Defeating creditors: a how (not) to guide

This article was first published in Property Law Journal (April 2016) and is also available at www.lawjournals.co.uk

As controversial political figures go, it would be hard to find a candidate in recent times to beat Lutfur Rahman. Mr Rahman, as readers will no doubt recall, used to be Mayor of the London Borough of Tower Hamlets until his election was successfully challenged by a group of private individuals, and he was unceremoniously removed from his post following a lengthy but arresting judgment by the Electoral Commissioner – reported at [2015] EWHC 1215 (Comm) for those with a taste for lurid tales of corruption, dishonesty and intimidation.  That judgment also resulted in a £250,000 interim costs order against Mr Rahman, and a spirited attempt by the successful petitioners to enforce that order by a series of charging order applications in respect of Mr Rahman’s modest property empire.

Those petitioners were unlikely to have been surprised, given the nature of the Commissioner’s findings, that two of those applications were met by a claim by Mr Rahman’s wife to the effect that she enjoyed a beneficial interest in the relevant properties, even though both were registered in Mr Rahman’s sole name, having been purchased in 2005 (as the Court found, contrary to Mrs Rahman’s case) as buy-to-let investments. Mrs Rahman produced in support of her claim an unregistered declaration of trust purportedly executed by Mr Rahman contemporaneously with the purchase of the properties. The Court (in Erlam v Rahman [2016] EWHC 111 (Ch)) had little difficulty in declaring this document to have been a sham, and even if it had not been a sham it was not in any event a document which even purported to create an interest in favour of Mrs Rahman. The premise of the declaration was that it reflected and recorded the existence of an interest which Mrs Rahman had already acquired by virtue of her contribution towards the purchase price of the properties. Mrs Rahman’s difficulty was that this contribution was not something which she was able to prove had ever occurred, and her intervention in the petitioners’ applications for charging orders accordingly failed.

Mrs Rahman is merely the latest in a long and undistinguished line of unsuccessful claimants of a beneficial interest in such circumstances.  Indeed, this is a routine so well established that it has practically developed its own jurisprudence. A Nutshell Guide to defeating creditors in this way is long overdue. So here, too late for Mrs Rahman but for the benefit of readers, is a bluffers guide to bluffing.

Make sure your sham declaration of trust is not a sham

Describing the word ‘sham’ as a ‘popular and pejorative word’, Diplock LJ explained, in Snook-v-London & West Riding Investment Limited [1967] 2QB 786, 802 that

‘for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.' 

A document which is a sham is of course not the same as one which is inauthentic. Clearly a document which has been manufactured after the event, instead of being created on the date which it bears, may be struck down as a fake. We are not concerned here with such documents. In the case of a sham declaration of trust, it is axiomatic that it will be a valid document in the sense that it is not a fake or a forgery, because it must be a document which all parties intend to present to the world at large, or more likely to select third parties, as creating rights and obligations which are different from the ones which they in fact intended. Establishing whether a document is such a thing requires very careful analysis. It is not merely an exercise in construction, so of course it is permissible for the Court to look outside the ‘four corners of the document’ (per Arden L in Stone-v-Hitch [2001] EWCA Civ 63). Equally a document is not necessarily a sham just because it is uncommercial, or even artificial. An artificial arrangement is one which may be intended to produce a significantly disadvantageous result for one or other of the parties for collateral purposes, but if that result is indeed the genuine intention of the parties then the document which creates it is not a sham. The hallmark of a sham document is that it is not in fact intended to govern the legal relations between the parties at all, at least not in the way which is stated.

Make sure your unregistered declaration of trust is registered

The failure to register a deed of trust at the Land Registry is a matter which the Court will readily take into account when deciding if it is something which the represents the bona fide intentions of the parties. So the Court of Appeal expressly held in Commissioners of Inland Revenue v Hashmi [2002] EWCA Civ 981, whilst acknowledging that there might be an innocent explanation for a failure to register. In particular it should be borne in mind that parties may not be aware of the need for registration. Norris J in Swift Advances Plc-v- Ahmed [2015] EWHC 3265 (Ch) was prepared to go further, showing somewhat less generosity of spirit towards a borrower who had purported to transfer the entire beneficial interest in property of which he was the sole registered proprietor to his wife. He pointed out that under the Land Registration Rules r.94(1)(a) the ‘….proprietor of a registered estate must apply for a restriction in Form A where (a) the estate becomes subject to a trust of land, other than on a registrable  disposition, and the proprietor….will not be able to give a valid receipt for capital money……”. He considered it a very significant factor in assessing the subjective intention behind the creation of such a trust that the mandatory requirement of registration had not been complied with. Public registers are maintained to inform the world at large about ownership of property, and the failure to register a declaration of trust is strong evidence that the parties to such a declaration intended to keep careful control over who becomes aware of its existence, and by what means. Few things could be more calculated to raise suspicion about the bona fides of a declaration of trust than to keep it in a safe, ready to be deployed for specific purposes, or quietly forgotten about in the event those circumstances fail to materialise.

