Sands & Anor v Monem & Ors

On 20 April 2010 District Judge Gamba ordered in the Brighton County Court that a transfer dated 6 February 2006 (“the 2006 Transfer”) of 28 Bannings Vale (“the Property”) by the Bankrupt into the joint names of himself and Asmaa Monem (“the Recipient”) should be set aside as constituting an unlawful preference. He also ordered that a further transfer dated 27 April 2007 (“the 2007 Transfer”) by the Bankrupt and the Recipient into the sole name of the Recipient should likewise be set aside on the same ground. The decision from which that order had resulted had been given on 25 March 2010, and District Judge Gamba’s order extended the time for appealing (following agreement on the terms of the order) to 4 May 2010.

On 30 April 2010 the Bankrupt’s solicitor dispatched an Appellant’s Notice, but by a combination of misfortune and mistake it did not include the correct fee, it did not enclose sufficient copies of the Appellant’s Notice and it omitted a sealed copy of the order being appealed. These deficiencies were drawn to the solicitor’s attention by a letter from the Appeals Office on 10 May 2010, and he immediately remedied them, pointing to a standard published work as the source of his errors. The time limited for appealing had by then expired.

Having considered the matters which are referred to in CPR 3.9 I propose to extend the time for appealing until 13 May 2010. My reasons are:-

I therefore address the question whether permission to appeal should be granted. This is an appeal by the Bankrupt against an order which has the effect of returning property to his estate for the benefit of his creditors. The Recipient (who was, until District Judge Gamba’s order, the sole registered proprietor of the Property) does not appeal. The Property is the only asset in the bankruptcy. The deficiency in the bankruptcy is of the order of £750,000, and the value of the Property is such that there is no prospect whatsoever of a surplus in the bankruptcy.

In the 2006 Transfer the Bankrupt declared that the transfer was “not for money or anything which has monetary value”, that he and the Recipient were to hold the Property on trust for themselves as tenants in common in equal shares; and he obtained the stamp duty consequences of those declarations. By the 2007 Transfer the Bankrupt and the Recipient declared (in transferring the Property into the Recipient’s sole name) that the transfer was again “not for money or anything which has a monetary value”; and they again obtained the stamp duty consequences of that declaration. In those circumstances it is entirely unsurprising that the Bankrupt’s trustees should seek to set aside the 2006 Transfer and the 2007 Transfer as being at an undervalue or as constituting a preference of the Recipient.

Both the Recipient and the Bankrupt assert that the 2006 Transfer and the 2007 Transfer misstate the true position, and that the statement that the transfer was not for anything of monetary value is untrue. They say that the transfers were in partial discharge of indebtedness: neither says that the Transfers discharged the indebtedness. (Indeed, the Bankrupt’s case before the District Judge was that the Property was at all times “in hock” for a sum far in excess of its value). That indebtedness arises under a written loan contract dated 25 December 2000 between the Bankrupt and Mr Al-Gammal (the Recipient’s father). This is for the sum of £500,000, repayable on 31 December 2005. Clause 9 of the Agreement says that if the Bankrupt had not repaid the loan by that date then the Bankrupt had to pay the amount of the loan together with a fine, by three equal instalments of £250,000 payable on 31 January 2006, 31 January 2007 and 31 January 2008. In respect of these instalments there are annexed to the loan agreement three “Trust Receipts” whereby the Bankrupt acknowledged that he had received from Mr Al-Gammal the sum of £250,000 and that “this amount has been entrusted to me to deliver it to [the Recipient]”. The agreement provides that “British courts shall have the jurisdiction of litigation in case of contract disputes”. The loan contains a provision which District Judge Gamba accepted created an equitable charge over the Property.

The terms of Clause 9 of the loan agreement make clear that until 31 December 2005 the loan is repayable to Mr Al-Gammal, and that after 31 December 2005 the Bankrupt’s obligation is to pay the instalment and the fine to Mr Al-Gammal: the “Trust Receipt” appears merely to operate as a payment mechanism, with the Recipient collecting the money as agent for Mr Al-Gammal.

So far as the equitable charge is concerned, the loan agreement misstates the true position as to the then state of the title. The date when the equitable charge actually arose was not the subject of decision.

The Recipient is said to have become beneficially entitled to the benefit of the “trust receipts” under an “Instrument of Donation” made in Egypt on 31 March 2001. Article 3 of this instrument contained an acknowledgment by the Recipient that she had received a gift from Mr Al-Gammal in the form of the three trust receipts “signed by her husband on 25 December 2000”. The Instrument of Donation in fact misstates the true position in that the Recipient was not then the wife of the Bankrupt, and he was not her husband. They did not marry until 5 March 2002 (although there was a period of engagement).

