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The Existential Crisis of Set Aside Transactions under section 37 MCA 1973

Byron James, barrister, 14 Grays Inn Square considers the questions arising in relation to transactions set aside by s.37 MCA 1973 orders


Byron James
, barrister,  14 Gray's Inn Square

It says a great deal of the times we live in that I recently had to draw to the court's attention that the judge's autocorrect spellchecker had replaced his use of the word 'beyond', a word which featured numerous times throughout the judgment, with 'Beyoncé'. It made, at certain crucial points, for rather interesting reading; certainly causing some confusion amongst the legal teams at first sight. Corrections were inevitably made, but I intend to keep my copy of the draft judgment. The final version may make it seem like the error never existed at all, but I have proof that it did: it was one thing, then another, not that it did not happen at all. Therein lies, the difference between voidable and void: the former having once existed, and now not; the latter having never existed at all.  This being at issue in the interesting Mostyn J decision of AC v DC & Ors (Financial Remedy: Effect of s37 Avoidance Order) (No 1) [2012] EWHC 2032 (Fam) (19 July 2012)

The main point in issue was neatly summarised by Mostyn J [para 13]:

"Does my order setting aside the transactions and the subsequent dealings operate to annul or avoid them ab initio so that for all legal (including fiscal) purposes they are treated as never having happened? Or does my order recognise the validity of the transactions and operate only to effect a (later) re-vesting anew in H?"

The parties in the case married in 1998, had three children, two of whom were now teenage, and one who was aged three. The marriage broke down in 2010; soon afterwards the Husband was diagnosed with frontal lobe dementia. Proceedings for financial remedies were eventually issued in October 2011, having previously been issued and dismissed. The Husband was found to be incapacitated under the provisions of the Mental Health Act 2005 and was represented in these proceedings by a litigation friend. The Husband's life expectancy was 'limited' and the Court had to give consideration to the 'many adverse legal and fiscal consequences' of his death in proceedings [para 5].

The Husband throughout the marriage had been an 86.24% shareholder in the successful company 'D Holdings ', with turnover of £53 million and an operating profit of £3,65 million in 2010. Following the issue of Form A, the Husband transferred his entire shareholding to a corporate trustee in the Isle of Man; the shares then in turn were acquired by five Manx companies, which were each owned by a separate sub fund of an Employer Financed Retirement Benefit Scheme (EFRBS), which had been established for the Husband and other directors of D Holdings.

The terms of the trust, subject to the transfer of shares, were extremely restrictive toward the beneficiaries (Husband, Wife and children): they had no access to the capital and the Wife, on divorce, would completely cease to be a beneficiary.  Mostyn J found that 'on any view' the steps taken by the Husband 'seriously compromised' the Wife's claims for financial remedies and, consequently, set aside the transaction [para 10].

In setting aside the transaction, Mostyn J referred himself to the test previously outlined in Kremen v Agrest [2010] EWHC 2571

"[9]   For W's application to succeed the following has to be demonstrated:

(i) That the execution of the charge was done by H with the intention of defeating her claim for financial relief. This is presumed against H, and he has to show that he did not bear that intention. See s 23(2)(a) and s 23(7). The motive does not have to be the dominant motive in the transaction; if it is a subsidiary (but material) motive then that will suffice: see Kemmis v Kemmis (Welland and Others Intervening), Lazard Brothers and Co (Jersey) Ltd v Norah Holdings Ltd and Others [1988] 1 WLR 1307, [1988] 2 FLR 223.

(ii) That the execution of the charge had the consequence of defeating her claim. This means preventing relief being granted, or reducing the amount of any such relief, or frustrating or impeding the enforcement of any order awarding such relief. See s 23(1) and s 23(2)(b).

(iii) That the court should exercise its discretion to set aside the charge. See s 23(2).

(iv) However, under s 23(6) there is an exception to the general rule that all dispositions are liable to be set aside. The disposition in favour of LF will not be set aside if it can be shown at the time it was made that,

a) it was done for valuable consideration; and

b) LF acted in relation to it in good faith; and

c) LF was without notice of any intention on the part of H to defeat W's claim for financial relief.

