Clarkson v Clarkson & Ors

Factual and Procedural Background

In 1989, Company A appeared prosperous during a property boom. The three directors and shareholders valued the equity at £1.5 million but were concerned about liquidity if one died. Each director took out a life insurance policy for £500,000, held on trust by the three directors as trustees. The trust deed granted the trustees discretionary powers to appoint the policy's proceeds to certain beneficiaries, including the directors and their families.

Following the end of the property boom in 1990, Company A became insolvent and entered administrative receivership in June 1991. In October 1991, the company’s principal lender demanded payment from the directors under personal guarantees. In June 1992, the three trustees appointed the policy proceeds to the spouse of one director (the Settlor). Subsequently, in early 1993, all three directors were declared bankrupt. The trustees in bankruptcy of two directors challenged the appointment as a transaction at an undervalue under section 339 of the Insolvency Act 1986, seeking to set it aside.

Legal Issues Presented

1. Whether the appointment of the insurance policy proceeds to the Settlor’s spouse constituted a transaction at an undervalue under section 339 of the Insolvency Act 1986.
2. Whether the power of appointment held by the trustees formed part of the bankrupts’ estate and was capable of being set aside by the trustees in bankruptcy.
3. Whether the exercise of the fiduciary power of appointment required the consent of the trustees in bankruptcy under common law or statute.

Arguments of the Parties

Trustees in Bankruptcy of Two Directors

• The appointment to the Settlor’s spouse was a transaction at an undervalue as defined by section 339 of the Insolvency Act 1986, as it was a gift or transfer without consideration.
• The trustees argued for a purposive construction of section 339 to include transactions that diminish the bankrupt’s estate within two years prior to bankruptcy.
• They contended that the appointment deprived the creditors of the chance to recover the policy proceeds, as the trustees could have appointed the proceeds to themselves as objects of the power.
• The power of appointment vested in the bankrupt trustees and thus formed part of their estate under section 283(4) of the Insolvency Act 1986.
• At common law, the exercise of such fiduciary powers would require the consent of the trustees in bankruptcy, preventing the appointment without such consent.

Appellant (Representing the Settlor’s Spouse and Trustees)

• The gift was made by the Settlor (the director who took out the policy) when creating the settlement in 1989, not by the trustees at the time of appointment.
• The appointment was an exercise of a fiduciary power of appointment, which does not create a new gift but selects the beneficiary of an existing gift from the Settlor.
• The power of appointment was held by the trustees in their fiduciary capacity and thus was not property belonging to the bankrupts for the purposes of inclusion in their estates.
• Section 283(3)(a) excludes property held in trust by the bankrupt from inclusion in the bankrupt’s estate.
• There is no authority that the exercise of fiduciary powers requires consent of the trustee in bankruptcy, and the cited authorities do not support this proposition in this context.
• The settlement was made more than two years before bankruptcy and at a time when the Settlor was solvent, so it cannot be attacked as a transaction at an undervalue.

Table of Precedents Cited

Court's Reasoning and Analysis

The court examined the nature of the gift and the power of appointment. It concluded the original gift was made by the Settlor when creating the settlement in 1989, which was more than two years prior to bankruptcy and at a time when the Settlor was solvent, thus outside the reach of section 339.

The appointment by the trustees was an exercise of a fiduciary power to select the beneficiary of an existing gift, not a new gift or transaction at an undervalue by the trustees themselves. The trustees held the power in their fiduciary capacity, not beneficially, so the power did not form part of the bankrupts’ estates for the purposes of the Insolvency Act 1986.

The court rejected the argument that the power of appointment vested in the trustees individually or that it required consent from trustees in bankruptcy upon exercise. It distinguished relevant precedents and statutes, emphasizing that the power was held on trust and excluded from the bankrupt estate under section 283(3)(a).

Accordingly, the appointment to the Settlor’s spouse was valid and could not be set aside as a transaction at an undervalue.

Holding and Implications

The court DISMISSED THE APPEAL.

The appointment of the insurance policy proceeds to the Settlor’s spouse was upheld as valid and not subject to avoidance under insolvency law. The decision confirms that gifts made by a solvent Settlor more than two years before bankruptcy, and appointments made pursuant to fiduciary powers held by trustees, are protected from attack by trustees in bankruptcy. No new precedent was established beyond this application of existing principles and statutory interpretation.