Court of Appeal clarifies interpretation of s423 of Insolvency Act 1986

The Court of Appeal has recently clarified interpretation of s423 of the Insolvency Act 1986. Julie Hunter, Partner in the commercial and dispute resolution team at Stephensons, looks at the recent case of Invest Bank PSC v El-Husseini [2023].

Introduction

In a Judgment handed down in May 2023, the Court of Appeal said that where a debtor, acting in his capacity as a director of a company wholly owned by him, transfers assets owned by his company in an attempt to put those assets beyond the reach of his creditors, those transfers could be challenged under Section 423 of the Insolvency Act 1986 (“the Act”) as transactions at undervalue even though the debtor is not personally a party to the transactions and the assets were not legally owned by him.

The Court also held that to interpret s423 of the Act as applying only to assets owned by the debtor, and not those owned by his company, would seriously undermine the purpose of the section.

What is Section 423 of the Insolvency Act 1986?

Despite being contained within the Insolvency Act 1986, the provisions of s423 apply regardless of whether the person, or company, is or later becomes insolvent. It applies to any transaction made by a debtor at undervalue and for the purpose of putting assets beyond the reach of his creditor, or otherwise prejudicing the interests of that creditor.

S423 of the Insolvency Act 1986 relates to transactions entered into at an undervalue and states that a person enters into such a transaction with another person if:

He makes a gift to the other person, or otherwise enters into a transaction with the other on terms that provide for him to receive no consideration.
He enters into a transaction with the other in consideration of marriage.
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.

By s423 (2) of the Act, where the court is satisfied that a person has entered into such a transaction for the purpose of putting assets beyond the reach of a creditor, or of otherwise prejudicing the interests of such a person, the court may make orders providing for the reversal of the transaction, by restoring the position to what it would have been had the transaction not been made, and protecting the interests of victims of the transaction.

Invest Bank PSC v El-Husseini [2023]

The facts

In Invest Bank PSC v El-Husseini [2023] EWCA Civ 555, the claimant, a bank operating in the UAE and Lebanon, had obtained a Judgment against Mr El-Husseini granted by a court in Abu Dhabi, for approximately £20 million, which it was attempting to enforce against the assets in England. The assets were two valuable properties in Hyde Park Garden Mews, London: the shares in a UK registered limited company and the proceeds of sale of a third property in Hyde Park Square, London.

All of these assets had been owned by a company which was wholly owned and controlled by Mr El- Husseini. The assets had all been transferred by the company, at the direction of Mr El-Husseini, to members of his family including his sons and former wife.

The arguments

The Bank alleged that these asset transfers were attempts by Mr El-Husseini to frustrate its efforts to enforce the Abu Dhabi judgment and made an application, under s423 Insolvency Act 1986, for a declaration that these asset transfers should be set aside because they were transactions at undervalue made for the purpose of putting the assets beyond the reach of the creditor bank, or otherwise prejudiced the interests of the creditors.

The Bank asked the court to make declarations that Mr El-Husseini still held the beneficial interest in the assets and sought relief under s423 Insolvency Act 1986. A first instance, the Commercial Court ruled on two points:

Firstly, that a transaction could be entered into within the meaning of s423 if the assets are not owned by the debtor personally. The court’s decision followed the ruling in Akhmedova v Akhmedov [2021] EWHC 545 (Fam) which said the concept of a ‘transaction’ was to be construed widely, and that it did not matter that the asset transfers were made by a company owned by the debtor rather than the debtor personally. The point being that to construe s423 otherwise would be to sidestep its protective purpose. The defendants appealed that point.
Secondly, that the bank could not rely on s423 because the debtor had not acted separately and in a personal capacity but rather only as the instrument by which his company acted. That denied the bank the remedy sought under s423. The bank appealed.

The defendants argued that s423 only applied to assets owned by the debtor and not to those owned by his company. They relied on a decision of the Court of Appeal in Clarkson v Clarkson [1994] BCC 921 (CA) which involved a bankrupt’s estate and provided that corporate assets belonging beneficially to a company do not belong beneficially to its shareholder and so would not fall within the scope of its shareholder’s bankruptcy.

In the ‘Invest’ case, the Court of Appeal said the ‘Clarkson’ case involved Section 339 of the Insolvency Act 1986 and turned upon the meaning of ‘property’ in bankruptcy, for the purposes of that section. The court said that was not relevant in the current case because Mr El-Husseini was not bankrupt. The distinction could be drawn because s423 applies even where there is no bankruptcy.

Instead, the Court of Appeal determined the Commercial Court Judge was right in following the decision in the ‘Akhmedova’ case; that the alternative would undermine the purpose of the section.

The defendant’s appeal was dismissed. The bank’s appeal was allowed. It advanced arguments as to the interpretation of s423 including that it is a wide-ranging statutory provision, which should be given a purposive interpretation; that its plain protective purpose is frustrated by an interpretation which countenanced sophisticated debtors disposing of assets owned by their companies without their creditors having recourse to the remedial powers of s423.

The outcome

The Court of Appeal accepted the bank’s interpretation, finding that the wording of the section was broad. The Court said that while respect must be had to the fact the company was a separate legal personality, the debtor had carried out acts the legal significance of which could be sufficient to challenge the transactions and that to conclude otherwise would be to leave a loophole in the statutory provisions intended to protect creditors against fraudulent debtors.

The bank’s appeal was allowed, enabling the bank’s claim to continue.

Summary

It is common for sophisticated debtors to put their assets in to a company, assuming that the protective corporate veil will put the assets beyond the reach of creditors, and then to cause the company to transfer away the asset to a third party, usually a close family member.

This decision will provide a mechanism enabling creditors to reverse these transactions and prevent fraudulent debtors from frustrating enforcement action by placing assets within a company and then transferring them away from the creditor’s reach.

About the author

Julie Hunter is a Partner in the commercial & dispute resolution team at Stephensons. She is highly experienced in litigation and dispute resolution matters covering all aspects of commercial litigation, including invoice and asset finance, secured finance, commercial contracts disputes and general litigation.

Find out more

Insolvency Act 1986 (Legislation)

Invest Bank PSC v El-Husseini [2023] EWCA Civ 555 (BAILII)

Akhmedova v Akhmedov [2021] EWHC 545 (Fam) (BAILII)

Clarkson v Clarkson [1994] BCC 921 (CA) (BAILII)

Images

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Publication date

5 August 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.