Insights

Chris Ward

Published 8 November 2023
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Transactions Defrauding Creditors

Court of Appeal clarifies section 423 of the Insolvency Act 1986

Early this year, the Court of Appeal judgment in the case of Invest Bank PSC v El-Husseini [2023] provided important clarification of section 423 of the Insolvency Act 1986 and the position of defrauding creditors and trying to challenge transactions made by a debtor at an undervalue in an attempt to avoid paying debts.

What is Section 423 of the Insolvency Act 1986?

Section 423 refers to “transactions defrauding creditors” and covers claims under Part XVI Provisions against debt-avoidance. This relates to the actions of debtors through companies they control and to transactions concerning the disposal of assets of which the debtor is not the beneficial owner.

Pursuant to these provisions, both an office holder and a victim of such a transaction may apply to the court for an order setting aside the transaction and restoring the position to what it would have been if the transaction had not been entered into. Section 423 applies to any transaction made by a debtor at an undervalue and for the purpose of putting assets beyond the reach of his creditor, or otherwise prejudicing the interests of that creditor. It also applies regardless of whether the debtor (person, or company), is or later becomes insolvent.

Invest Bank PSC v El-Husseini [2023] – a summary of the facts

The claimant (a bank) obtained judgment against Mr El-Husseini for approximately £20 million, which the bank was attempting to enforce against assets in England. The assets were two properties, shares in a UK-registered limited company and the proceeds of sale of a third property.

All of the assets had been owned by a company that was wholly owned and controlled by Mr El- Husseini but had been transferred by the company to members of his family.

The issues

The bank sought declarations that the defendants held the beneficial interest in the assets, or, in the alternative, the bank sought relief under section 423 of the Insolvency Act 1986.

Therefore, there were two main issues. Firstly, whether it is possible for a debtor to enter into a transaction with another person within the meaning of section 423 if his acts are actions of a company.

Secondly, whether a transaction can be entered into within the meaning of section 423 where the assets involved in the transaction are not beneficially owned by the debtor.

The defendants argued that section 423 only applied to assets owned by the debtor and not to those owned by his company.

The Court of Appeal decision

The Court of Appeal held that a transaction could be entered into within the meaning of section 423 even if the assets are not owned by the debtor personally.  The court found 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 Court of Appeal also found that the bank could rely on section 423 even though the debtor had not acted separately and in a personal capacity but as the instrument on behalf of the company.

The Court was at pains to point out 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. To conclude otherwise would frustrate the protection against fraud that section 423 was designed to create.

Comment

This decision makes clear that the court has significant powers to prevent defrauding creditors and a debtor cannot use the shield of a company to avoid their creditors.

If you believe you may be affected by this decision or would like to discuss an Insolvency issue, please get in touch.

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