Supreme Court
Action No. 302 of 1999
17th March, 2000
Shanks, J.

Mr. Denys Barrow, S.C. for the Plaintiff
Mr. Jeremy Courtenay for the Defendant

Law of Property Act - Defendants transferring land fraudulently to avoid claim of creditors - Transfer set aside and rectification of land Register Ordered.

J U D G M E N T

1. This is an application by originating summons under s. 149 of the Law of Property Act to avoid a transfer of 110 acres of land known as Parcel 440 in Block 1 of the Santa Elena Registration Section from Corozal Free Zone Development Ltd. (CFZDL) to Best Lines Ltd. The Application is brought in effect to enforce a judgment debt for US$345,OOO with interest at 60% arising from a loan made by the Plaintiff in June 1994. The judgment was given by the Court of Appeal on 28 June 1999 after a writ was issued on 17 July 1998 and an application for summary judgment made on 15 September 1998. Since it seemed to me that the affidavit evidence produced by the parties disclosed a prima facie case of a transfer with intent to defraud creditors, it seemed right that I should hear the summons on live evidence. I have therefore heard evidence from Michael Arnold, Curtis Arnold and Ernest Gallego who were called by the Defendants.

2. S. 149 provides as follows:

The law on s.149 has been helpfully summarized in a judgment of Meerabux J. to which Mr. Denys Barrow referred me in the case of Gardiner v Hoare (279/96). The judge referred in particular to a passage in Halsbury's Law 4th Ed. Vol. 18 at para. 365 which states:

"In an action to set aside a conveyance … the onus of proof of intent to defraud rests upon the Plaintiff where the conveyance is for valuable consideration. Where, however, the conveyance is voluntary, and even perhaps where it is for valuable consideration short of full consideration, then on proof that at the time of its execution …. the natural consequence of the conveyance was to defraud creditors, or that the circumstances under which the conveyance was effected bore one of the indications or badges of fraud subsequently mentioned, the onus of disproving an intent to defraud passes to the defendant."

The badges of fraud referred to include that the conveyance has been made after a writ has been issued against the transferor and that the conveyance includes a false recital (see para. 366.)

3. The transfer document is question here is dated 27 November 1998. It records the consideration for the transfer as having been $550,000 "receipt of which is acknowledged". In fact the only payment or other consideration alleged to have been actually received so far by CFZDL was $55,000, which was the proceeds of a cheque dated 20 November 1998 made payable to Mr. Michael Arnold, the major shareholder and controlling mind of CFZDL. Mr. Arnold stated in evidence that the cheque was cashed by him and that the cash was used to pay company debts and the balance was paid into the Company's account. However, although it was obviously of central importance and they were specifically requested by the Plaintiff to disclose records evidencing such payments, nothing was produced to substantiate this evidence. I am not satisfied on the balance of probabilities that the $55,000 ever went to the company at all. On any basis, therefore, the consideration for the transfer was not full consideration. Further, it was clear from the evidence that the natural consequence of the transfer was to defraud creditors, in the sense that the Plaintiff was prevented from having recourse to the only substantial piece of unencumbered property which CFZDL then held at a time when Mr. Arnold accepted the CFZDL was unable to pay the Plaintiff but when he wanted to be paid in cash. There were also badges of fraud in that the transfer was made after the issue of a writ and there was a false recital to the effect that $550,000 had actually been paid. It seems to me therefore that the onus lay on CFZDL to show that they had no intent to defraud creditors when making the transfer. Their explanation for the transaction was as follows.

4. The majority shareholder and directing mind of CFZDL was, as I have said, Michael Arnold. He had been trying, unsuccessfully, to raise money to develop the Company's land with a view to selling off plots and paying off creditors and making a profit. He knew that the Plaintiff was owed $345,000 US and interest and the Plaintiff was asking him for cash to allow him to satisfy his own Mexican bankers as soon as possible. His brother, Curtis Arnold, was the majority shareholder of Best Lines Ltd. and another company, which was a Shell distributor, Free Zone Fuel Distribution Ltd. Curtis gave evidence that he was approached by Michael in November 1997 to see if he was interested in acquiring some land. He was busy and asked Mr. Gallego, who was a director of Best Lines Ltd. and CFZDL and accountant to both companies, to negotiate about this offer with his brother. Mr. Gallego and Michael Arnold both gave evidence that the agreement that resulted from these negotiations was structured by Michael Arnold. That agreement, they said, was as exhibited as "EG 1" to Mr. Gallego's affidavit. It is dated 2 December 1997, though it was accepted that it was not entered into on that date and Mr. Barrow for the Plaintiff invited me to infer that it was fabricated after the fact.

