Delaney -v- Chen [2010] EWHC 6 (Ch)
An appeal was made by Delaney following the Court’s decision that the sale and leaseback of a property he had purchased from the sellers at a price substantially lower than the unencumbered freehold value amounted to a transaction designed to defraud creditors pursuant to s423 IA 1986.
Delaney purchased the property from the sellers for £210,000 some £65,000 lower than the stated unencumbered freehold value of £275,000. The parties intended that whilst Delaney purchased the property from the seller, the seller would continue to live at the property and following the transfer the parties had agreed that the seller would be granted a 21 year tenancy. The tenancy was stated to be exclusive to the seller and non-assignable. It was noted by Judge Purle QC that such sale and leaseback transactions are becoming more and more prevalent as it permits the original owner to release equity from the property without having to move house.
Chen argued that the primary purpose of the transaction was to defraud creditors by permitting the sellers to put assets beyond the reach of creditors, of which Chen was one. Chen stated that the transaction was made at an undervalue pursuant to s423 IA 1986 and the Court (if it was satisfied that that there had been a transaction at an undervalue) had the discretion to restore the position to how it would have been if the transaction had not been entered into.
In order to set aside the transaction, the Court had to be satisfied that the transaction was entered into for the purpose: “of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him; or of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make” (S423(3) (a) and (b) IA 1986).
At first instance, the Court held that the sale was a transaction at an undervalue made with the requisite purpose as prescribed in s423 IA 1986. The Judge ruled that there had been an undervalue of £65,000 and accordingly the transaction was void and was to be set aside with the property being transferred back to the sellers.
On appeal, the Court ordered that on a sale and leaseback transaction such as this the purchaser did not acquire an unencumbered freehold, but bought the property subject to (in this case) a 21 year tenancy. The purchaser only acquired the freehold reversion. The lower Court should therefore have looked at the value of the freehold reversion and not the value of the unencumbered property.
Evidence indicated that the freehold reversion was worth no more than £210,000, and may have been worth a lot less. Judge Purle QC accepted that: “…on my finding… £210,000 was a fair price for the reversion.” However, Chen argued that up until the point of sale, the seller had an unencumbered freehold and until the tenancy agreement had been made it could have been sold to anyone at its full unencumbered value of £275,000. As it was only sold for £210,000 there was clearly an undervalue. Judge Purle QC noted that had the sellers sold the property to Delaney for £275,000 and then entered into a 21 year lease of another property, paying a premium of £65,000, then the sale to Delaney would not have been an undervalue. Judge Purle QC went on to say that the premium element would be no different in principle from part payment in advance for any other services such as hotel accommodation: “The result can be no different in the case, as here, of a sale and leaseback where the premium value of the tenancy made up for any shortfall in the purchase price. In those circumstances, the sale at £210,000 was (on the present example) the equivalent of a sale at £275,000, with a leaseback at a premium of £65,000”. On these facts, the £65,000 premium value of the tenancy made up for any discount there may have been in the price paid by Delaney.
The Court concluded by stating that, in this case, the legal burden of proving any undervalue was on Chen and in order to do this Chen had to show that the tenancy granted to the sellers had a premium value of less than £65,000. No such evidence was provided. Accordingly, the appeal was allowed. On the evidence, s423 IA 1986 did not apply to this transaction.