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Court of appeal confirms remedy for void share transactions is value at date of transfer

March 2018

The Court of Appeal, Civil Division in  Ahmed and others v Ingram and another (Joint trustees in bankruptcy of the estate of Ahmed the above-named Debtor) [2018] EWCA Civ 519 have upheld the Judgment handed down by Mrs Justice Proudman in the High Court of Justice in Bankruptcy in the case of Ingram v Ahmed [2016]  EWHC 1536 (Ch), [2016] All ER (D) 11 (Jul) namely that when a share transfer by a debtor is void and the returned shares have diminished in value, the Trustees were entitled to not only the return of the shares, but they were also entitled to recover the loss in value whether or not they had pleaded the actual loss suffered. The Court also upheld the decision by Proudman J that the valuation of the shares, in this case, was to be a “fair value,” rather than the market value.

The Court did, however, allow the appeal to confirm that the correct date on which to value the loss was the date of the void disposition, rather than the date of the transfer.

The facts of the original case were that the Debtor had, prior to a bankruptcy petition being presented and subsequent order being made, transferred his minority shareholdings in a number of companies to his brother. Prior to the transfer, several other members of the Debtor’s family exaggerated debts owing in order to rig the vote for the Debtor to enter into an IVA. Following a challenge by another creditor the IVA was subsequently revoked and a bankruptcy order made. In the meantime, however, and sometime between the original transfer to the brother and the bankruptcy order, a proportion of the shares were transferred to the sisters.

On appointment and discovering the transfers and the fact that the shares had diminished in value, the trustees requested a declaration from the Court under section 284 of the Insolvency Act 1986 (IA 1986), that the transfers were void. They further sought to recover the loss in value.

Following a withdrawn application for a validation order, it was accepted that the transfers were void, but it was claimed that any relief for the diminution in value was unprecedented on the basis given that the Trustees had not pleaded, nor proved any actual loss. At first instance, the Court held that the trustees were not required to plead actual loss, and had proved that the parties involved had not acted in good faith, and therefore the applicant trustees were entitled to the fair value of the shares as at the time of the transfer. The brother and sisters appealed the decision.

The Court of Appeal identified the following issues to be determined on appeal

1.    S248 of the IA 1986; does this section provide a free-standing right to recover the value of the shares as awarded by the Judge

2.    approach to determination of liability;  was the right to compensation automatic or was the right to be compensated for the diminution only when the trustees could prove that the estate had actually suffered as a result of breach of trust on the part of the appellants

3.    pleadings and evidential points; if the above is decided that the trustees must prove loss, had the trustees in bankruptcy done so in this case’

4.    date of the calculation of loss

5.    method of valuation; Fair value or market value

6.    liability of the sisters; was the Judge correct to find the sisters jointly liable with the brother.

Upon the first issue of S248 of the IA 1986, the Judge held that Proudman J had, in fact, followed the precedent of Hollicourt (Contracts) Ltd supra which provided for a free-standing right to recover property which had been disposed of and that the right which is restitution.

The appeal Judge held that the second issue, the right of compensation went further than the restitution claim and was based on compensation for breach of trust. It was held that in accordance with the judgment handed down in AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] compensation is available where the claimant can establish a loss to the estate caused by the trustee’s breach of trust and can be awarded in appropriate cases in addition to the restoration of property.  As in this case, if specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed: Caffrey v. Darby (1801) 6 Ves. 488; Clough v. Bond (1838) 3 M. & C. 490.

In terms of the evidential points, the Court held that the applicants did not have to plead the actual loss as they had not been given the opportunity to sell the shares, and it had already been determined that there was a diminution. 

In consideration of issue 4, The Judge allowed the appeal on the date for calculation of the loss and substituted the date of the transfer for the date that the shared would have been valued for the purposes of ascertaining the loss suffered by the estate. This was considered as the date on which the appellants had become “trustees.”

In relation to the final issue for consideration, it was held that the correct basis of valuation was a fair value, rather than the market value. This was based on the fact that the sale was to family members who were also directors and shareholders of the companies and not to a third party. The fact that this transfer would stop a third party holding a 24% share in the business and keep it within the family would lead to a higher valuation. The appeal on this issue was therefore dismissed.

Finally, on the liability of the sisters, the Judge held that the sisters were in fact jointly liable along with the brother for the diminution in value of the shares calculated in accordance with the above, on the basis that they acted dishonestly and without regard to the estate when taking transfer of the shares without any regard to the estate.

This is an important decision which highlights the right for trustees in bankruptcy to claim compensation from the recipient for the loss suffered during the period of office, in addition to the return of the asset in specie. It also confirms that the valuation of the shares will be taken on a case by case basis and will reflect a “fair value” rather than the market value of the shares.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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