The Supreme Court has confirmed that remedies under s.423 of the Insolvency Act 1986 (IA 1986) allows creditors to obtain remedies if transactions entered into at an undervalue have the purpose and effect of prejudicing claims the creditors have against the debtor, even in circumstances where the debtor has not disposed of an asset in which he himself has a beneficial interest.
Background
Invest Bank PSC (the Bank) had obtained an approximately £20m judgment in Abu Dhabi against Mr Ahmad El-Husseini. The Bank had identified various assets in the UK against which it sought to enforce this judgment and argued that Mr El-Husseini had arranged for some of these assets to be transferred away, putting them out of the Bank’s reach. The Bank’s claim included several transfers of assets.
One such example was the transfer of a central London property, 9 Hyde Park Garden Mews (9 Hyde Park). This property had been owned by a company, Marquee Holdings Limited (Marquee). Mr El-Husseini owned all the shares in Marquee. The Bank's argument was that Mr El-Husseini caused Marquee to transfer 9 Hyde Park to his son, Ziad El-Husseini, for no consideration, which reduced the value of Mr El-Husseini’s shares in Marquee by £4.5m. The Bank did not allege that Ziad El-Husseini, in agreeing to receive or in receiving 9 Hyde Park, had any dishonest intent or shared his father’s alleged purpose. Nor did the Bank contend that the transaction was a sham.
Previous decisions
The High Court held that the fact that the properties were owned by a company controlled by El-Husseini (as opposed by El-Husseini personally), did not prevent the transfer from falling within the scope of s.423. However, the High Court refused to allow the Bank’s case to proceed on the basis that Mr El-Husseini had not acted in his personal capacity, but only on behalf of Marquee.
Both parties appealed the High Court’s decision. The Bank did so on the basis that the capacity in which Mr El-Husseini acted should not disapply s.423, and Mr El-Husseini on the basis that s.423 could not apply in circumstances where his father had procured Marquee to transfer the property for no consideration, rather than transferring an asset which he owned.
The Court of Appeal allowed the Bank’s appeal but dismissed the cross-appeal made by Mr El-Husseini. Mr El-Husseini appealed this point to the Supreme Court.
Supreme Court's decision
The Supreme Court dismissed the appeal. The Court found that both the language of s.423(1) and the purpose of the section point clearly to the conclusion that a “transaction” within s.423(1) is not confined to a dealing with an asset owned by the debtor, but extends to the type of transaction whereby the debtor enters into an arrangement under which a company owned by them transfers a valuable asset for no consideration or at an undervalue.
The court held that the proper approach to the construction of s.423(1) in the context of the factual background was:
- The transaction involving 9 Hyde Park fell within the terms of section 423(1), and that there was no requirement for Mr El-Husseini to dispose of property belonging to him.
- Mr El-Husseini arranged with Ziad El-Husseini that the former would procure Marquee to transfer 9 Hyde Park to the latter, who would not pay a price or provide other consideration for the transfer. Applying s.423(1)(a), Mr El-Husseini made an arrangement (“entered into a transaction”) with Ziad El-Husseini on terms that provided for Mr El Husseini to receive no consideration. If Ziad had agreed to provide some, but inadequate, consideration, s.423(1)(c) would equally have applied. In that case, Mr El-Husseini would have entered into an arrangement with Ziad for a consideration the value of which was significantly less than the value of the consideration provided by himself: the consideration provided by Mr El-Husseini was his agreement to procure the transfer to Ziad of 9 Hyde Park by Marquee, and the consideration provided by Ziad was the inadequate sum to be paid by Ziad either to Marquee or to Mr El-Husseini.
- A transfer by a solvent company owned by a debtor of a valuable asset for no or inadequate consideration necessarily results in a diminution in the value of the debtor’s shares in the company. Depending on the circumstances, the transfer may either reduce the value of the shares or destroy their value completely. Either way, it prejudices the creditor’s ability to enforce the judgment. It also removes an asset of the company that might otherwise have become available for enforcement of the judgment debt against the debtor.
Comment
The facts relevant to this decision did not include insolvency (as s.423 applies more widely in scope than within an insolvency), but nevertheless is of interest to practitioners as the Supreme Court's decision in El-Husseini makes it clear that a debtor who causes a solvent company (in which he owns shares) to transfer its assets to another person for no or insufficient consideration (thereby diminishing the value of his shares) brings the transaction into the scope of s.423.
The judgment noted that:
"even very wealthy debtors are sometimes unwilling to pay their debts… [and] may make strenuous efforts to use various instruments, including a limited company, for the purpose of putting their assets beyond the reach of a person who is making, or may make, a claim against them; or otherwise prejudicing the interest of such a person". Establishing this as a purpose to the transaction is fundamental to success in a s.423 claim.
