Lloyd's Maritime and Commercial Law Quarterly
Sham transactions
John Vella *
This article deals with sham transactions. It starts off by establishing some basic groundwork on shams, before engaging more specifically with two questions that have recently come to the fore both in cases and in academic debate. The first concerns the relevance of an intention to enforce and of actual enforcement in the search for the true intention of the parties. The second considers whether a variant notion of sham, often called a pretence, is justified or even necessary.
I. INTRODUCTION
Consider the following avoidance-driven transactions:
- A wishes to borrow money from B using his car as security. This transaction is prohibited by law. B thus agrees to purchase A’s car for the amount A wishes to borrow and to let it back to A by means of a hire-purchase agreement. A will pay rent back to B equivalent to the purchase price and interest. Once all the rent payments are made, A may exercise an option to acquire the car for a nominal amount.
- A, a company director, acquires inside information which will lead to a dramatic drop in the value of the company’s shares. He wishes to sell the shares he holds in the company but is prohibited from doing so by law. He thus transfers them by means of a deed of gift to his partner, B, who sells them to an outsider, C.
Are these transactions caught by the relevant laws? The answer depends, in part, on how courts will characterize the facts. This entails determining how the facts are viewed in the eyes of the law, in other words, determining the label they are given at law. The question of characterization is usually straightforward, as courts generally take the characterization given to the transaction by the parties and which appears on the face of