Case No: B3/2000/2666
Neutral Citation Number: [2001] EWCA Civ 1541
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE NEUBERGER
CHANCERY DIVISION
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Wednesday 24th October, 2001 
B e f o r e :

LORD JUSTICE JUDGE
LORD JUSTICE MUMMERY
and 
SIR MARTIN NOURSE
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	ROSEMARY DOREEN JONES & ORS	Appellant	
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	NATIONAL WESTMINSTER BANK PLC	Respondent	

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
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Mr Stephen  Jourdan (instructed by  Messrs Burges Salmon , Narrow Quay House, Bristol, BS1 4AH  for the Appellant)
Mr John  Martin QC & Miss Georgina Middleton (instructed by Messrs Addleshaw Booth & Co , 100 Barbirolli Square,  Manchester, M2 3AB  for the Respondent)

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Judgment
Lord Justice  Mummery : 

This is the judgment of the Court.
1.	This is an appeal from the decision of Neuberger J on 22 June 2000 in proceedings brought by the National Westminster Bank (the Bank) to enforce its rights as mortgagee against Mrs Rosemary Jones, against her husband, Mr Harold Jones, and against Neuadd Goch Farm Limited (NGF), a company owned, controlled and operated by them in connection with their farming activities.
2.	The defendants appeal, with the permission of the judge, against orders declaring that securities granted by them to the Bank are valid and subsisting in respect of the farm land, stock and assets and setting aside under section 423 of the Insolvency Act 1986 (the 1986 Act) a tenancy agreement and asset sale agreement made on 27 April 1999 between Mr and Mrs Jones and NGF. Mr Jourdan, who appears for Mr and Mrs Jones, informed the court that other cases are waiting on the result of this appeal. It turns on whether transactions entered into by the appellants with NGF, without the concurrence of the Bank, with a view to ensuring the survival of their business, were effective to prevent the Bank from enforcing its rights and remedies in respect of property subject to fixed and floating charges made by Mr and Mrs Jones to secure their indebtedness to the Bank. 
The Facts     
3.	Mr and Mrs Jones, who were married in 1975, are sheep and cattle farmers at Neuadd Goch farm (including Neuadd Goch hill) Newtown, Powys  comprising 179 acres of pasture, a farmhouse and buildings, owned by Mrs Jones since 1989, and also on 30.5 acres at Rhostwpa, Adfa, Newtown, owned  by Mr Jones since 1989.
4.	The couple are long standing customers of the Bank. On 31 January 1990 Mrs Jones granted a legal mortgage to the Bank over Neuadd Goch Farm to secure all monies from time to time owing to the Bank. Clause 6 of the mortgage deed contained a provision requiring the written consent of the Bank for leasing or parting with possession of the farm or for the granting of a right or interest to occupy it.
5.	On 2 April 1993 Mr Jones deposited the title deeds and Land Certificate of the Rhostpwa land with the Bank and signed the Bank’s standard form memorandum confirming the grant of an equitable charge for all his liabilities to the Bank.
6.	On 1 November 1994 Mr and Mrs Jones executed three Agricultural Charges in favour of the Bank securing all their borrowings and creating  floating charges on the farming stock and other agricultural assets. The charges were made under the Agricultural Credits Act 1928 (the 1928 Act). 
7.	Unfortunately, Mr and Mrs Jones ran into financial difficulties. In December 1998 another creditor began bankruptcy proceedings against Mr Jones. They sought advice from Mr Des Phillips of UK Mortgages & Finance Services Limited, who obtained valuations of the farms from Norman Lloyd & Co of Welshpool in January 1999. Neuadd Goch Farm was valued at £346,000 and Rhostwpa at £45,000. On 8 March 1999 the Bank was supplied by Mr Phillips with copies of documents relating to an Individual Voluntary Arrangement (IVA) and was informed that Mr & Mrs Jones would be making an offer to the Bank.
8.	On 12 March 1999 the Bank made a formal written demand on Mrs Jones in the sum of £332,852.45. It was not satisfied. A further demand  was made on Mr & Mrs Jones on 9 April for £335,418.85. The events which occurred after the demands  caused the Bank to seek relief in these proceedings commenced on 28 September 1999.
9.	In April 1999 Mr Phillips advised Mr and Mrs Jones that they could save their home and their farming business from action by the Bank by forming a company and by then granting an agricultural tenancy to it and selling the farming assets to the company at a proper value. The advice was implemented. On 12 April 1999 NGF was incorporated. Mr and Mrs Jones were the sole directors and shareholders, each holding beneficially one of the two issued shares.
