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Mark Davies answers your Insolvency queries: Legal Q&A

4th August, 2017

Mark Davies has been specialising in Insolvency cases for 26 years and is a full member of R3, The Association of Business Recovery Professionals.

Question
I am the liquidator of a company that had a beneficial interest in shares held on trust by a trustee. After commencement of the winding-up, the trustee transferred the shares to a third party in purported settlement of a debt that the trustee owed personally to the third party. Is that transfer a void disposition pursuant to s127 IA 86?
Answer

Section 127 of the Insolvency Act 1986 holds that in a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.

The matter at hand in your case is whether the transfer of shares could be considered a ‘disposition’ of the company’s property under s127 of the Act, after the commencement of winding up.

In Akers and others  v. Samba Financial Group [2017] the UK Supreme Court was asked to consider, in the context of proceedings brought by Saad Investments Co Ltd, in liquidation, (SICL) and its joint official liquidators (the liquidators) against Samba Financial Group (Samba), the question of what constitutes a ‘disposition’ for the purposes of section 127 Insolvency Act 1986 (the Act).

The original proceedings related to the ownership of shares in five different Saudi Arabian banks, of a total value of around $318,000,000. The legal owner, Mr Maan Al-Sanea (Mr Al-Sanea), a citizen of Saudi Arabia, also acted as chairman and was the ultimate beneficial owner of SICL, a company incorporated in the Cayman Islands. In a series of six transactions between 2002 and 2008, Mr Al-Sanea transferred the shares to SICL and created a series of trusts but retained the legal title in order to comply with the legal requirements of Saudi Arabia, whose laws do not recognise the institution of a trust. In July 2009 SICL went into liquidation following which, in September 2009, Mr Al-Sanea transferred all of the Saudi Arabian shares to Samba.

The liquidators and SICL brought proceedings against Samba, which sought a declaration under section 127 of the Act that the transfer of shares by Mr Al-Sanea in September 2009 was a void disposition of the property of SICL. In reaching their decision, the Supreme Court looked primarily at whether section 127 of the Act should apply in the circumstances, before giving some consideration to the concept of property in a common law trust where a jurisdiction does not legally recognise such an institution.

All three Supreme Court Justices found, for varying reasons, that there had been no ‘disposition’ of SICL’s property. Lord Mance reasoned that section 127 was ‘neither aimed at nor apt to cover’ the transfer of equitable interests which continued to exist in the shares despite the transfer of legal title. Interestingly, although the case was decided on the basis of there being no disposition under section 127, the Supreme Court also commented that the Hague Convention on the law applicable to trust and on their recognition (the convention) would apply in principle to this claim. Samba had unsuccessfully argued it should not on the basis that Saudi Arabian law does not recognise the institution of trusts.

Question
I am the trustee of a bankrupt in whose sole name the matrimonial home was registered and who was responsible for making all the mortgage payments. The bankrupt and spouse are both arguing that they beneficially owned the property in equal shares. The spouse is further arguing entitlement to a charge on the bankrupt’s share in the property since the borrowing was for the purposes of the bankrupt’s business – the equity of exoneration. Would by argument that the spouse benefitted indirectly from the loan, as it enabled the bankrupt to continue in business and meet the mortgage payments, overcome the spouse’s argument?
Answer

This is a fundamental question of whether couples should be treated separately in law where one stands surety for the debt of the other, and one that the courts have recently re-considered in Armstrong (As Trustee in Bankruptcy of Andrew Obinna Kalu Onyearu) v. Onyearu and Another [2017], where the Court of Appeal was asked to consider the principle of equity of exoneration in respect of an application for possession and sale.

The property in question was the matrimonial home and was registered in the sole name of Mr Onyearu who also had responsibility for making all of the mortgage payments. In 2005 Mr Onyearu obtained a loan facility from the bank, which was secured against the matrimonial home, and which was used to pay debts of his solicitor practice totalling £131,642. On 3 March 2011, Mr Onyearu was declared bankrupt and an application was brought by the trustee in bankruptcy for the sale of the property. Mr and Mrs Onyearu argued that they beneficially owned the property in equal shares, which was accepted by the deputy registrar who accordingly dismissed the application for possession and sale.

The deputy registrar found that Mrs Onyearu was entitled to a charge on her husband’s share in the property applying the principles of equity of exoneration in respect of the loan facility and that the banks security exhausted Mr Onyearu’s beneficial interest.

The trustee, Mr Armstrong, appealed, relying heavily on the argument that, although the loan facility was directly for the benefit of Mr Onyearu in respect of his business debts, Mrs Onyearu had obtained an indirect benefit as the loan facility had enabled Mr Onyearu to continue to practice as a solicitor and meet the monthly mortgage.

On considering the arguments, the Court of Appeal dismissed the appeal on the grounds that the indirect benefit obtained by Mrs Onyearu was too remote to displace the evidential presumption that Mr Onyearu was to bear responsibility for repayment of this loan. Lord Justice David Richards also identified that Mr and Mrs Onyearu did not operate as a single financial unit and maintained their own separate bank accounts and incomes, despite sharing the family expenses. Accordingly, Lord Justice Richards considered that denying Mrs Onyearu relief under equity of exoneration would result in her paying both her share of the expenses and Mr Onyearu’s, which is contrary to the notion of equity.

The decision of the Court of Appeal not to change the law is in keeping with existing trends which seek to allow couples to retain a separation of their financial affairs in so far as they desire.

Disclaimer: the nature of the advice given is general and neither RECOVERY nor the writer is responsible for any consequential loss arising in connection with information given in this publication.

This article was written by Mark Davies, Insolvency Partner for RECOVERY magazine, Summer 2017 edition.

Mark Davies

Partner in Insolvency
Email: [email protected]
Tel: 01244 405435

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