Finding that in the present case:

i) The transaction in December 2010 manifestly had the effect of defeating W's claims for a financial remedy in that they either prevented relief from being granted or had the result that lesser relief would be granted.

ii) H has not demonstrated that he effected the transaction without the intention to defeat W's claims.

iii) It has not been shown that R9 received the shares in good faith and for valuable consideration and without actual or constructive notice of W's potential claims.

iv) Therefore all of the factual criteria are satisfied.

v) It would be a fair and just exercise of my discretion to set aside the transaction for were I not to do the very vice that s37 is directed towards would be given full rein.

vi) There would be consequential orders under s37(3) to reverse certain subsequent dealings, which are compendiously described in the skeleton argument of Mr Goodfellow QC at paras 2.1 – 2.4

Having determined to set aside the transaction, the focus fell upon the effect of the decision: was a set aside transaction something that never existed at all or something that flashes in and out of existence, with legal and fiscal consequences? It was the latter with which the Court was concerned because if the transaction was deemed to never have existed at all, then on a sale of D Holdings, the Husband would be solely liable for CGT; whereas, if the transaction was held to have existed, so that the shares literally passed from the Husband, to the trustees and back anew to the Husband, whilst the CGT liability was likely to be less it would fall on the EFRB and other directors and not the Husband. It was therefore of some consequence to determine the status of a transaction now set aside.

Mostyn J was 'in no doubt at all', and It was his 'plain conclusion', that section 37 MCA 1973 operates retrospectively to void the transaction from the start. There is something of a confusing reference in paragraph 15 to 'in my judgment a transaction caught by s37 is plainly a voidable transaction', after much thought the writer can only imagine this should read 'void' rather than 'voidable' (answers on a postcard please!). In so doing, he referred to two 'powerful' authorities, Kemmis v Kemmis [1988] 1 WLR 1307 and Newlon Housing Trust v Alsulaimen [1999] 1 AC 313.

In Kemmis, Purchas LJ stated "by inference, if the necessary intention can be proved, although this will become increasingly difficult with the passage of time, there is no limit provided in the section to its retrospective effect" This confirming the retrospective operation of the section. In Newlon Housing Trust, Lord Hoffman dealt with the meaning of disposition of property, within in the statue, and whether a notice to quit referable to a tenancy could fall under the definition. Mostyn J's analysis concluded that the "restorative" power of the set aside order referenced by Lord Hoffmann is wholly consistent with the concept of the original disposition being rendered void ab initio" (para 22)

Mostyn J, under the heading of policy, further held that,

"If the power to set aside a reviewable disposition were not (at least) capable of reversing the legal effect of the reviewable disposition sufficiently so that tax charges which had arisen as a result of (or during) the (albeit temporary) validity of the reviewable disposition and/or subsequent dealings, the purpose of s37 (to preserve the assets of the family) would likely be frustrated in part."

The policy reason at play being that there is no reason why a third party, such as HM Treasury should benefit 'from the brief life of transactions which have for all other purposes been set aside, particularly when that benefit is at the cost of the family's assets".

There was an additional interesting point to come from the case concerning the procedural issue of the separate representation of HMRC and the consequent effect of their not being directly involved in the case. There was discussion concerning their involvement and the possibility of them being joined as a party but it was decided the delay involved would be unacceptable given the health position of the Husband. Mostyn J considered the impact of proceeding without HMRC being represented, concluding that any decision clearly could not be binding on them [para 3]. But if not binding, then surely the judgment would still have some force?

Reference was made to a similar situation in G v G [2002] 2 FLR 1143 whereby Coleridge J dealt with (para 43) "whether the transfer to the wife of some shares in the husband's business would give rise to business hold-over relief so that the wife would receive the shares at the husband's base value and that no liability to CGT would therefore arise on the husband as a result of the transfer". Coleridge J accepted that he would not be able to bind the Inland Revenue but gave his opinion that the relief would/should be available.  Later, in Hill v Haines  [2007] EWCA 1284  Rix LJ stated "the view expressed by Coleridge J [in G v G (Financial Provision: Equal Division)] at para [43] regarding potential consequences for the purposes of capital gains tax can hardly be regarded as authoritative in the absence of the Revenue".

Mostyn J pointed out [para 3] that it may not have been authoritative "but it was influential as following publication of the judgment of Coleridge J the Inland Revenue adjusted its Practice Manual to reflect the terms of his opinion." He expressed the view that he hoped his own views, in the present case, would also be 'influential', especially given 'the depth of learning which [he] had received….'