Mr Goldfarb was the trustee in bankruptcy of Mr Sabz Ali Khan. His case was that the appellant – Mr Khan’s daughter – acquired three properties at an undervalue from her father. The properties were transferred, Mr Goldfarb said, at a time when Mr Khan was insolvent, and facing claims from third parties who sought to enforce against his assets. It followed that Mr Goldfarb claimed the transactions in question were transactions at an undervalue and/or transactions defrauding creditors within the meaning of sections 339 or 423 of the IA1986.

The three impugned transactions were as follows:

i. The transfer of 2 Wharf Road, Swindon, from the joint proprietorship of Mr Khan and Ms Khan to the sole proprietorship of Ms Khan for £10,000;

ii. The transfer of the freehold of 15 Leckwith Place, Cardiff, from Mr Khan to Ms Khan for £1 as a birthday gift; and

iii. The transfer of the freehold of Church House Inn, Newport, from Mr Khan to Ms Khan for £1 as a birthday gift.

A proprietary injunction had been made against Ms Khan, as the sole legal owner, preventing her from disposing of, dealing with, or diminishing the value of the three properties. Ms Khan appealed that order on the grounds that Mr Goldfarb could not establish a proprietary interest in the properties sufficient to justify the grant of the proprietary injunction in his favour. Mr Goldfarb disagreed that there was a need for him to establish a proprietary interest – it was sufficient that he was seeking proprietary relief in his substantive claims.

The question for Michael Green J, then, was whether undetermined claims under sections 339 or 423 of the IA 1986 could support a proprietary injunction.

Requisite proprietary interest

Proprietary injunctions do not require the applicant to prove a risk of asset dissipation, nor to explain any delay in bringing the application. This distinguishes them from freezing injunctions.

In Kea Investments Limited v. Watson & ors [2020] EWHC 472 (Ch), Nugee J noted that if a claimant asserts a proprietary interest over disputed assets and goes on to win the action, it then becomes clear that the assets were not the ostensible owner’s at all. The ostensible owner was, instead, holding the assets on trust for the claimant. In such a case, the claimant “does not… have a present beneficial interest in the fund”. However, if the claimant is successful, they will obtain not just money, but “actual possession of the fund”. If that is not strictly a present proprietary claim, Nugee J said, it is “very close to one as the very gist of the action is to assert a right to possession of the disputed fund”.

Mr Goldfarb placed reliance on Kea Investments. That case was of assistance to him because, as Michael Green J said, it strongly suggested that a claimant does not need to show a present proprietary interest – it is enough that the claim is to a future proprietary interest which, if proved, will show that the claimant had a proprietary interest at the time of the application for the proprietary injunction.

Mr Goldfarb further relied on Allen v. Bulatovic [2023] EWHC 612 (Ch), a case factually similar to the present. Citing Kea Investments, Leech J accepted that if the claimant was successful under section 339 of the IA 1986, “then the property itself effectively represents the disputed fund and he will be entitled to an order vesting the property in him”. Leech J saw it as at least arguable, then, that there was no need to demonstrate a real risk of dissipation as with a freezing injunction. In that sense, the application was for a “quasi-proprietary injunction rather than a true freezing injunction”.

Ms Khan said that Allen was plainly wrong. Michael Green J was, in his own words, not so sure. Leech J had picked up on the concept of a quasi-proprietary interest discussed in Kea Investments and decided that a successful claim under section 339 of the IA 1986 would likely give rise to a vesting order. This, in turn, would effectively grant a proprietary interest in that the asset would be returned to the bankruptcy estate.

Transactions void ab initio

Mr Goldfarb put forward an alternative argument. If he did in fact have to establish a present proprietary interest, he nonetheless had one because the relief sought in his substantive application included a claim for a declaration that the transactions from Mr Khan to Ms Khan were void ab initio, and the effect of that declaration would be that the properties always vested in Mr Goldfarb. However, the parties disagreed on the whether the court would ever grant a declaration that the transactions were void in the first place.

Mr Goldfarb pointed to sections 423 and 339 of the IA 1986. Both sections deal with transactions at an undervalue. A person enters into a transaction at an undervalue with another person if he “makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration”, or inadequate consideration. Sections 423 and 339 are triggered by different factors. For section 423 to apply, the court must be satisfied that the transaction was entered into by the debtor for the purposes of prejudicing his creditors’ claims. The condition for the application of section 339 is that the transaction was entered into within five years prior to the date on which the bankruptcy application was made or the bankruptcy petition was presented.

Both sections make similar relief available, enabling the court to restore the position to what it would have been had the transaction at an undervalue not been entered into. Under section 342(1)(a), for example, an order under section 339 may require transferred property “to be vested in the trustee of the bankrupt’s estate as part of that estate”. Mr Goldfarb also emphasised that transactions caught by the predecessor to section 339 of the IA 1986 – section 42 of the Bankruptcy Act 1914 (BA 1914) – were “void” against the trustee in bankruptcy.

