Court of Appeal offers important clarification of two issues relating to the scope of section 423 of the Insolvency Act 1986 (Investment Bank PSC v El-Husseini and others)

Dispute Resolution analysis: The Court of Appeal has conducted a helpful analysis of the scope of section 423 of the Insolvency Act 1986 in relation to the actions of debtors through companies they control and in relation to transactions concerning the disposal of assets which are not beneficially owned by the debtor.

Investment Bank PSC v El-Husseini and others [2023] EWCA Civ 555

What are the practical implications of this case?

This is an important appellate decision in relation to claims under section 423 of the Insolvency Act 1986, the provision concerning claims alleging a transaction defrauding creditors. It deals with two principal questions. First, 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 (in law) actions of a company. Second, 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 use of corporate vehicles in the context of civil fraud claims are by no means uncommon. As are disputes as to the beneficial ownership of assets in such claims. This is likely, therefore, to be an important point of reference for many claims alleging that a debtor has entered into a transaction defrauding creditors.

What was the background?

The appeal concerns claims brought by a public shareholding bank established in Sharjah, UAE. The claims were brought against a Lebanese businessman, (“Ahmad”) and Ahmad’s sons. The bank sued on various judgments obtained in the UAE and under various alleged guarantees. These were the primary claims. The bank also brought secondary claims relating to various property assets. The secondary claims alleged that Ahmad took various steps in relation to those assets in 2017 which either disguised his beneficial ownership of them or caused them to be transferred within his family with a view to putting them beyond the reach of, or otherwise prejudicing the interests of, his creditors. The bank sought declarations that Ahmad holds the beneficial interest in those assets or, in the alternative, relief under section 423 of the Insolvency Act 1986. Mr Justice Andrew Baker was faced (at an early stage in the proceedings) with (1) an application by the bank to amend its Particulars of Claim to add in certain claims; (2) an application by Ahmad and two of his sons to set aside permission to serve the claim on them outside the jurisdiction; and (3) an application by another son challenging jurisdiction in respect of a part of the claims brought against him and for reverse summary judgment of those claims. As part of the task of dealing with those applications, the Judge concluded (1) in respect of a transfer to a third party of an asset owned by a company which is owned and controlled by a debtor, at an undervalue, where the transfer is caused by the debtor (acting with the relevant statutory purpose of prejudicing his creditors), section 423 is not applicable unless the debtor acted separately in a personal capacity and not only as the instrument by which the company acted; and (2) a transaction can be entered into within the meaning of section 423 even where the assets are not beneficially owned by the debtor.

What did the court decide?

On the first principal question, the Court of Appeal concluded that the Judge had erred. While the separate legal personality of a company must be respected and whilst the shareholders have no ownership of the company’s assets, it does not follow that the director has not done anything at all. Factually, the director plainly has. The issue is whether those acts have any legal significance. They sometimes will due to a personal legal wrong by a director. In other circumstances, the significance may be that some other legal consequence is to be attached to the performing of those acts. Given the broad wording of section 423, the debtor’s acts can fall within the terms of section 423 and so the bank’s appeal was allowed. Lord Justice Singh emphasised that, in allowing the appeal, the Court of Appeal was deciding the point on a narrow legal issue, concluding that the Judge was wrong to prevent the bank from pursuing its claim as pleaded on the issue. It was not concluding necessarily in this case that the acts triggered liability under section 423. Those issues would need to be established at trial. On the second question, the Court of Appeal rejected the assertion that a person cannot be said to have entered into a transaction unless the subject matter of the transaction is the transfer of assets which are beneficially owned by that person. The broad scope of section 423 was identified by the Court of Appeal and a textual analysis of the provision did not support such a contention. The bank’s appeal was allowed and the Defendants’ appeal was dismissed.

Case details

• Court: Court of Appeal, Civil Division
• Judge: Lord Justice Singh, Lord Justice Males and Lord Justice Popplewell
• Date of judgment: 19 May 2023

Article by Phillip Patterson – first published by LexisNexis