Court of Appeal broadens the scope of Section 423 of the Insolvency Act 1986

S.423 IA 86 is entitled “transactions defrauding creditors”, though that title is perhaps a little misleading as there is no requirement of fraud. S.423 enables a transaction to be set aside if: (1) it was entered into at an undervalue (within the meaning of s.339 IA 86); and (2) for the purpose of putting assets beyond the reach of a creditor, so as to frustrate an actual or potential claim that the creditor has against the person who entered into the transaction.

The Court of Appeal in Invest Bank PSC v El-Husseini noted that although s.423 is a provision of the IA 86, there is no requirement of insolvency in order to pursue a claim under this section. Instead a claim can be pursued by any victim of a transaction that falls within s.423. The court made specific reference to the unfortunate reality of life being that even very wealthy debtors are sometimes unwilling, rather than unable, to pay their debts. The court went on to say, on this topic, that such debtors may well make strenuous efforts to use various instruments, including a limited company, for the purpose of putting assets beyond the reach of a person who is making, or may make, a claim against them.

A claim under s.423 is also open to insolvency office-holders, either in bankruptcy or corporate insolvency.

The facts of Invest Bank PSC ~v~ El-Husseini

The claimant UAE bank had obtained Abu Dhabi judgments against the first defendant and sought to enforce those against him in the UK. The bank claimed under s.423 that the first defendant was the beneficial owner of various assets he had transferred to his sons (the second to fifth defendants), by a company wholly owned and controlled by him. It was the bank’s case that the first defendant had entered into those transactions in order to put assets beyond its reach, so they brought a claim under s.423.

The first aspect of the appeal addressed the finding by the High Court, at first instance, on the following key facts: The transfer to a third party at an undervalue of an asset owned by a company, where the company was owned and controlled by a debtor and where the transfer is caused by the debtor; the question for the court was whether s.423 was engaged, as the bank claimed. The High Court determined that s.423 was not applicable unless the debtor acted in a personal capacity and not only as the instrument by which the company acted. The bank appealed this decision.

The second aspect to the appeal was brought by some of the defendants and raised the question of whether a “transaction” can be entered into within the meaning of s.423 if the assets in question are not beneficially owned by the debtor. The High Court held that it could. The defendants appealed.

The decision of the Court of Appeal

The court considered whether a director/shareholder could enter into a transaction within the meaning of s.423 if their acts are acts of a company. The claimant argued that, in an appropriate case, s.423 should be interpreted to include a person who causes a company (which he controls) to enter into such a transaction with another person. The court agreed.

It held that it was possible for a debtor to enter into a transaction within the meaning of s.423, even if his acts were to be regarded in law as the acts of a company. The court held that a director may therefore be personally liable for their actions under s.423, notwithstanding the separate legal personality of the company from its directors/shareholders. It is clear from the court’s decision that the key consideration will be exactly what role the director/shareholder played in a transaction.

The second key point arising from this case concerns the definition of “transaction”. The key issue of principle for the court was whether, on the proper interpretation of s.423, there can be a “transaction” even though the asset which is alleged to have been disposed of at an undervalue was not beneficially owned by the debtor.

The defendants’ case was that a person could not enter into a transaction within the meaning of s.423 unless the subject matter of the transaction was the transfer of assets beneficially owned by that person.

The court held that the defendants’ interpretation of s.423 was wrong, as it required reading the word “property” into s.423. The word “transaction” was defined broadly to include a gift, agreement or arrangement.

The court found that this broader interpretation of “a person enters into such a transaction with another person” would better serve the purpose of s.423, otherwise that provision could easily be frustrated through the use of a limited company to achieve the debtor’s purpose of prejudicing the interests of his creditors.

As a result the court adopted a wide interpretation of the meaning of “transaction”; it rejected an argument that a person cannot enter into a transaction unless it involves assets which are beneficially owned by that person.

However, as this appeal was only a decision from an interim application, the court stressed that it was allowing the bank’s appeal on a narrow issue of law and in effect saying that the High Court was wrong to prevent the bank from pursuing its claim under s.423. The finding of the Court of Appeal was that those acts of the First Defendant were capable of falling within the terms of s.423, but the court made it clear that the question of whether those acts of a debtor did fall within s.423 would have to be established at trial after considering the whole of the evidence.

Conclusion

This is a helpful decision for those looking to pursue claims under s.423. This does, though, seem to be a decision limited to transactions at an undervalue within the meaning of s.423 alone, as opposed to having a wider impact on such transactions caught by s.238 IA 86 (transactions at an undervalue) or s.239 IA 86 (preferences). The court identified a number of important differences between the structure of ss.238 and 239 on the one hand and s.423 on the other, not least that the application of s.423 is not confined to an insolvency situation.

The broader interpretation of s.423 is likely to be the subject of further argument and judicial consideration in due course, when the courts come to consider transactions at an undervalue. For now the decision in Invest Bank ~v~ El-Husseini is welcome news for claimants affected by transactions defrauding creditors.