The Supreme Court delivered a significant ruling reaffirming the broad interpretation of "transaction" under Section 423 of the Insolvency Act 1986.
Background:
Invest Bank PSC, established in the United Arab Emirates (UAE), obtained a judgement in Abu Dhabi against the appellants’ father, Mr. El-Husseini, for approximately £20m. The Bank had identified various assets in the UK against which it sought to enforce this judgement. The Bank argued that Mr. El-Husseini had arranged for those assets to be transferred to others in order to put them beyond the reach of the Bank or to reduce the value of the companies that owned them in contravention of Section 423 of the Insolvency Act 1986.
For instance, a valuable house in central London (estimated value of £4.5m) owned by a company called Marquee which was, in turn, owned by Mr. El-Husseini, transferred the property to one of his sons without any consideration in return.
The Bank issued these proceedings on 9 July 2021 and obtained a default judgement. Mr. El-Husseini and his sons applied to set aside the service of the Bank’s claim. The High Court ruled that the fact that the relevant assets were not owned by Mr. El-Husseini himself, but instead by a company owned or controlled by him did not, in law, prevent the transfer from falling within the scope of Section 423. The Court of Appeal (CoA) allowed the Bank’s appeal and dismissed the cross-appeal against the ruling that Section 423 could apply where Mr. El-Husseini had procured Marquee to transfer the property for no consideration. The family appealed.
Decision:
The Supreme Court unanimously dismissed the appeal, upholding the CoA’s judgement. The Supreme Court found that “both the language and purpose of Section 423 pointed clearly to the conclusion that a “transaction” within Section 423(1) is not confined to a dealing with an asset owned by the debtor but extends to the type of transaction in this case.” The Court noted that restricting Section 423 to transactions directly involving property owned by the debtor would not only require an implied restriction but would also seriously undermine the purpose of the section itself.
A debtor who causes a solvent company that they own to transfer assets to another person for no or insufficient consideration will be subject to liability under Section 423(1) of the Insolvency Act 1986. The Court rejected the argument that Section 423(1) required for a transaction to involve a disposal of property belonging to the debtor.
Implications:
This judgement is very important as it stops debtors from attempting to move assets beyond their creditors’ reach by making them “judgement-proof”. The decision is clear that Section 423 can extend to those assets which are not beneficially owned by the debtors themselves when the debtors transfer valuable assets at an undervalue or against no consideration. A transaction can still fall within Section 423, even if the property transferred was not owned by the debtor, as it effectively reduces the value of the debtor’s assets.
This decision expands the tools available to challenge suspect transactions in insolvency cases and closes the loophole of exploiting corporate structures to defraud creditors.