Section 284 of the Insolvency Act 1986, which is the equivalent of section 42 of the Bankruptcy Ordinance (Cap. 6), provides that where a person is adjudged bankrupt, disposition of property made by that person in the period from the day of the presentation of the petition to the vesting of the bankrupt’s estate in the trustee is void except with the court’s consent or subsequent ratification of the court. This provision serves a crucial role to preserve bankruptcy estates by preventing improper dissipation of assets upon filing of bankruptcy petition. However, the Act does not provide a mechanism for recovering compensation in the case of diminution in value of assets that are transferred post-petition. The English Court of Appeal (the “CA”) in Ahmed and others v Ingram and another  EWCA Civ 519 approached the issue from equitable restitutionary principles in granting compensatory relief for a void disposition pursuant to section 284 of the Act.
The bankrupt and the appellants are siblings. In the period between the presentation of a bankruptcy petition in January 2007 and the making of a bankruptcy order in April 2009, the bankrupt transferred his minority shareholdings in three private companies (the “Share(s)”) to the 1st appellant. The 1st appellant subsequently transferred the Shares to the 2nd to the 4th appellants at unknown times between 2008 to 2009, which were eventually re-transferred to the 1st appellant by no later than the end of June 2010. During the period after the bankrupt’s initial disposal of the Shares, the Shares had diminished in value.
The trustees in bankruptcy (i) applied for a declaration that the Share transfers were void pursuant to section 284; and (ii) sought recovery for loss arising from diminution in value of the Shares. Shortly before trial, the appellants accepted that the Share transfers were void and delivered Share transfer forms executed by the 1st appellant in end February 2015. The remaining issue in dispute related to monetary claim from the trustees. The High Court upheld the application and ordered each of the appellants jointly liable to pay the difference in fair value of Shares between the date of the initial transfer of Shares from the bankrupt to the 1st appellant and the date the Shares were delivered to the trustees. The appellants appealed to the CA.
Basis of remedy
The CA held that section 284 only provides a mechanism to avoid dispositions of assets from the day of the presentation of the petition to the vesting of the estate in the trustee, and is silent as to the remedy available to the bankruptcy estate. Instead, the right to recovery is “restitutionary”, meaning that the trustees in bankruptcy are entitled to claim equitable compensation only in respect of any actual loss that the estate had suffered as a result of the breach of trust. In the present case, specific restitution of the trust property is not possible due to diminution in value of Shares despite the appellants having returned the Shares to the bankruptcy estate. To make good a loss in fact suffered which is caused by the breach of trust, one has to pay sufficient compensation to the bankruptcy estate to restore it to the position it would have otherwise been had the breach not been committed.
Breach of trust
Before considering the issue of breach of trust by the appellants, the CA first discussed the timing when the appellants became trustees. It was held that the 1st appellant held the legal title to the Shares as from the transfer date, which is contingent upon the making of the bankruptcy order. As from the date the bankruptcy order was made, the 1st appellants (and the 2nd to the 4th appellants, at appropriate timings) held legal title of the Shares on trust for the bankrupt with title vested in the trustee in bankruptcy upon his appointment.
The 1st appellant’s obligation to return the Shares arose at the time he had knowledge of the facts that made him a bare trustee (i.e. that a petition had been presented and bankruptcy order had been made) and once the trustee in bankruptcy had been appointed, he had an immediate obligation to restore the estate and was under a duty to tender the Shares. The underlying reason is that trustees in bankruptcy have immediate obligations to realise the assets for the benefit of creditors once they have been appointed. To discharge such obligation of the 1st appellant, he should have notified the trustee in bankruptcy of his possession of the Shares and tender the same immediately.
Calculation of loss
The starting point for analysing the quantum of loss is to consider the time when the breach of trust occurred. The fact that the breach of trust occurred on the making of the bankruptcy order does not mean that loss had been incurred on that date. The CA accepted that the loss occurred, or flowed from, the date at which the trustee in bankruptcy would have actually sold the shares, having regard to the circumstances of the case. In the present case, there was no evidence to support a finding that the first appointed trustee had attempted to sell the Shares upon his appointment of thereafter. In contrast, there was evidence to show that a sale of the Shares would have taken place within three to six months from the appointment of the following trustees (which was supported by evidence provided at trial with regard to market practice of transfer of shares in private companies). It was therefore ruled that the appropriate timing for valuation of the Shares was 30 June 2010, i.e. at or around the time when the Shares were re-transferred to the 1st appellant.
Valuation and liability
The issue of valuation was whether the shares should be valued at market value or on fair value. For the present case of sale from a trustee in bankruptcy to a family member, the CA considered applying the context of sale between family members to be appropriate as the CA took the view that the most likely buyer would consider the trustee in bankruptcy to be the next best option of selling assets to someone outside the family. Thus, the CA acknowledged fair value as the appropriate basis of valuation.
The 2nd to the 4th appellants were held to be jointly liable for the loss suffered by the bankruptcy estate to the extent of their respective shareholding, despite having re-transferred the Shares to the 1st appellant. Their obligations did not conclude upon their transfer of shares back to the 1st appellant, as their obligations were to transfer the Shares to the trustees in bankruptcy instead.
Ahmed v Ingram illustrates how section 284 of the Insolvency Act 1986, which is the equivalent section 42 of the Bankruptcy Ordinance, does not provide a free-standing remedy. The CA has applied restitutionary principles for recovery of damages with the need to establish actual loss suffered by the bankruptcy estate. The present case also serves as a reminder to trustees in bankruptcy to take active steps in realising the properties, to show that actual loss has been suffered in the case of drop in value of assets.
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This article was originally published on ONC Lawyers.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.