When and how can trustees set aside ancillary relief orders? (Sands v Singh)

Is there any way for trustees in bankruptcy (trustees) to circumvent the Court of Appeal’s decision in Hill v Haines? John de Waal QC, barrister at Hardwicke Chambers, and Mark Sands, partner at RSM, review the judgment in Sands v Singh, in which the High Court was asked, among other things, to set aside an ancillary relief (AR) settlement entered into prior to bankruptcy as a transaction at an undervalue (TAU).

Original news

Sands (as trustee in bankruptcy of Mr Tarlochan Singh) v Singh and others [2016] EWHC 636 (Ch), [2016] All ER (D) 209 (Mar)

The Chancery Division ruled on an application by the first respondent’s trustee in bankruptcy, challenging transactions that the first respondent had entered into in 2010/11 in relation to a property he owned, the first respondent having subsequently been adjudged bankrupt, including a trust deed and consent order disposing of AR proceedings brought by the first respondent’s wife. It held that one of the charges was a sham and so a nullity, but that a second charge had not been proved to be either a sham or a preference within the meaning of section 340 of the Insolvency Act 1986 (IA 1986), and the challenge to the trust deed and consent order also failed.

What was the background to the application?

Some nine months before Tarlochan Singh was made bankrupt owing his creditors £1m, and as part of a settlement reached in AR proceedings, he put the valuable matrimonial home—which was registered in his sole name—in trust for his two young children. Mr Singh had earlier also granted charges to his father and sister. Mr Singh’s trustee, Mark Sands, applied to set aside the charges as shams or alternatively preferences and the AR settlement as a TAU pursuant to IA 1986, s 339.

What were the legal issues the judge had to decide?

As well as considering the law in relation to sham transactions the judge, Mr Justice Newey, had to consider the decision of the Court of Appeal in Hill v Haines [2007] EWCA Civ 1284, [2007] All ER (D) 56 (Dec) which held that, absent fraud or collusion, a transferee (here Mrs Kaur) under a transfer made in AR proceedings is generally to be regarded as having given consideration equivalent to the value of the property being transferred. The questions were:

  • firstly, as a matter of fact, whether there was collusion between Mr Singh and Mrs Kaur, and
  • secondly, if not, whether as a matter of law there were circumstances which justified an order setting aside the AR settlement as a TAU

What were the main legal arguments put forward?

The main legal submission put forward on behalf of the trustee was that the Court of Appeal in Hill v Haines had left the door open for an AR settlement to be set aside if it was a TAU and there were exceptional circumstances such as this transaction, which apparently gave Mrs Kaur all of Mr Singh’s property in return for nothing of real value.

What did the judge decide, and why?

The judge held that:

  • the charge created in favour of Mr Singh’s father was a sham—this part of the judgment, at paras [45] and [46], contains a useful summary of the law in relation to sham transactions
  • he could not be satisfied on the evidence that there had been collusion between the spouses and, taking into account the fact that Mr Singh had a beneficial interest in other properties of which Mrs Kaur was not aware at the time, that the AR settlement was not a TAU—however, and importantly, at para [73] in the judgment he recognised that there were circumstances in which AR settlements could be set aside as TAUs

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

There are three important points on the Hill v Haines issue:

  • firstly, the decision confirms that AR settlements can be set aside if the trustee can show a ‘vitiating’ factor—fraud, mistake or misrepresentation
  • secondly, the judge accepted that an AR settlement can be set aside even if there has been no collusion between the spouses and gave some examples, such as when a husband dishonestly conceals the true state of affairs from his wife
  • thirdly, the judge agreed that it was not necessary for the trustee to proceed by intervening in the AR proceedings

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

The whole area of divorce, relationship breakdown, and debt is relevant to a large number of insolvent estates. Hill v Haines has been seen by many as closing the door on any attempts to upset a divorce settlement entered into before a bankruptcy. That is not an accurate representation of the decision in Hill v Haines, and this case was an opportunity to test the extent to which cases may be challenged despite that decision. While the result is disappointing, the comments in this judgment are helpful and will hopefully encourage trustees to challenge shams and to review divorce settlements at the extreme ends of reasonableness.

To that end, trustees and their advisors should bear in mind the following:

  • firstly, that it is always worth considering whether a transaction can be set aside as void on the basis that it is a sham (documents created to give the appearance to third parties that legal rights and obligations exist when no such rights, or different rights, exist)
  • secondly, that it remains very difficult for a trustee to set aside an AR settlement, principally because proving—as opposed to suspecting—collusion is very difficult if there is no paper trail
  • thirdly, however, that if a transaction made as part of an AR settlement can be characterised as a TAU, it remains possible to set it aside if, absent collusion, the trustee can prove that the order made in AR proceedings is one which the court would, in the words of the judge in this case at para [73], ‘never have approved if it had known of the true facts’

John de Waal QC specialises in chancery and commercial work with a particular focus on property law and property-related professional negligence. He is regularly instructed in complex property-related litigation in the Chancery Division and Court of Appeal, and in the past few years he has appeared in the House of Lords in the leading case on economic torts, OBG Ltd v Allan [2007] UKHL 21, [2007] All ER (D) 44 (May) and in the Supreme Court in the leading case on the law of penalties ParkingEye Ltd v Beavis [2015] UKSC 67, [2015] All ER (D) 47 (Nov).

Mark Sands has more than 25 years’ experience of insolvency issues. The last 12 years have been focused on the personal insolvency sector, including several reported cases involving bankrupts seeking to put assets beyond the reach of their creditors. Mark is a leading commentator on personal bankruptcy and financial issues, regularly contributing to national print and the broadcast media. Mark sits on the consulting editorial board for LexisPSL Restructuring & Insolvency, and is current president of the Insolvency Practitioners Association.

John acted for Mark in this case.

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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The impact of bankruptcy on divorce proceedings

The bankruptcy court's power to set aside financial orders made on divorce or dissolution of a civil partnership

Dos and don'ts for family lawyers when dealing with bankruptcy

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First published on LexisPSL Restructuring and Insolvency

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