Ramlort Ltd v Reid

Factual and Procedural Background

This appeal concerns an order made by His Honour Judge Norris QC in the Chancery Division (Bankruptcy) on 18 July 2003. The proceedings were brought by the judicial factor of the estate of the late Mr. Debtor, who died intestate and insolvent in Scotland on 19 September 1996. Prior to his death, Mr. Debtor executed a Declaration of Trust dated 26 July 1996, declaring that he held the benefits of a whole life assurance policy ("the Policy") on trust for Company A absolutely. The Policy was effected with an assurance company ("Company B").

Company A provided consideration for the Declaration of Trust by making two payments: one payment to a third party and another by way of loan to Mr. Debtor. The judicial factor sought a declaration that the Declaration of Trust constituted a transaction at an undervalue under section 339 of the Insolvency Act 1986, and an order setting it aside.

The preliminary issue concerning the valuation of consideration in light of Mr. Debtor’s liver transplant and subsequent death was reserved for trial. At trial, the judge found the Policy had a minimum value of £10,000 as at the date of the Declaration of Trust, but valued the consideration provided by Company A at nil, concluding that the transaction was at an undervalue. The judge ordered that the proceeds of the Policy be held on trust to repay Company A the sums it had paid, with the remainder held for the insolvent estate.

Company A appealed, challenging the valuation of the Policy and the consideration, contending the Policy was not worth significantly more than the consideration given and that the Declaration of Trust was not a transaction at an undervalue. Alternatively, Company A argued for a remedy of monetary compensation rather than setting aside the Declaration of Trust. The judicial factor filed a Respondent’s Notice seeking to uphold the judge’s decision on additional grounds. Permission to appeal was granted.

Legal Issues Presented

1. Whether the Declaration of Trust constituted a transaction at an undervalue within the meaning of section 339 of the Insolvency Act 1986.
2. If so, what is the appropriate remedy under the statutory discretion: setting aside the Declaration of Trust or ordering monetary compensation.

Arguments of the Parties

Appellant's Arguments

• The valuation of the Policy by the judge was erroneous; the Policy's value as at 26 July 1996 was no more than its surrender value (£71) or at most the total consideration paid (£3,000).
• The judge erred in valuing the consideration provided by Company A at nil; the loan of £1,900 and the payment of £1,100 to a third party had value from Mr. Debtor's perspective.
• The comparison of values should be made from Mr. Debtor’s point of view, not solely from the insolvent estate’s perspective.
• The remedy should be monetary compensation equal to the undervalue rather than setting aside the Declaration of Trust, to avoid an unjustifiable windfall to creditors.
• The judge should have accepted the evidence of Company A’s principal witness.

Respondent's Arguments

• The judge correctly applied section 339, assessing values objectively from the perspective of the insolvent estate as at the date of the transaction.
• The loan obligation effectively negated the value of the £1,900 loan from Mr. Debtor’s estate perspective, and there was no evidence that the £1,100 payment to the third party benefited Mr. Debtor.
• The Policy had a minimum value of £10,000, supported by actuarial evidence, and the surrender value was not indicative of the Policy’s true value.
• The absence of cross-examination of Company A’s expert undermined the credibility of that evidence.
• The appropriate remedy under sections 339 and 342 is to set aside the Declaration of Trust and restore the estate to the pre-transaction position, including repayment of sums with interest.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Re MC Bacon Ltd [1990] BCLC 324	Interpretation of "transaction at an undervalue" under insolvency legislation.	Provided guidance on comparing incoming and outgoing values from the debtor’s perspective under section 339(3)(c).
Phillips & Anor v. Brewin Dolphin Bell Lawrie Ltd & Anor [2001] 1 WLR 143	Valuation principle: asset value is what a reasonably well-informed purchaser would pay in arm's length negotiations.	Supported the general rule for valuation of the Policy and consideration at the date of transaction.
National Westminster Bank plc v. Jones [2002] 1 BCLC 55	Requirement for courts to ascertain actual values in undervalue transactions under section 423 (analogous to section 339).	Affirmed that precise valuation is preferable but not always necessary; court may use minimum/maximum values.
Agricultural Mortgage Corporation plc v. Woodward [1995] 1 BCLC 1	Valuation without precise figures is permissible where evidence supports significant difference.	Used to support that exact valuation is not always required to find undervalue.
Craven v. Secretary of State for Health (unreported, 28 Oct 1999)	Valuation principle: absence of a market does not mean an asset has no value.	Used as analogy that no actual market or buyer does not negate asset value for valuation purposes.
Walker v. WA Personnel Ltd [2002] BPIR 621	Remedy principles under section 238/339: restoring status quo ante as far as practicable, including setting aside transactions.	Supported the court’s discretion to set aside undervalue transactions rather than only awarding compensation.
Chohan v. Saggar [1994] 1 BCLC 706	Interpretation of restoration of position under insolvency law.	Referenced in support of the principle that the court’s remedy aims to restore the position as if the transaction had not occurred.

Court's Reasoning and Analysis

The court began by considering the statutory framework of section 339 of the Insolvency Act 1986, focusing on transactions at an undervalue. It emphasized that the comparison of values must be made from the debtor's point of view at the time of the transaction. The court acknowledged that precise valuations are preferable but not an absolute requirement; a finding of a significant difference in value suffices.

The judge’s valuation of the Policy at a minimum of £10,000 was supported by the actuarial evidence, notably the report of the actuarial expert, despite adjustments made for risks such as potential reduction of the death benefit and surgical risks. The court rejected the valuation based solely on the Policy's surrender value (£71) as unrealistic, noting that the surrender value reflects a contractual right rather than market value, and that special purchasers with an interest in the Policy's benefit would likely value it higher.

Regarding the consideration provided by Company A, the court found the judge erred in valuing it at nil. The loan of £1,900 had value to Mr. Debtor despite being repayable on demand, and the £1,100 payment to a third party was of value to Mr. Debtor, reinforced by witness evidence. However, even assuming the incoming value was approximately £3,000, this was still significantly less than the Policy's minimum value.

The court concluded that the transaction was at an undervalue within the meaning of section 339(3)(c). On the question of remedy, the court agreed that the judge had exercised discretion on an erroneous basis regarding the incoming value and thus that discretion must be exercised afresh. The court held that the appropriate remedy is to set aside the Declaration of Trust and restore the parties to their pre-transaction position, including repayment of sums with interest, rather than merely ordering monetary compensation.

The court rejected the submission that subsequent events, including Mr. Debtor’s death and conversion of the Policy into a monetary sum, precluded setting aside the transaction. It emphasized that restoration "so far as practicable" is the guiding principle and that the remedy should prevent unjust enrichment or windfall to creditors.

Holding and Implications

The court DISMISSED THE APPEAL save for a variation of the order to provide that Company A is entitled to interest on the sums to be repaid from the date of payment.

The direct effect is that the Declaration of Trust is set aside, the proceeds of the Policy are held on trust to repay Company A the sums it paid (with interest), and the remainder is held for the insolvent estate. The court’s decision does not establish any new precedent but confirms the application of established principles regarding transactions at an undervalue under section 339 of the Insolvency Act 1986, including the valuation methodology and the court’s remedial discretion.