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Trustee’s Section 423 Insolvency Claim Dismissed Overview

The Trustee’s Section 423 Insolvency Claim Dismissed was sparked by the case of Hinton v Wotherspoon [2022] EWHC 2083 (Ch)

In that case, Mrs Wotherspoon was sued by the Trustee in Bankruptcy, Mr Hinton (“Hinton”), under Section 423 of the Insolvency Act 1986 in a claim concerning her receipt in 2008 of 50% of her husband’s interest in the property on the banks of the River Thames in Twickenham (“Strand House”). This was the matrimonial home.

The Judge assessed Mrs Wotherspoon as a witness as follows:

Unfortunately I found her to be a very unreliable witness at trial … in addition a number of examples of her evidence misleading the court until she finally corrected herself under cross-examination … her evidence must be treated with extreme caution in the absence of acceptable, corroborative evidence.

So did Hinton hit the 423 mark?

Perhaps the starting point is to consider a point raised by the late Gabriel Moss QC referred to in the post Inconsistency Can Damage Your Credibility which sprouted due to the case of Stewart & Ors v Watkin [2019] EWHC 1311 (Ch):

you cannot prove a case on inconsistencies

The burden was with Hinton to prove his case notwithstanding the concerns referred to by the Judge in relation to Mrs Wotherspoon.

It is perhaps important to recognise (as the Judge did) that Hinton was not involved in the transactions. Hinton was not there at the time and had no first-hand knowledge of the matters at large. 

Later on in the judgment, the Judge explained his approach to the evidence where there were concerns expressed:

However, as with many false statements (whether false memory or intended), the evidence still presents factual elements which should be accepted. First, their relationship as husband and wife. Second, the concerns Mrs Wotherspoon naturally held for her son. Third, that it is reasonable to conclude that Mr Wotherspoon wanted to protect her by transferring a valuable asset to her. Fourth, that this arose when the mortgage would soon be and was redeemed. Fifth that the back problems and the potential for surgery could be a catalyst for taking action to give effect to the desire to protect.

What Is Section 423 Of The Insolvency Act 1986?

Section 423 of the Insolvency Act 1986 refers to transactions entered into to defraud creditors. It is open to the victim of such a transaction to bring such a claim as well as Insolvency Practitioners.

Insolvency and Companies Judge Jones said in respect of this Trustee’s Section 423 claim:

  • The evidence was circumstantial.
  • No direct evidence to show a prohibited purpose to put assets beyond the fingertips of creditors.
  • The transfer of Strand House of the bankrupt’s residual 50% interest in 2008 had to have been done at a time when there were potential claims of creditors to have motivated the bankrupt’s thinking but there was no deemed foreseeable creditor that might claim.

What Are The Tests For A Section 423 Insolvency Claim?

What Must Be Shown?

In order for a claim under Section 423 of the Insolvency Act 1986 involving transactions defrauding creditors to succeed the following must be shown:

  • The transaction was entered into for a prohibited purpose.
  • The purpose of the transaction was to put assets beyond the fingertips of someone who might make a claim.

What Does Not Need To Be Shown?

In order for a claim under Section 423 of the Insolvency Act 1986 involving transactions defrauding creditors to succeed the following does NOT need to be shown:

  • There is no need to show insolvency when the transaction was entered into.
  • There is no need for the transaction to be in effect triggered by a specific creditor who would benefit from relief at the date of the transaction.

What Happened With Strand House?

Mr and Mrs Wotherspoon married in 1993. Strand House was sold by Mrs Wotherspoon in 2013. She received her husband’s remaining 50% beneficial interest in Strand House in 2008 (“the Second Transfer”) giving her sole legal and beneficial interest in it. She had already received 50% previously in 2001 (“the First Transfer”). 

Interestingly in 2008 at the point of the Second Transfer a restriction was entered into in favour of Mr Wotherspoon as follows:

No disposition (including a legal charge) of the registered estate by the Proprietor of the registered estate is to be registered without a written consent signed by John Wotherspoon or his conveyancer.

However, although it might have appeared attractive that this could have signalled some residual interest beneficially in Strand House for Mr Wotherspoon the Court did not see it that way:

I find as a fact, therefore, that as at 12 June 2008 Mr Wotherspoon had gifted his half share of the beneficial interest in Strand House to Mrs Wotherspoon. Pursuant to the Restriction he had a personal, life-time contractual right to prevent dispositions. Whilst it may be that Mr and Mrs Wotherspoon intended to continue to treat Strand House as their matrimonial home and to share it as husband and wife, that would not and did not prevent them from achieving the intention of Mr Wotherspoon expressed in his letter to Boodle Hatfield and implemented through the transaction they put in place.

