Carman v Yates & Ors

1. LORD JUSTICE AULD: The applicant and the first defendant in this action, Dennis Anthony Yates, was at all material times an undischarged bankrupt. His trustee in bankruptcy is Russell John Carman.

2. In this action the trustee sought and obtained before Mr Justice Charles (1) a declaration that Mr Yates had a beneficial interest in a property called The Hewarths, and (2) an order setting aside Mr Yates' assignment in September 1992 to his wife Mrs Valerie Yates, the second defendant, of all his interest in a life policy with a surrender value of about £16,000. The second matter does not form part of this application to appeal, as I understand it.

3. Mr Yates and his two co-defendants to the action, his wife Mrs Yates and his mother-in-law Mrs Hannah Dempster, denied that he had a beneficial interest in the property and asserted that they - the two co-defendants - owned it between them.

4. The story, which is a long and involved one, starts, for the purpose of this application, in early 1985 when Mr Yates transferred all his share in his and his wife's then home, 327 Coppice Road, to her. The transfer document records that he did so in consideration of his natural love and affection for her, thus, on the face of it, rendering her the sole beneficial owner of that property.

5. In late 1985 Mrs Yates sold 327 Coppice Road for £30,000 and then purchased, in her name and that of Mrs Dempster, The Hewarths for £90,000. The transfer document recorded that they were to hold it as tenants in common in equal shares. Following the purchase, the three defendants, at Mr Yates' instigation, entered into what was called a lodging agreement, by which I assume he was being designated as a lodger in their house. The purchase was eventually funded, as to about one-third, from the proceeds of sale of 327 Coppice Road and, as to two-thirds, by Mrs Dempster. It was common ground in the action, as I understand it, that, whatever the terms of the transfer, Mrs Dempster, by virtue of her two-thirds contribution to the purchase price, acquired, and should be treated as having acquired as between her and Mrs Yates, a two-thirds share in the beneficial interest of the property.

6. Following the acquisition of The Hewarths, a number of significant additions and improvements were made to the property, some of them acknowledged by Mr Yates to have been funded by him and some - about £134,000 worth - he and Mrs Yates maintain were funded by her from the sale of gold sovereigns owned by her. The trustee maintained, first, that the transfer of Mr Yates' interest in 327 Coppice Road, the purchase of the main plot at The Hewarths in the names of Mr and Mrs Yates and her mother and the funding of the additions and improvements were dishonest devices and/or shams to protect Mr Yates' assets from claims by his creditors; secondly that the transfers should on that account be set aside as against him under the relevant provisions of the Insolvency Act 1986; and, third, that all the improvements should be treated as having been funded by Mr Yates, resulting in an enhancement of his interest in the property.

7. Mr and Mrs Yates were not legally represented below and are not on this application for permission to appeal. Below, they maintained that the various transactions were genuine and otherwise honest, that they had not been entered into with intent to defraud Mr Yates' creditors and that Mr Yates had not acquired any beneficial interest in the property. As part of that general case they denied that Mr Yates had provided the funds for all the improvements and additions to the property.

8. Following a full and careful analysis of the evidence, the judge concluded (1) that he disbelieved the evidence of Mr and Mrs Yates in support of their assertions and (Mrs Dempster did not give evidence); (2) that, save as to Mrs Dempster's contribution of two-thirds of the initial purchase price of The Hewarths, Mr Yates provided from undeclared trading income all the funds, the subject of the litigation; (3) for good measure, that neither Mrs Yates nor Mrs Dempster at any material time had the resources to fund the property purchases, additions or improvements.

