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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> National Westminster Bank Plc v Jones & Ors [2000] EWHC 1565 (Ch) (22 June 2000) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2000/1565.html Cite as: [2001] 1 BCLC 98, [2000] BPIR 1092, [2000] EG 82, [2000] EWHC 1565 (Ch) |
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CHANCERY DIVISION
B e f o r e :
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NATIONAL WESTMINSTER BANK PLC |
Claimant |
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-and- |
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(1) ROSEMARY DOREEN JONES (2) HAROLD DELWYN JONES (3) NEUADD GOCH FARM LIMITED |
Defendants |
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Mr Stephen Jourdan (instructed by Messrs. Burgess Salmon, of Bristol) appeared on behalf of the defendants.
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Crown Copyright ©
MR JUSTICE NEUBERGER:
INTRODUCTION
THE BASIC FACTS
"6. The statutory powers of leasing or of accepting surrender of the leases conferred on mortgagors shall not be exercised by [Mrs Jones] nor shall [she] part with possession of the [farm] or any part thereof nor confer upon any person... any... right or interest to occupy the [farm] or any part thereof without the consent in writing of the Bank."
"I... hereby confirm the [Rhostwpa deeds] has/have been deposited with the Bank as security for all of my/our liabilities to the Bank from time to time of any nature whatsoever."
The confirmation was intended to be signed by the "Depositor(s)", and by a representative of the Bank to "acknowledge receipt of the completed copy of this document". Mr Jones duly signed the confirmation, but no representative of the Bank has done so.
"The floating charge hereby created shall become a fixed charge (iii) upon the dissolution of partnership in any case where the property hereby charged or any part thereof is partnership property..."
I shall refer to the assets charged by the charges (which included the livestock) as "the farming assets".
THE ISSUES
A Whether the Bank's interest in the farm is subject to the tenancy;B The extent of the Bank's interest (if any) in the assets.
Each of these issues involves sub-issues. Most of the sub-issues raised by each of the two issues are very similar.
A1. In relation to Neuadd Goch, it is open to the Bank to rely upon clause 6 of the mortgage, assuming the tenancy is otherwise effective;A2. On proper analysis, the tenancy was an attempt by the defendants to grant a tenancy to themselves, and is therefore ineffective;
A3. The tenancy is a sham transaction, which should not be given effect by the court, or which the court should set aside;
A4. The tenancy was a transaction at an undervalue within the meaning of Section 423 of the Insolvency Act 1986 ("Section 423").
B5. The sale agreement was an attempt by the defendants to deal with themselves;B6. The sale agreement was a sham transaction;
B7. The sale agreement was a transaction at an undervalue within the meaning of Section 423.
The Bank alternatively contends that, if the farming assets became validly vested in the Company, they were, and still are, nonetheless subject to fixed charges in favour of the Bank by virtue of the provisions of Clause 3 of the Charges and/or Section 7 of the Agricultural Credits Act 1928 ("the 1928 Act"). In this connection, the Bank contends that its floating charge was converted into a fixed charge because:
B8. The grant of the tenancy, and the transfer of the farming assets, to the Company, resulted in the dissolution of the partnership;B9. When the defendants transferred the farming assets to the Company, the partnership ceased carrying on business.
ISSUE A1: CLAUSE 6 OF THE MORTGAGE
"[To] reserve the best rent that can reasonably be obtained, regard being had to the circumstances of the case, but without any fine being taken."
ISSUES A2 AND B5: SELF DEALING
ISSUES A3 AND B6: THE "SHAM" ARGUMENT
Introductory
"I share the Judge's view that these arrangements were not a sham. There was no element of pretence... The parties were not doing one thing and saying another. I would... accept the... view that the... leases were an artificial device intended to circumvent a result the Act would otherwise have brought about. But the signing of such a device did not defeat the reversioners in Jones -v- Wrotham Park Settled Estates [1980] AC 74 [a case involving the grant of what may be said to be an artificial tenancy to improve the landlord's entitlement to compensation under the leasehold enfranchisement legislation] nor the lessor in Hilton -v- Plustitle Limited [1989] 1 WLR 129 [where a prospective residential occupier was required to acquire a company for the purpose of a letting so that the landlord could avoid the rent restriction legislation] and I am for my part satisfied that in the field of real property the principles in W T Ramsay ...entitle the court simply to ignore or override apparently effective transactions which on their face confer an interest in land on the transferee. Many transactions between group companies may be artificial. That does not entitle the court in ordinary circumstances to treat such transactions as null."
"It is I think necessary to consider what (if any) legal concept is involved in the use of this popular and pejorative word. I apprehend that if it has any meaning in law, it means acts done or documents executed by the parties to the sham which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. But one thing, I think is clear, in legal principle, morality and the authorities... for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating."
"[A] lthough the subsequent actings of the parties may not be prayed in aid for the purposes of construing the agreements they may be looked at for the purpose of determining whether or not parts of the agreement are a sham in the sense that they were intended merely as "dressing up" and not as provisions to which any effect would be given."
It is clear that Lord Jauncey accepted that contention, because he said at 476G: "When subsequent events are looked at the matter becomes even clearer".
"[T] hough subsequent conduct is irrelevant as an aid to construction, it is certainly admissible as evidence on the question of whether the documents were or were not genuine documents giving effect to the parties' true intentions."
Lord Templeman (with whom Lord Ackner also agreed) concurred. At 463G, he referred "finally and significantly" to the fact that the right granted by the provision in question had never been exercised as a reason for concluding that the provision was a sham (or, as he preferred to put it, a pretence).