As a result of the Instrument of Donation the capacity in which the Recipient held the “trust receipts” changed from being that of an agent to that of being beneficial owner (to use the concepts of English law). If English law is applied to the transaction (which was the basis on which the hearing before District Judge Gamba proceeded) the Instrument of Donation did not have the effect of assigning at law or equity the benefit of the equitable charge contained in the original loan agreement.

It was the position of the Bankrupt and the Recipient at the hearing before District Judge Gamba that whatever was declared on the face of the 2006 Transfer the intention was that the Bankrupt should transfer a 90% (or a 95%) interest in the Property (which would have had a value of about £292,000) to the Recipient in satisfaction of the first instalment of the loan repayment and fine in the sum of £250,000 promised in the first trust receipt. It was the position of the Bankrupt and the Recipient at the hearing that whatever the 2007 Transfer said it was their joint intention that the balance of the Bankrupt’s interest in the Property should pass to the Recipient in part satisfaction of the next instalment of the loan repayment and fine due under the second trust receipt.

The District Judge accepted this evidence. He does not appear to have decided the “undervalue” question (although as I read his findings the 2006 Transfer was at an undervalue, since the Recipient obtained a share in the Property worth £292,000 by releasing a debt of £250,000). But he held that “in all the circumstances” there was a preference because the Recipient was simply an unsecured creditor (like HMRC and the other creditors). The reason why the existence of security and the conferring of a preference were interlinked was because it had been submitted that if the Recipient was a secured creditor, the transfer to her of property over which she in any event held an equitable charge could not amount to a “preference” because it did not improve her position.

On this appeal the Bankrupt wishes to argue (although the Recipient does not) that she was a secured creditor because following the Instrument of Donation Mr Al-Gammal held the benefit of the equitable charge created by the original loan agreement on trust for the Recipient (a technical argument that turns upon the correctness of the decision in Morley v Morley (1858) 25 Beav. 253. It is then sought to argue that the transfer to her of property which was subject to an unperfected equitable charge held on trust for her did not constitute a preference.

In a letter to the court dated 9 June 2010 (copied to the Bankrupt) the trustees argue that this technical point is entirely academic. That was so because (a) on his case the Bankrupt has parted with the whole of his interest in the Property (b) whatever the outcome of the appeal he will not obtain an interest in the Property (c) the state of the bankruptcy is such that there is no possibility of a surplus in which he might have some future interest (and the appeal appears designed to reduce any theoretical surplus).

Counsel for the Appellant submitted that he had not had a fair opportunity to address this argument. I therefore permitted further written argument. I have received such supplemental submissions together with a witness statement exhibiting material from Egypt. These establish that Mr Monem is under threat of being sued in Egypt by Mr Al-Gammal (apparently notwithstanding the English jurisdiction clause in the original Agreement and notwithstanding the assignment to the Recipient) for the outstanding £750,000 (instead of just the outstanding balance after deducting the value of the property); and that penal consequences may follow under Egyptian law because “the Egyptian courts will not adopt the declaration of his bankruptcy in Britain”.

Having considered this additional material I have decided to refuse permission to appeal.

District Judge Gamba was deciding an issue in an English bankruptcy (and I am likewise considering an appeal in that context). In that context (a) the person whose property is affected by the Order under appeal does not wish to appeal any aspect of the order (b) no other person with any real economic interest in the bankrupt’s estate wishes to appeal the substance of the order. The essential question (ignoring the issue of whether an 1858 case was correctly decided) is therefore whether there is a real prospect of Mr Monem persuading an appeal court that he has any standing in the matter. Can someone who has no economic interest in the outcome of the English bankruptcy, but is subject to foreign proceedings which (so far as the evidence goes) will continue whatever the outcome of the English bankruptcy, challenge an order which is accepted as correct by all the parties who do have a real interest in the English bankruptcy? In my judgment the answer to that question on the facts of this case is plainly “No”.

Should Mr Monem have permission to appeal the costs order alone? In my judgment there is no real prospect of successfully appealing the costs order. It was agreed between the parties. It cannot therefore be the subject of a freestanding appeal. In any event I think Mr Clarke was entirely right to have agreed it. Irrespective of who was correct on the “security” point (and on the undecided “undervalue” point) the fact was that the proceedings before the District Judge had been occasioned because Mr Monem had misstated (what he now said was) the true position in every document and formal declaration that he had signed: so an order that he (rather than the creditors) should bear the bulk of the costs burden of sorting out the muddle was only just and right. That is the way that an appeal court would look at the costs before the District Judge.

This outcome will disappoint Mr Monem. But he should know that his position was well argued by his legal representatives.