Judgment was handed down on 6 July 2004 by the Court of Appeal in the case of Reid v Ramlort Ltd. Reid v Ramlort Ltd is interesting for the nature of the remedies ordered in what was obviously an undervalue transaction.
The full background to this case is set out in our previous Law-Now article. To view the previous article that we issued on 27 November 2002 please click here.
The facts in brief
Two companies owned and controlled by Mr Thoars (the deceased) owed a total of about £185,000 to the defendant. In 1996 the deceased was waiting for a liver transplant. He was very concerned about his financial affairs and saw bankruptcy as inevitable. In July 1996 he declared that he held the benefit of a life policy on trust for the defendant absolutely. As consideration for the making of this declaration of trust, the defendant made two payments, £1,100 to a third party (apparently for the benefit of the deceased) and £1,900 by way of a loan to the deceased. In September 1996 the deceased had the liver transplant operation and died the following day, intestate and insolvent. The policy produced a payout of some £186,000, which was put on deposit. The claimant was appointed judicial factor of the deceased's estate. He claimed relief on the basis that the declaration of trust constituted a transaction at an undervalue within the meaning of section 339 of the Insolvency Act 1986.
The making of the declaration of trust was held to be a transaction at an undervalue. This was not surprising. Section 339 (3) of the Insolvency Act 1986 states that an individual enters into a transaction with a person at an undervalue if:
(i) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration, or
(ii) he enters into a transaction with that person for a consideration the value of which . . . is significantly less than the value . . . of the consideration provided by the individual.
The value of the policy at the time of the declaration of trust was found at first instance to be at least £10,000. The Court of Appeal did not disagree. The judge found that the value received by the deceased from the payments by the defendant had been nil.
The Court of Appeal found that the loan of £1,900, especially as it was interest free, had more than a nominal value to the deceased in money or money's worth, and was in fact worth not much less than face value, and that the payment to the third party had a value to the deceased equal to its face value. The value of the two payments was, therefore, not substantially less than £3,000. The Court of Appeal held that it was not always necessary to put an exact value on the consideration on one side or the other; in this case the transaction had clearly been at an undervalue as £3,000 was significantly less than £10,000. The final question was what was the most appropriate remedy. Section 339(2) provides that the court shall make such order as it thinks fit for restoring the position to what it would have been if the individual had not entered into the transaction.
The wrinkle in this case was that a policy which in July 1996 had had a value of not less than £10,000 produced a pay-out of £186,000 two months later. The remedy here was not to order the defendant to pay the difference between the £3,000 consideration which it had actually provided and £10,000 or more, the value of the policy. If the declaration of trust had not been made, the deceased's insolvent estate would have had the benefit of the sum on deposit (representing the policy proceeds plus interest), and the defendant would not have paid out the £3,000. The appropriate order, therefore, was to reverse the transaction and order that the sum on deposit, representing the proceeds of the policy, be paid to the claimant, and the £3,000 plus interest be paid back to the defendant.
For further information please contact Peter Fidler at [email protected] or on +44 (0) 207 367 3177.