The arguments on the sham issue
1 The sole purpose of the agreements was to ensure that the defendants remained in possession of the farm and retained control over their home and business, by defeating the Bank's otherwise indisputable right to obtain possession, and to sell the farm and the farming assets over their heads;
2 The defendants imposed obligations under the agreements on the Company, in particular payment of rent and performance of the repairing covenants under the tenancy and payment of the annual instalment under the sale agreement, with which the Company could not comply and had no intention of complying;
3 The defendants had no intention of enforcing the Company's obligations under the agreements and, in particular, of forfeiting the tenancy or putting the Company into liquidation: quite apart from anything else, that would have been quite contrary to the whole purpose of the agreements;
4 Given that it is permissible to look at events subsequent to the agreements, none of the rent or instalments due from the Company has been paid, and no steps to enforce payment have been taken by the defendants;
5 Ultimately, the agreements were entered into with a view to reaching a settlement with the Bank, whereupon they would have been put aside;
6 The sham nature of the agreements is demonstrated by the fact that Mr Jones had no idea whatever as to the level of rent under the tenancy or the level of instalments under the sale agreement; nor did he have any idea as to when those payments were due;
7 The agreements were arrangements which no sensible person in the position of the defendants would have entered into, save for the purpose of improving their position as against the Bank.
Conclusion on sham
ISSUES A4 AND B7: SECTION 423 OF THE 1986 ACT
The approach of the court under Section 423
"(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if...
(c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next sub-section, make such order as it thinks fit -
(a) restoring the position... and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose-
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make."
"the threefold benefits of safeguarding the family home, enabling her to acquire and carry on the family farming business and a surrender value. Furthermore, and most significantly, the transaction, if effective, placed her vis-a-vis [the mortgagee] in... a "ransom" position. If the tenancy was effective, [the mortgagee] would have had to negotiate with and no doubt pay a high price to her before it could obtain vacant possession of the farm and sell it for the purpose of enforcing its security in repaying the debt owed to it by the [husband mortgagor]".
"Significantly less" in Section 423
"The valuer is not liable unless he is negligent. In deciding whether or not he has been negligent, the court must bear in mind that valuation is seldom an exact science and that within a band of figures valuers may differ without one of them being negligent."
"[O]nce the valuer has been found to have been negligent, the loss for which he is responsible is that which has been caused by the valuation being wrong. For this purpose the court must form a view as to what a correct valuation would have been. This means the figure which it considers most likely as a reasonable valuer... would have put forward as the amount which the property was most likely to fetch itself upon the open market."
"The evidence enabled the Judge to assess what the market value was, and that figure would correspond with the price that could be expected to be achieved, given exposure to the market for a reasonable time. The question, what the figure was, was an issue of historic fact which had to be established on the evidence..."
The tenancy
The sale agreement
Conclusion
ISSUES B8 AND B9: HAS THE BANK'S FLOATING CHARGE BECOME FIXED?
1. At that moment, the partnership between the defendants was dissolved.
2. At that moment, the defendants ceased carrying on business.
" An agricultural charge creating a floating charge shall have the like effect as if the charge had been created by a duly registered debenture issued by a company:Provided that - (a) the charge shall become a fixed charge upon the property comprised in the charge as existing at the date of its becoming a fixed charge –
…
(iii) upon the dissolution of partnership in the case where the property charged is partnership property;
…"
"[T]he question whether the cessation of the Company's business causes an automatic crystallisation of a floating charge [which he described as] one of general importance upon which there appears to be no decision directly in point" (at 376G).
After considering a number of authorities, Nourse J said this at 377F to 378C:
"Although the general body of informed opinion is of the view that automatic crystallisation is undesirable... I have not been referred to any case in which the assumption in favour of automatic crystallisation on cessation of business has been questioned. On that state of the authorities it would be very difficult for me to question it, even if I could see a good ground for doing so. On the contrary, it seems to me that it is in accordance with the essential nature of a floating charge. The thinking behind the creation of such charges has always been a recognition that a fixed charge on the whole undertaking and assets of the company would perilise it and prevent it from carrying on its business A cessation of business necessarily puts an end to the company's dealings with its assets. That which kept the charge hovering has now been released and the force of gravity causes it to settle and fasten on the subject of the charge within its reach and grasp."
"I cannot accept that there is a conceptual impossibility involved in making a charge become fixed, and attached to specific property, contemporaneously with the event that brings that about. I do not accept that it is in the nature of crystallisation of a charge that it can only occur after the happening of the event which, by contract, produces crystallisation I do not accept that... the two things must occur in sequence or that the law necessarily perceives a relevant interval of time between the two."
Of course, as is clear from that short extract, the New South Wales Court was concerned with the effect of a contractual provision. However, it appears to me that, if it is of the nature of a floating charge that it crystallises when the chargor ceases business, and if the event which gives rise to the cesser of business is the transfer of assets, then, as it seems to me, the logic of the reasoning of Nourse J is that the crystallisation would occur at the moment of the transfer, and that the transferee would not have taken free of the fixed charge.
CONCLUSION
1. The tenancy is one which satisfies the requirements of Section 99(13A) of the 1925 Act;
2. the tenancy and the sale agreement do not offend the rule against self dealing;
3. the tenancy and the sale agreement were each transactions at an undervalue pursuant to Section 423, and I consider that they should be set aside as against the Bank;
4. In any event, the Company acquired the farming assets subject to a fixed charge in favour of the Bank.