10.	On 23 April 1999 Mr Phillips informed the Bank that NGF had been incorporated, that Mr and Mrs Jones would be granting a tenancy to it and that they would be transferring the farming assets to it. On learning of this the Bank made it clear that it would not grant its consent to or recognise the proposed transactions, and would not be submitting any claims in the IVA.  It confirmed its position in a letter of 26 April 1999.
11.	On 27 April a meeting of creditors was held to approve the IVA. On the same day Mr and Mrs Jones granted to NGF a tenancy of the farms for a term of 20 years from 27 April at a base rent of £1,000 a year for the first 5 years,  rising to £4, 276 a year for the remaining 15 years. A further rent was payable at the rate of £17, 420 a year to be reviewed to the market rental as at 1 June 2004, 2009 and 2014. NGF was put under full repairing and insuring obligations.    
12.	By the Sale Agreement of the same date Mr and Mrs Jones transferred their agricultural assets to NGF for the sum of £341,880, payable by 20 equal instalments of £17, 094 starting on 27 April 2000.
13.	The Bank took steps to protect its position. A letter before action was sent on 12 July 1999, followed on 17 September 1999 by a formal demand for £350,774.34 and on 21 September 1999 by the appointment of receivers. The Bank instituted proceedings on 28 September asserting the validity of its security and of the appointment of the receivers and seeking an order under section 423 of the 1986 Act setting aside the tenancy agreement and the asset sale agreement. On 30 September an interim injunction was made restraining Mr and Mrs Jones from dealing with the farming assets without the consent of the receivers.
The Judgment
14.	Although the Bank won the action, it did not succeed in all its arguments. The judge rejected the Bank’s contentions that (a) it was entitled to rely on a breach of clause 6 of the mortgage as a ground for contending that it was not bound by the tenancy; (b) Mr and Mrs Jones had in truth invalidly granted a tenancy to themselves and had breached the self dealing rule; and (c) the tenancy and the sale agreement were shams.
15.	The judge held in the Bank’s favour that (a) the tenancy and the sale agreement were each transactions at an undervalue and were entered into in circumstances caught by section 423 (1) (c) of the 1986 Act and (b) the Bank’s floating charges on the farming assets had crystallised and become  fixed charges in favour of the Bank as a result of Mr and Mrs Jones ceasing to carry on business.
Transactions at an Undervalue 
16.	Section 423 of the 1986  (“ Transactions defrauding creditors”) Act provides as follows:-
 “ (1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if –
(a)…………
		(b)…………
(c) he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next sub-section, make such order as it thinks fit for -
(a) restoring the position…., and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose –
 (a) of putting assets beyond the reach of a person who is making , or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.”
(5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it” 
17.	The judge decided that the tenancy agreement and the sale agreement were transactions at an undervalue caught by section 423 and that they should be set aside as against the Bank.
18.	Mr and Mrs Jones admitted that they had entered into the two agreements for a purpose falling within section 423 (3), but contended that when their overall asset position, including the value of their shares in NGF, was considered as a whole, there was no transaction at an undervalue. Agricultural Mortgage Corporation PLC –v- Woodward [1995]  1 BCLC 1 at 11 d-g was cited for the proposistion that, in considering whether a tenancy fell within s.423 (1)(c), the transactions should be viewed as a whole and that a broad approach should be taken. The judge rejected their contention, holding that the relevant transactions did not include the acquisition of NGF or the shares in it. He also rejected their contention that the issue of undervalue should be determined by reference to a “band of values” rather than one “correct” value and that the proper approach was to consider whether the consideration actually received was “significantly less ” than the bottom end of the band.
19.	The judge concluded that the Bank had discharged the onus of establishing that,  by entering into the tenancy agreement,  Mr and Mrs Jones significantly reduced the value of the freehold and that the obligations of NGF had a value which was “significantly less” than the surrender value bestowed on NGF by the grant of the tenancy. As for the sale agreement, the value of NGF’s unsecured obligation to pay £17, 094 a year for 20 years beginning on 27 April 2000 was “significantly less” than the value of the assets transferred to NGF.
Appellants’ Submissions 
20.	Mr Jourdan, on behalf of Mr and Mrs Jones, criticised the judge’s conclusions  on S.423 on three main grounds, disputed his conclusion that the floating charges had crystallised  and raised a new point of law on the 1928 Act.