5. The agreement relied on recites that CFZDL has developer status in the Free Zone, that Best Lines is desirous of acquiring the land and developing it in partnership with CFZDL and that the parties have agreed a price for sale of the land of $550,000. The agreement provides for payment of a deposit of $55,000 within 10 months after the issuance of an unencumbered title to the land in CFZDL's name and that the balance of the purchase price ($495,000) should be paid by Best Lines paying for developing and marketing the land in plots. By clause 3 Best Lines were enabled to take possession at any time after execution. Clause 8 provided that, upon the issue of a title to Best Lines, CFZDL would develop and market the land and clause 9 provided that the cost of those activities would be borne by Best Lines. Net profits from sales of lots were to be divided between CFZDL and Best Lines in the ration 15/85. The agreement is therefore an odd one on its face. There is no provision for completion to take place at any particular time. There is no obligation on Best Lines to carry out any development and the mechanism by which their payment of the costs is to be worked out is entirely unclear and the onus to develop lies on CFZDL. Meanwhile the land could be transferred to Best Lines outright against a payment of just $55,000 by way of deposit. Mr. Michael Arnold said that he understood the agreement to be an "option to purchase" the land. Although the form of the agreement was in no way consistent with this categorization, it may be that in reality it was intended to be something like an option.

6. No convincing explanation was given for why the agreement should be structured in the way it was by Mr. Michael Arnold. In particular it was entirely unclear why, if he wanted to raise money from his brother to develop this land at a profit, he could not simply have borrowed the money against a mortgage, which would have saved a substantial amount of stamp duty. He said (and Curtis Arnold confirmed) that his brother would want control of the property and that he would not understand the concept of a mortgage; but a mortgage would equally give control and it was no doubt possible to explain (if necessary through Mr. Gallego) what a mortgage was. Also, it was very hard to see the commercial sense from CFZDL's point of view of entering into a contract with Best Lines. Best Lines was accepted as being a shell company through which Mr. Curtis Arnold wished to deal so as to keep the fuel distribution company free of entanglements outside the fuel business. Best Lines had no assets of its own and apparently borrowed the $55,000 paid to Michael Arnold from the fuel distribution company. Its covenant to pay the balance of the price was therefore of little value on the face of it and, if it failed to pay for any reason, Mr. Michael Arnold would have been left having to direct his company, CFZDL, to sue Curtis' company, Best Lines, but there was nothing that he could have done to recover the land.

7. The reality as it turned out was that although the land was transferred on 27 November, 1998 and this Application was not started until 15 July 1999, nothing whatever had been done about developing the land and no further money had changed hands at that stage. This was explained on the basis of doubt about the Free Zone's future but such doubt must have been in existence at the time the land was transferred. It was also a mystery why it was thought a good idea for the land to be held by a company that did not have developer status when the company that was to do the development did have such status. And, finally, there was no good reason under the contract for the transfer to happen when it did since, as I have said, the contract contained no provision for completion. In fact it happened after proceedings had been issued by the Plaintiff at a time when the application for summary judgment had been heard by the Judge but before a decision had been given him.

8. Taking account of all these considerations, it is clear to me that CFZDL has not discharged the burden of showing that the transfer was not intended to defraud creditors. I should say, in case my reasoning has gone wrong at some stage, that although I have adopted the rather schematic approach to the question indicated in the paragraph of Halsbury's Laws which I have mentioned, I am quite satisfied on all the material I have seen that CFZDL had the requisite intent, wherever the burden of proof lies. The fact is that Mr. Michael Arnold, knowing of the Plaintiff's very substantial debt and that he wished to be repaid in cash as soon as possible, arranged for the only substantial unencumbered asset of the company to be transferred absolutely to his brother's shell company in exchange for a purported payment of 10% of its value and some vague undertakings to invest in developing the asset at some future date from which CFZDL would receive 15% of the profits, if any. This transaction cannot be allowed to stand.

9. Mr. Courtenay, who appeared for both CFZDL and Best Lines, did not put forward any arguments on behalf of Best Lines in reliance on s. 149(3) and it seems to me that he was right not to do so. Given the close connection between CFZDL and Best Lines and the intimate knowledge of Mr. Gallego as to the financial position of CFZDL and the existence of the debt to the Plaintiff and the fact that the structure of the entire transaction was dictated by Mr. Michael Arnold, I do not see how Best Lines could possibly satisfy the requirements of that subsection.

10. I will therefore declare that the transfer of Parcel 440 was made with intent to defraud creditors and order that it should be set aside and that the Land Register be rectified accordingly. Mr. Barrow also seeks the costs of the application on a "solicitor and own client" basis on the grounds that this application was based on fraud. I would be inclined to accede to that application but will hear Mr. Courtenay if he wishes to make submissions on it.