Make sure your agreed beneficial interest is agreed

Of course not all parties seeking to establish a beneficial interest in property in answer to an application for a charging order are able to appear in Court flourishing a declaration of trust to that effect. Many seek to argue that the legal position fails to reflect the underlying disposition of beneficial interests not because of an express declaration of trust but because of a common interest constructive trust of the Stack v Dowden type, or a resulting trust. Often the case where the property is occupied by an unmarried cohabiting couple and the interest sought to be charged by way of a charging order is that of only one of the parties, it is important to bear in mind that the principles are less flexibly applied than commonly thought.

Dobbs J in Re Ali [2012] EWHC 2302 (Admin) gave the following summary in the context of a confiscation case under the Proceeds of Crime Act 2002:

1. The starting point is the legal ownership of each property. It is for the party asserting that the beneficial interests are held other than as per the legal title to prove their case: Stack v Dowden [2007] 2 AC 432 at 56.
2. The law has been further clarified by the case of Jones v Kernott [2012] 1 AC 776, in which it was noted that in “sole name” cases, there were two questions to be asked – namely whether it was intended that the other party have any beneficial interest in the property at all and, if he does, the second issue is what that interest is. In considering the first of the questions there will need to be evidence of an actual agreement, arrangement or understanding between the parties which must “be based on evidence of express discussions between the partners, however imperfectly remembered and however imprecise their terms may have been” (Lloyds Bank v Rosset and Another [1991] AC 107, Lord Bridge of Harwich at 132 F-G)
3. In considering the second of these questions the Court may have regard to the “whole course of dealing” between the parties, in order to ascertain their intentions, or, if necessary, to impute them.

The difference between the approach of the Court at each of the two stages was more recently emphasised by Sales LJ in Capehorn v Harris [2015] EWCA Civ 955: A court is not entitled to impute an intention to the parties at the first stage in the analysis, but only at the second. At the first there must be an actual agreement, although such an agreement ‘may be inferred from conduct in an appropriate case’. The difference between inferring an agreement from conduct, which is permissible at the first stage ‘in an appropriate case’, and imputing an agreement on the basis of a whole course of dealing, which is not permissible except at the second stage, is not necessarily an easy distinction to understand and perhaps even harder to apply in practice.

In any event it needs to be borne in mind that the common intention type of constructive trust described by Baroness Hale of Richmond in Stack v Dowden is almost certainly confined to what she described as the ‘domestic consumer context’ characterised typically by cohabiting couples purchasing residential property for the purpose of providing a home for themselves. That is not to say that it is restricted to couples of either sex living together in a platonic or sexual relationship. It extends to parties in different sorts of personal relationships, including parent and child (as in Adekunle v Ritchie [2007] BPIR 1177) provided that the purpose of the acquisition of the property was to provide a home for them. But it does not extend more broadly to the acquisition of all property, and in particular to the acquisition of property for the purposes of investment even where the parties acquiring the property are also in a familial relationship (Laskar v Laskar [2008] 1WLR 2695). Family agreements to invest in buy-to-let properties are closer in character to arms-length commercial arrangements and are accordingly excluded from the reasoning of Stack v Dowden. In order to establish a beneficial interest in such properties it is necessary to satisfy the stricter resulting trust analysis, where only a contribution to the purchase price will be sufficient to found a beneficial interest.

Make sure you can prove all of the above

It would take a heart of stone not to have just a little sympathy for Mrs Rahman. Her husband had been found guilty of unlawful influence, corruption, intimidation and dishonesty on a scale not seen in England since the great cartoonist Gillray cast his merciless gaze on the political life of the Georgian establishment. Perhaps sensing that Mr Rahman would not have cut an impressive figure as a model of probity and rectitude in the witness box, she chose not to call him. Although the Court dismissed her concerns that her husband’s evidence would be discounted because of his unimpressive performance before the Electoral Commissioner, and drew predictable adverse inferences from his failure to appear, it is hard to imagine his contribution would have enhanced her prospects greatly.

The same cannot necessarily be said of the timely disclosure of full and unredacted bank statements, however, and the failure by Mrs Rahman to produce these drew yet further criticism. Indeed, the drawing of adverse inferences from a party’s failure to place before the Court documents which it would not be difficult to produce has a sound basis following careful consideration by the Supreme Court in Prest v Petrodel Resources Ltd [2013] UKSC 34, Lord Sumption adopting the dictum of Lord Lowry in R v Inland Revenue Commissioners, Ex p TC Coombs & Co [1991] 2 AC 283 to the effect that

“In our legal system generally, the silence of one party in face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence. Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case. But, if the silent party's failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified.”

In the event Mrs Rahman’s failure was inexplicable and suspicious, and the Court had no difficulty in finding her claim that she contributed to the purchase price of the properties unproven.

Conclusion

Cynicism has no place in any judicial process, but any party seeking to resist an application for a charging order must expect a degree of scepticism, particularly if their claim is based upon a declaration of trust hastily produced, if not out of thin air, then out of a desk drawer.