If claims under these sections were primarily concerned with returning property to the estate and turning the clocks back to the pre-transaction situation, then it was well within their scope, Mr Goldfarb said, for the court to ultimately declare the transfers void. This, he submitted, naturally flowed from section 42 of the BA 1914 (section 339’s ancestor), and there was no reason to think that the court’s power to grant such relief would be in any way limited.

This was important because if the transactions were void ab initio, the properties would have always vested in Mr Goldfarb. Thus, even if he was incorrect to say that a present proprietary interest was not a prerequisite to the grant of a proprietary injunction, he nonetheless had such an interest at the time of the application and was thereby entitled to the injunction.

Ms Khan challenged this, highlighting that section 42 of the BA 1914 did not help Mr Goldfarb because its successor – section 339 of the IA 1986 – did not contain express words rendering the transaction “void”. Other sections of the IA 1986 did contain such words, implying that section 339 itself was never intended to void transactions.

Ms Khan further relied on Stonham v. Ramrattan [2011] EWCA Civ 119 . In that case, Lloyd LJ did not accept that property ordered to be transferred pursuant to section 342(1)(a) is thereby treated as forming part of the bankrupt estate at the commencement of the bankruptcy. Counsel in Stonham had argued that such retrospective effect would be the natural consequence of the court restoring the pre-transaction position. However, Lloyd LJ said, the effect an order under section 342 would “depend on the terms of the order to some extent”. If the ordered required the transferred property to be vested in the trustee as part of the bankrupt’s estate, it seemed to Lloyd LJ that “vesting takes effect as from the date of the order and no earlier”.

Michael Green J noted that even if a vesting order only took effect from the date of the order, that was nonetheless the alternative case put by Mr Goldfarb. In Stonham, Lloyd LJ had said that the order would depend on its terms, and that case seemed to allow for the possibility that the court could make a declaration that the transfers were void. Ultimately, none of the contra-indications in the IA 1986 to which Ms Khan drew attention answered the point that the court “may, in due course, be asked to and will in fact make a declaration that the transfers were void and that they were never effective to transfer the beneficial interest”.

In the result, both ways in which Mr Goldfarb pursued his claims were sufficient to establish a proprietary (or quasi-proprietary) interest to ground an application for a proprietary injunction. There was no need to demonstrate a present proprietary interest as a prerequisite to asking the court for an interim proprietary injunction. All that was necessary was that the claim was for a proprietary interest and there was a serious issue to be tried as to whether that relief would be granted. Logically, the injunction “protects the subject matter of the action and ensures that the properties remain available to be restored to the bankrupt’s estate” should the respondent succeed in establishing that the transactions were transactions at an undervalue within the meaning of either section 339 or 423 of the IA 1986.

Full and frank disclosure

Ms Khan brought a separate ground of appeal. She argued that the judge who had granted the without notice order for a proprietary injunction was wrong in not discharging that order by reason of Mr Goldfarb’s failure to make full and frank disclosure and/or to give a fair representation of the application at that hearing. There were three alleged breaches.

Firstly, according to Ms Khan, Mr Goldfarb had said at the hearing that he had had no time to properly consider the proprietary interest issue and went no further than making bare assertions that the transfers were void ab initio or might become so. Michael Green J did not think that this was a fair characterisation. In one of his witness statements, Mr Goldfarb had defined the two bases upon which he was asserting a proprietary interest. Mr Goldfarb’s counsel had set out his position in his skeleton argument for the without notice hearing, and in his oral submission. Furthermore, the judge who granted the proprietary injunction had been aware of the issue.

Secondly, Ms Khan complained that one of her defences – that Mr Khan was solvent at the time of the transfers – was not raised before the judge on the without notice hearing. Mr Goldfarb questioned how there could have been an obligation on him to raise the defence in light of the fact that Ms Khan was not relying on it at the hearing. In any event, Michael Green J found on the basis of Mr Goldfarb’s witness statement, counsel’s skeleton argument, and counsel’s oral submissions that the judge had been fully alive to the issue of insolvency.

Thirdly, Ms Khan argued that Mr Goldfarb did not adequately address the court on the effect of Hunt v. Ubhi [2023] EWCA Civ 417 . That case concerned the decision to continue a freezing order against the appellant, an allegedly insolvent partnership in which the respondent petitioners had invested. The petitioners had given a restricted cross-undertaking in damages, which the partnership said was unacceptable and should result in the set-aside of the freezing order.

Paragraph 29 of Newey LJ’s judgment in Hunt set out the principles relevant to cross-undertakings in damages on an application for an interim injunction. Ms Khan submitted that Mr Goldfarb should have specifically referred to paragraph 29. Michael Green J drew attention to the fact that Mr Goldfarb had submitted to the judge at the without notice hearing that “Ubhi makes clear that we need to justify any departure from a full undertaking”. The judge’s judgment referred to Ubhi, and read: “It is clear from authority that the mere fact that the applicant is a trustee in bankruptcy is not usually enough to persuade the court to accept an undertaking in damages which is limited.”

Michael Green J was therefore satisfied that the judge at the without notice hearing was aware of the point raised by Newey LJ in paragraph 29 of Hunt. Ultimately, then, none of Ms Khan’s three arguments as to full and frank disclosure were made out and her appeal, in its entirety, was dismissed.