21.	First, he submitted  that the judge wrongly held that benefits afforded to Mr and Mrs Jones by the two agreements were to be ignored in considering whether the transactions were at an undervalue for the purpose of section 423. In particular,  he was wrong to take account only of the benefits afforded to them in their capacity as transferors and to leave out of account the benefits to them as shareholders in NGF. The increase in the value of their shares resulting from the grant of the tenancy and the sale of assets should have been taken into account.
22.	 Secondly, the judge  wrongly rejected the “band of values “ approach as being of no assistance in this case. If applied, that approach would have led to the conclusion that the Bank had failed to prove that the transactions were at an undervalue. There was not just one “right ” value. There was a range of values for the open market rent and for the vacant possession value of the land. The approach taken by the court in determining whether a valuer had been negligent in his valuation of property should be followed in a case under s.423..
23.	Thirdly, a point of law not taken before the judge was raised. It was submitted that, in determining whether the tenancy was at an undervalue, the judge had failed to take into account the inability of the Bank under the terms of the mortgage and equitable charge and section 100 of the Law of Property Act 1925 to accept a surrender of the tenancy by NGF without the consent  of Mr and Mrs Jones. They would not have given their consent, or, if they had given consent, they would have been entitled to demand a share of the “marriage value” and that would have reduced the value of the tenancy. This ground of appeal was withdrawn after submissions on s.99 and 100 of the 1925 Act were made by the Bank and it was pointed out that clause 6 of the legal mortgage expressly provided that the Bank could accept ”surrenders of leases without restrictions”.
Approach under s. 423            
24.	In our judgment, Mr Jourdan’s  submissions rest on a  misapprehension as to the proper construction of section 423 and the correct formulation of the questions which  the court is required  to consider.  
25.	Three relevant questions must be answered.
26.	The first is: what are the relevant transactions? The answer is the tenancy agreement and the sale agreement. They were the transactions entered into by Mr and Mrs Jones with NGF for the admitted purpose of putting assets  (i.e. the farm land and the farming stock) beyond the reach of the Bank, which was making a claim, and of prejudicing the interests of the Bank in relation to the claims it was making against Mr and Mrs Jones under its securities. The  acquisition of NGF and the issue of the shares in it was not a relevant transaction within section 423.       
27.	The second is: what was the consideration for the transaction? The consideration for the tenancy agreement was the obligation to pay rent for possession of the farm land. The consideration for the sale agreement was the sum to be paid by 20 instalments. The issue of the shares in NGF to Mr and Mrs Jones was not consideration for either transaction. The fact the two transactions caused the shares in NGF to increase in value is irrelevant to the question as to what was the relevant transaction and what was the relevant consideration. The increase in the value of the shares was the consequence of the transactions, which increased the value of the assets of NGF. 
28.	The third is: was the value of the consideration provided by the transferee “significantly less” than the value provided by the transferor? There is no challenge to the judge’s findings of fact relating to the values. As Millett J held in Re MC Bacon Limited [1990] BCC 78, section 423 (1)(c) requires a comparison to be made between the value of the consideration  received by the transferor for the transaction and the value of the consideration provided by the transferor. Both values must be measured in money or in  money’s worth . Both must be considered from the transferor’s point of view. There is no express or implied reference in section 423 to the concept of a “band or range of values”, such as is used by the courts when determining the liability of a valuer for professional negligence. Failure to come up with the “correct” value does not necessarily mean that a valuer has been negligent. He is not negligent if the valuation provided by him is within the “range of values”  which a competent valuer would have made. A margin of error is allowed in determining whether there has been negligence.
29.	There is no place for such a concept in the language and purpose of section 423. The section requires a comparison to be made between two figures. For that purpose the court must arrive at  a conclusion on actual values. The evidence may, of course, disclose a range of suggested figures. But the court must ascertain from the evidence the actual value against which the consideration for the transaction must be measured. This was the approach adopted by the judge. It is correct. 
Crystallisation of Floating Charge
30.	The judge held that NGF acquired the farming assets subject to  fixed charges in favour of the Bank. We agree with the judge that the three floating charges crystallised. On the execution of the agreements in favour of NGF Mr and Mrs Jones ceased to have  anything to farm. Their partnership business ceased to be carried on. The reason for the continuation of the floating nature of the agricultural charges also ceased.
