The High Court was faced with a difficult case and was asked whether a declaration of trust was a sham or felt within the meaning of section 423 of the Insolvency Act 1986 for the sole purpose of defrauding creditors.
Background:
Liquidators of MSD Cash & Carry plc sought to enforce judgement against a property jointly owned by the debtor and his daughter-in-law. The defendants are members of the same family with Mohinder being the father of Surjit, and Raminder being married to Surjit.
The proceedings were issued under Part 8 of CPR in June 2022 to enforce a series of charging orders that secured a judgement debt of £996,494.61 owed to Mr. Ingram by Mohinder and Surjit as a result of a misfeasance proceeding. The applications concerned four properties but the judgement mainly focuses on one known as ‘Oaks’. The defendants tried to resist the enforcement by arguing that the property was held in trust solely for the daughter-in-law.
Decision:
The High Court was not convinced that an oral express trust had been declared or intended from the date of the property’s acquisition in 2003. While the subject matter and object of the trust were easily demonstrable, the intention to create a trust was not. The Court reached this decision based on the lack of evidence on the timing, who heard this oral trust, or the precise words used. Similarly, the Judge could not find any evidence of a common intention constructive trust held in favour of the daughter-in-law.
Having concluded that the 2017 declaration of trust effectively created a trust, the Court rejected the liquidator’s argument that a professionally drafted declaration of trust was a sham. Based on the judgement in JSC Mezhdu Narodniy Promyshlenniy Bank v Pugachev, it is clear that the unilateral intentions of the settlor are not sufficient to assume that there is a sham. Instead, there must have been a common intention between the settlor and beneficiary.
The defendants argued that the declaration was drafted to bring clarity in case Mohinder passed away. However, for this explanation to be accepted the defendants should have demonstrated that either an oral trust or a constructive trust existed, which was rejected by the Court. However, the Judge agreed that the declaration of trust had been made for the sole purpose of defrauding creditors within the meaning of section 423 of the Insolvency Act 1986. The test is satisfied if the claimant can show whether the transaction was entered for a prohibited purpose, based on JSC Bank v Ablyazov. The Judge concluded that the declaration was made to put Mohinder’s beneficial interest in the Oaks outside the reach of any third-party claims. He reached this conclusion due to the inclusion in the declaration of a non-fiduciary power of revocation, allowing the director to call back his beneficial interest. He noted that “the Declaration was undeniably conceived, drafted and executed in close proximity to actual claims being brought against Mohinder” who was facing investigation by HMRC.
Implications:
Entering into a trust declaration to defraud creditors will be of no help. Although, in theory, the property will be held in trust, in practice as this case demonstrates, the courts will be able to see past it and will restore the position the property would have been in had the declaration not been entered into.
This case also reiterated the test for oral trust or constructive trust and the types of evidence necessary to convince a judge.