Treating Strand House As A Joint Asset – Section 423 Prohibited Purpose?

The Court did note that there were signs that Mr Wotherspoon still had some influence in relation to Strand House but this did not sway matters Hinton’s way:

Their evidence on those matters was unreliable and I am satisfied that the evidence relied upon by Mr Hinton does lead to the conclusion that in practice Strand House was treated as a continuing joint asset when and to the extent needed but (importantly) in the context of Mr Wotherspoon having achieved his aim of transferring his beneficial interest. In other words, I am satisfied from the evidence that they treated it as the matrimonial home, they made decisions together, Mr and Mrs Wotherspoon would look to this asset for their current and future financial plans when needed but Mrs Wotherspoon was still the legal and beneficial owner. This evidence does not support a conclusion that the 2008 transfer was for a prohibited purpose.

Trustee’s Section 423 Claim Dismissed Based On 2008 Transfer

In deciding the Trustee’s Section 423 claim the Court said:

There is no doubt that on 12 June 2008 Mr Wotherspoon aimed to achieve the transfer of his remaining 50% beneficial interest in Strand House as a gift. That, after all, is what occurred. It took place at a time when no specific creditor with a debt due and owing can be identified as a person in respect of whom Mr Wotherspoon was seeking to put his beneficial interest beyond their reach or otherwise to prejudice their interests. The only possible candidate might be HMRC but the evidence establishes that he was able to pay his current tax liabilities at that time. The claim must rely upon Mr Wotherspoon’s general financial position and assert a prohibited purpose in respect of persons who may at some time make a claim against him.

That claim is based upon circumstantial evidence. There is no direct evidence of Mr Wotherspoon’s subjective mindset having a prohibited purpose. Such evidence needs to be viewed as a whole, its effect being cumulative so that the individual elements become stronger by their linkage for the purpose of applying the standard, civil balance of probability test.

The problem for the claim is that it cannot be concluded on the balance of probability that there were at the date of the 2008 transfer any possible or potential persons in the mind of Mr Wotherspoon who may at some time make a claim against him. The only possible, identifiable future creditor might be HMRC, as occurred, or another creditor who might be unpaid because of payment to HMRC. However, as at the date of the 2008 Transfer there was no suggestion on the facts or in his mind of any possibility of future tax being potentially at risk of non-payment. That was the position from October 2007 when Mr Wotherspoon first sought advice from Boodle Hatfield.

Certainly there is cause for supposing that Mr Wotherspoon may have had concerns about his long term financial position and for supposing that those concerns may have influenced him to decide to transfer his interest to Mrs Wotherspoon to ensure she would have the security of a home for herself and her son (whether those concerns arose from financial and/or health worries or otherwise). However, even if that was proved on the balance of probability, s.423 IA requires more.

It needs a purpose to put assets beyond the reach of or otherwise prejudice the interests of persons making (none) or who may at some time make a claim against him. There was no reasonably foreseeable creditor or type of creditor who might do that. It is not enough to assert that the debtor wished to protect assets and that this would have the result of adversely affecting any creditors in the future because it would inevitably diminish Mr Wotherspoon’s assets. There had to be, and there had to be in Mr Wotherspoon’s mind, creditors to whom he would in the future be unable to make payment and who may at some time make a claim.

Mr Hinton suggests Mr Wotherspoon’s future financial position was far from secure because his companies did not offer the security needed for the future, he did not have adequate alternative resources and the positioning and ultimate risk of his assets becoming available for creditors was increasing because of the economic climate. In support he points to the difficulties caused by the taxation of his income from the Wickforce Trust suggesting that there was a significant prospect or risk that he would not be able to pay future tax demands and that HMRC may become a creditor making a claim against him. He also suggests that the “cash at bank” position was not nearly healthy enough and that the other companies were failing or would fail.

I accept these are all factors weighing in the balance for his case and that they should be addressed cumulatively. However, none of this evidence satisfies me that it has been established on the balance of probability that Mr Wotherspoon was considering being unable to pay his tax (or any other creditors) in the future with the result that claims may be made. That applies even though he would have been wary of and concerned by the economic crisis. It also applies notwithstanding the difficulties caused by the taxation of his income from the Wickforce Trust or the position of Headfort Properties Limited.

There is insufficient evidence from which to conclude objectively that there was a significant prospect or risk at the time of the 2008 transfer that he would not be able to pay future tax demands and that HMRC may become a creditor making a claim against him or that some other creditor would because of the financial difficulties. There is no subjective evidence from which to conclude on the balance of probability that that he had such matters in mind when deciding to transfer his beneficial interest. The circumstantial evidence is of insufficient weight to satisfy the burden of proof.