31.	Mr Jourdan contended that the cesser of the business did not cause a crystallisation, either under section 7 of the 1928 Act or under clause 3 of the charges, which provided exclusive lists of crystallising events, and omitted all mention of cessation of the business in which the charged assets are employed.
32.	Section 7 of the 1928 Act  (“Effect of floating charge”) provides-
“ (1) An agricultural charge creating a floating charge shall have the like effect as if the charge had been created by a duly registered debenture issued by a company:
Provided that-
(a) the charge shall become a fixed charge upon the property comprised in the charge as existing at the date of its becoming a fixed charge-
(i) upon bankruptcy order being made against the farmer;
(ii) upon the death of the farmer;
(iii) upon the dissolution of partnership in the case where the property charged is partnership property;
(iv) upon notice in writing to that effect being given by the bank on the happening of any event which by virtue of the charge confers on the bank the right to give such a notice.” 

33.	In our judgment, Mr Jourdan’s submission that written notice was required to crystallise  these charges fails to take account of the general principle stated by Nourse J in Re Woodroffes (Musical Instruments) Limited [1986] Ch 366 at 376G – 378C that, on a cessation of a business,  dealings with the assets of the business cease and  the rationale for the floating nature of the charge also ceases. Automatic crystallisation occurs. 
“That which kept the charge hovering has now been released  and the force of gravity causes it to settle and fasten on the subject of the charge within its reach and grasp.  The paralysis, while it may still be unwelcome, can no longer be resisted” (p. 378 B-C ). 
34.	There is nothing in section 7 of the 1928 Act or in the charges themselves which expressly excludes the general principle applicable to floating charges in debentures created by a company. We agree with Neuberger J.  He said
“….one of the effects of a company granting a floating charge is that, irrespective of whether it is agreed as one of the terms of the charge itself, the charge will automatically become a fixed charge if the company chargor ceases carrying on its business. I think that Nourse J concluded that that is an inherent feature of a floating charge granted by a company. If that is so, then it seems to me that, in the opening part of section 7 (1) of the 1928 Act, the legislature has effectively provided that this is also an inherent characteristic of the charge granted under the 1928 Act.”
35.	For the same reasons the judge also was also right to reject Mr Jourdan’s alternative submission that crystallisation would not in any event have occurred until after the sale agreement was made and that NGF would therefore have taken the assets free of the fixed charges.
36.	Mr Jourdan’s new point of law was based on section 6 of the 1928 Act,  which deals with the effect of a fixed charge. Subsection (1) sets out the rights and obligations of the bank so long as a fixed charge continues in force. Subsection (2) sets out the obligations imposed by a fixed charge on the farmer, so long as the fixed charge continues in force e.g. payment forthwith to the bank of the  net proceeds of sale of any of the property received by the farmer. Mr Jourdan relied on subsection (3) which provides
“ Subject to compliance with the obligations so imposed a fixed charge shall not prevent the farmer from selling any of the property subject to the charge, and neither the purchaser, nor, in the case of a sale by auction , the auctioneer, shall be concerned to see that such obligations are complied with notwithstanding that he may be aware of the existence of the charge.”  
37.	He contended that section 6 applies to a floating charge which has crystallised into a fixed charge, so that Mr and Mrs Jones were able to sell the farming assets to NGF free of  fixed charges.
38.	We are unable to accept this submission. The Bank does not dispute that, on a proper exercise of the power of sale and subject to the farmer’s compliance with the obligations imposed by section 6 (2), the farmer sells free of a fixed charge on the property. However, we agree with Mr John Martin QC for the Bank that section 6 does not apply to this case and cannot be relied upon by Mr and Mrs Jones. The 1928 Act draws a distinction between the effect of a fixed charge , as set out in section 6, and the effect of a floating charge, as set out in section 7. This was a case of sale of property which was subject to floating charges. They only became  fixed charges on the sale itself. We also agree with Mr Martin that the crystallising events specified  in section 7(1)  are inconsistent with the farmer retaining a power of sale after the event has occurred. The right of sale inherent in a floating charge terminates on crystallisation.        
Result
39.	In our judgment the appeal should be dismissed. In those circumstances it is unnecessary to consider the point raised by the respondent’s notice that the judge should have held that the transactions were shams.
Order: appeal dismissed with costs; 1st and 2nd defendants' costs not to be enforced for period in which they were in receipt of Community Legal Services Funds; 1st and 2nd defendants costs to be subject to detailed assessment; application to House of Lords refused.
(Order does not form part of the approved judgment)