9. The judge, relying on the provisions of Section' 423 and 339 of the Insolvency Act, sought to protect the creditors' interest restoring, so far as practicable, Mr Yates' assets to him and, through him, to his trustee in bankruptcy to make them available for execution by his creditors. The judge - applying those provisions, and by reference to Section 172 of the Law of Property Act 1925 - first, granted relief in respect of all the transactions so as to set them aside; second, found in relation to each of the transactions that neither Mrs Yates nor Mrs Dempster had been deceived by Mr Yates (they knew what was going on); third, found that the intention and understanding of the defendants was that Mr and Mrs Yates would have equal shares in The Hewarths with the balance being owned by Mrs Dempster, but that the initial one-third/two-thirds division on the initial purchase was varied by the subsequent additions and improvements so as to have the effect of increasing the Yates' share as against that of Mrs Dempster and of doing so on the basis that they held their share in equal shares; fourth, found on that basis that they each funded the initial purchase of The Hewarths as to £15,000, making together £30,000 of the £90,000 purchase price; fifth, found, as to the additions and improvements, that Mr Yates' total contribution, following their setting aside, was £172,666 which, with his initial contribution of £15,000, made £187,667 or about 71 per cent of the total; sixth, in the exercise of his discretion under the Insolvency Act provisions to make such order as he thought fit, concluded that a fair solution was to attribute to Mr Yates, and hence to the trustee, a share that represented Mr Yates' expenditure on the property, and, the percentage value of his share in the property at the time of the claim if the transactions had not been set aside; seventh, he found that while it was necessarily a rough-and-ready calculation, the fair approach was to take a linear calculation of the contribution of Mr Yates' additions and improvements over the years against the property's current market value, namely about 70 per cent. However he added that some allowance should be made for uncertainties and assumptions - that was a concession the trustee had made - say 10 per cent - resulting in an award of 60 per cent of the total value to the trustee, leaving Mrs Yates and Mrs Dempster with 40 per cent between them.

10. Mr Yates seeks to challenge that outcome. He maintains, as far as I can follow him, that the judge should have found his interest to be 50 per cent of one-third of the initial purchase price of the house - valued at £500,000 to £550,000 at that stage - plus the actual value added at the time of each of his additions and improvements, but not on the broad brush pound-for-pound approach of the judge, by which Mr Yates means not by an extrapolation of the percentage of Mr Yates' contributions into the increasing value of the property overall over the years. He submits that the judge should have taken the difference - having allowed for 50 per cent of one-third of the price of £500,000 odd - between the current valuation of £750,000 and that figure, producing together a figure of £340,000 odd attributable to him, some 40 per cent rather than 60 per cent as the judge calculated.

11. There were clearly a number of ways in which the judge could have gone about this calculation, namely the reconstruction of Mr Yates' trading position and earnings, his contributions over the years to the property, producing additions and improvements, and, in turn, the overall valuation at today's date. It was necessarily an imprecise calculation.

12. As Mr Yates observed on his submissions to the judge and certainly in his application for permission to appeal, some of the things for which he paid by way of addition or improvement to the house may not have added very much to its value. Others may, so some allowance should be made for that. The judge acknowledged for that possibility in his judgment and, no doubt, it was with that in mind, as well as other uncertainties inherent in the assumptions that had to be made in this difficult exercise, that he reduced his initial figure of a 70 per cent interest derived from Mr Yates' contribution to 60 per cent.

13. To succeed on this application Mr Yates has to persuade me that he has a real prospect of success - a real prospect of success - on appeal in demonstrating that the judge went about his calculations in the wrong may. I cannot feel that the appeal has that real prospect of success. This was, as I said, necessarily a rough-and-ready exercise for the judge; it could not be otherwise. The judge had to assess the growing value of Mr Yates' interest in The Hewarths resulting from his own prodigious efforts as against the initial divide between him, his wife and Mrs Dempster when the property was first purchased.

14. The judge's approach conformed with the way in which the statute required him to exercise his discretion, to have regard, not only to the contributions and their effect on the bankrupt, but also to what would be available to the bankrupt's creditors if the position had been that these transactions had never occurred - which is now what the court has to work on, the judge having set the transactions aside.

15. I cannot say that the arguments of Mr Yates have a real prospect of success. There were probably more than two ways in which the judge could have gone about this extremely difficult calculation, and I cannot see a full Court of Appeal upsetting his approach on the arguments of Mr Yates. On that ground I refuse the application. (Post-judgment discussion re the costs)

16. LORD JUSTICE AULD: I cannot help you on that application either.

17. I say that for two reasons. First it is very rare for the Court of Appeal to upset a decision as to costs by the judge below on which he has a very wide discretion. He had the handling of the case. He saw the run-up and the pleadings, the issues drawn, the way in which the witnesses gave their evidence and the history of the matter as well as anybody - far better than this court. It would require a strong case for the court to intervene in the exercise of discretion as to costs. In addition, from what you told me, it does not seem to me that he had much option but to make the order he did. There are two sides to this issue. Both sides can make approaches as to settlement at different stages of the trial; you complain that the trustee did not do so - you did not do so - before the proceedings were issued. The offer you made afterwards was clearly inadequate, and you went into trial with many, very serious issues between you for which the trustee had to prepare. So I regret that I cannot grant that application either.

18. Thank you for your courteous presentation of the matter and helpful summary of it in your skeleton argument.

Order: Application refused.