Moreover, whilst it is not for Mrs Wotherspoon to prove her case, she can reasonably rely upon the facts that Mr Wotherspoon: had access at the time of the 2008 Transfer to cash in amounts relatively significant in the context of current and foreseeable taxation liabilities; he had an interest in a trust fund which appeared to have more than enough equity from which significant money could be raised; Abbotsinch was a substantial development with the potential for profit, as evidenced by the subsequent sale of land and property realising £9 million, and there was no apparent cause to conclude that it would be loss making at the date of the 2008 Transfer or earlier; and the future problem for payment of tax was the unforeseeable event of the Kaupthing Singer & Friedlander collapse. These are all matters which can be weighed in the balance in favour of the defence and provide additional facts to support the conclusion that the burden of proving the subjective existence of the prohibited purpose has not been satisfied on the balance of probability.

It is of concern in reaching that decision that important parts of the evidence of Mr and Mrs Wotherspoon has been rejected. That has caused me to consider whether this evidence was presented to hide the true purpose. I have borne in mind that what may be described as the “normal matrimonial arrangement” of equally shared assets had been achieved in 2001 (even assuming there was no common intention constructive trust before then). Also that the 2008 Transfer had nothing to do with fulfilment of a promise made during the engagement. That by 2008 Mrs Wotherspoon had the security not only of a half beneficial interest but also of her matrimonial rights in the event of divorce and the parties could arrange matters by will to ensure she received more than her statutory rights upon his death. She also owned the yacht and her flat in Chelsea and both assets would have been relevant to her need to look after herself and her son if required to do so. I have additionally rejected evidence concerning the stepdaughters and the concerns about a will and/or the need for easy access to cash upon Mr Wotherspoon’s death.

Nevertheless, that still leaves the point that whilst it is plain Mr Wotherspoon wanted to ensure Mrs Wotherspoon was secure and the existence of her son’s difficulties no doubt took a place in those thoughts, the rejection of key parts of their evidence does not establish that he had the prohibited purpose in mind. This is a provision concerned with defrauding (not with any requirement of dishonesty) creditors who had brought or may bring claims and I am satisfied it has not been proved that there were such creditors in mind or that there was any intention to escape the liabilities of future claims. Whist purpose may be inferred, it cannot be in this case (see Moon v Franklin [1996] BPIR 196 and Midland Bank v Wyatt [1996] BPIR 288).

In BAT Industries plc v Sequana SA [2016] EWHC 1686 (Ch), [2017] Bus LR 82 at [517] Mrs Justice Rose, as she then was, observed that a person cannot have a section 423 IA purpose if they had or would have sufficient assets left to meet the claim which was or may at some time be made. In this case there is no claim against which to measure that result and nothing to suggest that the assets held as at the date of the 2008 transfer would not be sufficient to cover the foreseeable future. Nor is this a case such as Inland Revenue Commissioners v Hashami [2002] EWCA Civ 981, [2002] B.C.C. 943 where it was found that the debtor transferred property knowing he would become liable to HMRC for substantial sums and because he could not be sure at the time he chose to make the transfer that he would be unable to make provision for those liabilities at a later date. This is a case (applying the approach of Leggatt LJ in JSC BTA Bank v. Ablyazov above at [16]) where the fact of the transfer has had the consequence that the beneficial interest is not available for the benefit of Mr Wotherspoon’s creditor but it has not been proved that this was his purpose…

Section 423 IA does not apply to the 2008 transfer because it has not been proved on the balance of probability that Mr Wotherspoon entered into it for a prohibited purpose.

Oliver Elliot Observation On Trustee’s Section 423 Claim Dismissed

Claims brought under Section 423 of the Insolvency Act are generally not all that easy to bring. It is often not straightforward to produce evidence showing that a person was intending to defraud creditors. Although matters will be determined on a case-by-case basis, it might be improbable to anticipate the discovery of written evidence showing such a prohibited purpose. In the absence of written evidence of a prohibited purpose, to then look to prove that at the point of cross-examination may be a bit of a risk.

In this case, Hinton did not have first-hand knowledge of the facts as the Court acknowledged and so would typically have had to consider what the facts suggested to him and how they should be assessed. Generally, that is a matter of judgement for a Trustee to make themselves, more often than not with the benefit of legal advice. The Court put its own construction on these facts that did not accord with the position of the Trustee. For example, it appears to have done so where the position of creditors at the time of the Second Transfer such as HMRC was concerned and the impact of the financial crisis in 2007/2008.

In general terms, it would be wise before launching any Section 423 insolvency claim to take independent legal advice.

What Next?

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