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9-02-2021

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The case of Lyle v Bedborough has been dealt with previously on the issue of waiver of privilege. The trustee had brought claims under sections 339 and 423 of the Insolvency Act 1986. Mrs. Bedborough, the bankrupt’s spouse and a Respondent, was running a Fagan v Papanicola defence. Her case was that in 2008 she had given her husband an ultimatum that they would divorce unless their property was transferred to her. She had received legal advice and the earlier decision had held that merely referring to that fact in her witness statement was not sufficient to waive privilege which would have forced her to give disclosure of that advice.

In 2012, the parties had competed a declaration of trust altering the shares in the property to 95/5% in favour of Mrs. Bedborough. That declaration was just about within the 2 year period before the presentation of the petition and so capable of being subject to section 339 of the Act.

The defence raised was that the true transfer of the beneficial interest had taken place in 2008. As a matter of fact, the court found that the parties did have a conversation in 2008 and it was understood between them that Mr. Bedborough would be willing to transfer the property to his wife if she asked him to do so. However, their conversations lacked the crucial element that could give rise to an intention based constructive trust because there was no understanding of a transfer of the beneficial interest at the time but merely an understanding that Mrs. Bedborough could request the transfer and Mrs Bedborough would comply. The judge found that both of them knew that their oral agreement in 2008 had no legal effect and that further documentation would be required. Further it was found that at the time the parties did not consider that the 2008 agreement was compromising potential divorce proceedings.

As for the 2012 declaration, it made no mention of the 2008 agreement nor that, if it was not executed, Mrs. Bedborough would have instigated divorce proceedings. There was a further finding on the evidence that it was more likely than not that Mrs. Bedborough had not threatened divorce proceedings in 2012.

At the time, Mr. Bedborough’s business had difficulties, tax debts (although Mr Bedborough disputed those) and so the declaration of trust rendered him insolvent although that need not be proved within the 2 year period under section 339.

With the 2012 declaration being considered the operative agreement that transferred the bulk of the property to Mrs. Bedborough and it being in the period of 2 years before petition, that transaction could be set aside.

The was argument as to whether that should be set aside on the grounds that, it occurred just within the 2 year period before petition and Mrs. Bedborough as an alternative would have issued proceedings for divorce and sought a property adjustment order had the declaration not been entered into . Following Hill v Haines, that order would not have been capable of being challenged under section 339.

The judge considered this point and held that section 339 was a provision which showed that the rights of creditors was to prevail. If the transaction was caught by that section it would be wrong to deprive the creditors merely because the parties could have taken a different course of action. To do so would be insulating Mr. and Mrs. Bedborough from the consequences of their decisions and that would not be an appropriate exercise of the discretion.

There were further issues as to whether the court should grant an order for possession and sale and for Mrs. Bedborough to be awarded an equitable accounting credit.

The court dismissed any suggestion that there were exceptional circumstances owing to Mrs. Bedborough’s medical circumstances. Whilst it was true that they would not be able to live in a comparable property in the same area, the judge considered that to be one of the inevitable consequences of bankruptcy and is not unusual. There had been no evidence that this property had been specifically adapted to her needs.

As for equitable accounting, the judge applied Wilcox v Tait, to the effect that the spending by one of a couple on the property is only recoverable under equitable accounting if there is an implied agreement between them that the non-paying party would contribute. Such an agreement would be rare for a co-habiting couple and the judge found no evidence of it here.

The trustee was entitled to a declaration under section 339 to set aside the declaration of trust and to an order for possession and sale.

Commentary

The case highlights the fact that so many investigations into dealings with the beneficial ownership of property are seeking to establish the terms of an intention based trust. The parties’ intentions are paramount. The best evidence is a written agreement which can be verified as to the date of execution. Whilst an oral intention can be valid, the evidence needed to establish that becomes far trickier in both senses. The person seeking to rely on that evidence has the burden of establishing the intention relying on the memory of events many years ago. Likewise the person challenging that evidence had little to go on in terms of knowing precisely what would have been said.

For the Respondents here, it could be said that their fatal error might have been not referring to the 2008 discussions in the 2012 document nor specifically stating in the recitals that the agreement was being entered into as an alternative to divorce from the point of view of Mr. Bedborough. Interestingly, had it done so, the issue as to the potential value of that promise not to divorce would  have needed to be considered but, having concluded that there was no such promise, the judge held that he did not need to consider that issue.

In similar scenarios, sceptics might cast doubt on such oral discussions but, as a matter of fact, the judge found that they had taken place. The finding on those, however, was that they were not sufficient to constitute an actual common intention between them sufficient to transfer the beneficial interest at that point in time. Having made this finding, the court was not required to consider whether any 2008 agreement could be set aside under section 423.

The judgment is useful for an exploration of the issues that surround reliance on an oral intention to alter beneficial shares and the difficulties that can create. It also highlights yet again that it is far better to put intentions into a legally binding and accurate document.

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