Valuation of assets transferred by bankrupt post-petition (Ahmed and others v Ingram and another)

Francis Collaço Moraes, barrister, of Three Stone, examines the Court of Appeal’s approach to the valuation of what trustees in bankruptcy could recover after a bankrupt transferred his shares subsequent to presentation of the bankruptcy petition. In this case, the value of the shares had fallen before they were delivered up to the trustees.

Ahmed and others v Ingram and another [2018] EWCA Civ 519, [2018] All ER (D) 144 (Mar)

What are the practical implications of the judgment?

Where a bankrupt disposes of a non-cash asset post-petition, which is caught by section 284 of the Insolvency Act 1986 (IA 1986), it is vital to ensure the prompt appointment of a trustee in bankruptcy (trustee).

It is important to identify the wrongful act of the recipient of the non-cash asset with respect to the bankrupt’s estate to establish the date when the breach occurs.

On appointment, the trustee must promptly consider whether to demand the return of the non-cash asset. The trustee must also consider what steps should be taken to recover and then market and sell the non-cash asset, and promptly undertake those steps.

As the remedy is restitutionary, it is important to identify the loss suffered by the bankrupt’s estate in respect of the disposal of such non-cash asset, and if necessary obtain expert evidence.

If a validation order is sought in respect of a non-cash asset, the application should be made promptly to minimise the sum that may have to be paid to the estate, particularly where the asset has a fluctuating value.

Careful consideration must be given to the basis upon which the asset should be valued, as the basis of valuation may dramatically affect the sums recoverable.

What was the background?

The appellants were siblings of the bankrupt. The respondents were his trustees.

After the presentation of the bankruptcy petition on 23 January 2007, the bankrupt had entered an individual voluntary arrangement (IVA) which had been passed as a result of the votes of family members, who claimed to be creditors. The IVA was successfully challenged and the bankruptcy order was made on 21 April 2009.

The initial trustee was appointed on 22 July 2009 and replaced by the respondent trustees on 14 April 2010.

On 6 June 2007, between the presentation of the bankruptcy petition and the making of the bankruptcy order, the bankrupt had transferred his shares in family companies to his brother, the first appellant. Some of the shares were, at an unknown later date, transferred to the second, third and fourth appellants, before being transferred back to the first appellant by, at the latest, 30 June 2010.

The respondent trustees applied to the Chancery Division for a declaration under IA 1986, s 284, that the transfers were void, and sought to recover the loss in value of the shares. Shortly before trial, the appellants accepted that the share transfers were void and delivered up the shares to the respondent trustees on 27 February 2015. However, the value of the shares had fallen since the bankrupt had transferred them to the first appellant.

The judge at first instance held that the respondent trustees were entitled to the difference in value of the shares on 6 June 2007 (the date of their transfer from the bankrupt to the first appellant) and 27 February 2015 (the date of their return to the respondent trustees).

The appellants appealed against that decision.

A number of issues arose for the court’s determination, including:

  • whether, as the respondent trustees argued, IA 1986, s 284, provided a free-standing right to recover the value of the shares as awarded by the judge, namely the value of the shares as at the transfer date, less their value as at the date of their redelivery to the respondent trustees
  • if not, whether the respondent trustees were automatically entitled to be compensated for the diminution in the shares’ value, or only for any loss which the respondent trustees could prove that the bankrupt’s estate had actually suffered as a result of breach of trust on the part of the appellants
  • from what date the loss was to be calculated
  • the basis of the valuation of the shares

What did the Court of Appeal decide?

Free-standing right

The court, following Hollicourt (Contracts) Ltd (in liquidation) v Bank of Ireland [2001] Ch 555, [2001] 1 All ER 289, held that IA 1986, s 284, only operated to avoid dispositions of property by a bankrupt between the time of the petition for the bankruptcy order and the vesting of the bankrupt’s estate in a trustee. The section was silent as to the remedy available to the bankruptcy estate when a disposition had been avoided, and the appropriate remedy was, accordingly, governed by the general law.

The court concluded that IA 1986, s 284, did not provide a free-standing right to recover the value of the shares and applied the general law instead, where the remedy was restitutionary.

Approach to determination of liability

The Court of Appeal concluded that the judge appeared to have adopted the wrong approach in finding the bankrupt’s estate had suffered an actual loss at the transfer date. In accordance with Target Holdings Ltd v Redferns and another [1996] AC 421, [1995] 3 All ER 785 and AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] 1 All ER 747, she needed to have identified what constituted the breach of trust, when it occurred, and what was the loss actually caused to the estate as a result of the breach of trust on the part of the appellants.

The judge’s conclusion that the appellants were simply fixed with liability as of the date of transfer because of a fiduciary duty to preserve the assets of the estate, without explaining why the breach had occurred or the loss, was wrong.

Date of calculation of loss

The court decided that as from the transfer date of 6 June 2007, the first appellant held the shares on trust contingently for the bankrupt in the event that a bankruptcy order was made against him. As from the date of the bankruptcy order on 21 April 2009, the first appellant held the shares on trust for the bankrupt, and title to them was vested in the original trustee on his appointment on 22 July 2009. Therefore, the judge had been wrong to accept the respondents’ submission that the first appellant had become a bare trustee of the shares for the bankrupt immediately upon the disposition.

The first appellant and the other appellants (when title was transferred to them) came under an immediate obligation to restore the shares to the estate. The breach of trust by the appellants occurred when they failed to immediately restore the shares following the appointment of the original trustee on 22 July 2009.

However, the fact that the breach occurred on that date, ie 22 July 2009, did not mean that the loss also occurred on that date—the loss occurred, or flowed from, the date at which the trustee would have actually sold the shares. On the facts, that was 30 June 2010, nearly a year after the first trustee’s appointment, the Court of Appeal concluding that it was the replacement trustees (ie the respondent trustees) who had resolved to sell the shares.

As the judge had erred in finding that the appellants’ liability for loss flowed from the transfer date of 6 June 2007, the appeal would be allowed only in regard to the date at which the shares should be valued for the purposes of ascertaining the loss which the estate had suffered. Otherwise the decision of the judge was upheld.

Basis of valuation

The court concluded that the judge was correct in concluding that the shares should be valued on a fair rather than a market basis, in the context of shares being in companies ‘owned’ by associates of the bankrupt.

Francis Collaço Moraes appeared for the respondents in this case.

Interviewed by Robert Matthews.

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

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