to him, on cogent evidence verified to his reasonable satisfaction, that the property in question (a) was acquired by the bankrupt, and (b) was acquired by him after the commencement of the bankruptcy. If it is objected that this test may set the bar too high, the answer is in my judgment obvious, In a situation where the bankrupt has failed to comply with his statutory duty, in relation to a matter within his personal knowledge, it is entirely reasonable that the standard required from his trustee for the purpose of s 309(1) should be set at a fairly high level of certainty.

What did the judge decide, and why? What arguments were put forward?

As stated above, there were three dates by which it was alleged that the trustee knew that Lord St Davids had a beneficial interest in the Optional share.

The first date was the date of the meeting on 22 November 2006 at Cameron McKenna’s offices. In support of his claim that the trustee knew of his interest in the Optional share by this date, Lord St Davids relied on the following sentence in the note of the meeting:

Optional Systems Limited was described by MH [one of the trustee’s representatives at the meeting] as being RP’s [Lord St Davids] personal company that he used to fund his day-to-day living expenses.

The court held that the note did not establish the alleged knowledge of the trustee for the following reasons:

  • it was not an accurate record of what was said as found by the Registrar and there were no grounds to overturn her finding
  • the Registrar had found that the trustee had not acquired any knowledge of ownership of the Optional share prior to the meeting, a finding which had not been appealed, and
  • the reference, in any event, to Optional being Lord St Davids’ ‘personal company’ did not lead inexorably to the conclusion that Lord St Davids was its beneficial owner

The second date was in November 2008, when the trustee received an affidavit made by Lord St Davids in proceedings commenced by him in Mauritius. In that affidavit, Lord St Davids had asserted that he was the sole beneficial owner of all the shares in AHL and the sole economic, beneficial and ultimate owner of the Aubach structure generally. He further asserted that Optional was part of the Aubach structure, but in a structure chart of the group, did not show how Optional fitted into that structure. Lord St Davids maintained that on reading this, the trustee would have known that he was the beneficial owner of the Optional share. The court held that this argument was a little short of absurd in light of the fact that:

  • at best, the trustee only had knowledge of allegations or assertions raised by Lord St Davids for a particular purpose in hostile litigation in another jurisdiction
  • the allegations were in apparent conflict with the two bankruptcy questionnaires provided by him, and
  • the allegations contradicted his own oral evidence that when he swore the affidavit in 2008, he did not know that he was the beneficial owner of the Optional share

The final date when knowledge was alleged was 18 December 2008, being the meeting when the trustee’s solicitor was told by Mr Shaw of CCN that Lord St Davids was the beneficial owner of the Optional share. The court upheld the Registrar’s finding that even at this stage the trustee could not be said to have had the relevant knowledge. In particular, it was relevant that:

  • the information had been provided by the very people who were being accused by Lord St Davids of having defrauded him and whose probity was, therefore, in issue, and
  • the allegations were made in circumstances where there had been a history of non-cooperation and obfuscation by Lord St Davids

In such circumstances, the court said it was entirely reasonable for the trustee to require documentary confirmation before the information provided to the trustee’s solicitor at the meeting could be said to have constituted actual knowledge for the purposes of IA 1986, s 309.

Accordingly, the court refused the appeal.

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

The test enunciated by the court is a good practical test for insolvency practitioners. They will need to look at the information they have and the source(s) of that information and decide whether the quality of the evidence is sufficient for them to be said to have knowledge of a particular fact, namely, that the property is the bankrupt’s and that it was acquired after the bankruptcy or whether it is merely knowledge of an allegation that the property is the bankrupt’s and was so acquired.

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

Each case will, of course, depend on its own particular facts. However, this case is a good illustration of how the test may be applied.

Interviewed by Lucy Trevelyan.

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

Further Reading

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What assets vest in the trustee in bankruptcy and what steps does the official receiver/trustee in bankruptcy need to take?

What vests/what doesn't vest in the trustee in bankruptcy—checklist

Notice under Insolvency Act 1986, section 307

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First published on LexisPSL Restructuring and Insolvency

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