Section 423 of the Insolvency Act 1986 (IA1986), titled "Transactions Defrauding Creditors" is a critical mechanism which, when deployed, can protect creditors from fraudulent transactions.
The statutory purpose of this section is to address transactions entered into by a debtor with the intent of placing assets beyond the reach of individuals who have, or may have, claims made against them. Unlike sections 238 and 339 IA1986, which apply in respect of transactions at undervalue in insolvency situations, section 423 applies more broadly to any circumstances where debtors transfer or conceal assets in an attempt to evade their obligations. section 423 is a versatile and powerful tool, capable of being invoked even where the debtor is not formally insolvent.
The Court of Appeal decision in Invest Bank PSC v El-Husseini & Ors [2023] EWCA Civ 555 has clarified the (broad) scope of potential transactions that can be challenged under section 423.
Invest Bank (the Bank) sought to enforce a judgment from the UAE against Mr Ahmad El-Husseini (Mr El-Husseini), alleging that he had transferred assets (including two London properties, proceeds of sale of a third London property and shares in a UK company) to conceal his beneficial interest and prevent the Bank from enforcing its claims.
The key issue was whether section 423 applies to transactions involving assets held not directly by the debtor but through a company controlled by the debtor. Mr El-Husseini asserted that as he was not one of the legal parties to the transaction in question - it could not be a ‘transaction’ for the purposes of section 423(1)(c). This interpretation was approved at first instance by Andrew Baker J.
However, it was overturned on appeal. Singh LJ concluded that although the separate legal personality of a company must be respected, it does not follow that a director’s factual acts have no legal significance. Those acts must be considered in the relevant context; which here was whether a debtor’s acts, as director of a company, can fall within the scope of section 423. In Singh LJ’s opinion they could for two main reasons: (i) the language used in the statute is very broad; and (ii) such interpretation would better serve the purpose of the legislation, “which could otherwise be easily frustrated through the use of a limited company to achieve the debtor’s purpose of prejudicing the interests of his creditors”.
The Court of Appeal’s decision demonstrates the broad reach of section 423 and, at least in this instance, the Court’s willingness to adopt the approach best suited to serving the purpose of the legislation - namely to protect the interests of creditors from fraudulent acts.
This decision should embolden insolvency practitioners and creditors to consider a broader range of transactions when considering potential claims under section 423. However, the final word on Invest Bank is yet to be given. Mr El-Husseini challenged the Court of Appeal’s decision and such challenge was heard on 7-8 May 2024. The decision of the Supreme Court is now duly awaited.
Henderson & Jones is a litigation investment company that purchases and funds litigation and arbitration claims from insolvent companies and individuals. Henderson & Jones is well placed to assist insolvency practitioners, creditors and claimants pursue section 423 claims and can offer advice and assistance with any queries regarding the assignment of litigation claims.
