Court Of Appeal Applies Rigorous Approach To Assessing Purpose Element Of Claims To Set Aside Transactions Defrauding Creditors

Despite evidence that a defendant knew he was facing potential proceedings which could bankrupt him, at the time he transferred assets to his son, the Court of Appeal held that this was not sufficient to find that the transfer was made for the purpose of defrauding creditors. Consequently, the transfer could not be unwound under s423 Insolvency Act 1996: JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov [2018] EWCA Civ 1176.

This decision reconfirms previous authority as to the court's approach where a defendant to a section 423 claim had more than one purpose when entering into the relevant transaction. The victim need only show that the purpose of defrauding creditors was a purpose, not the only purpose or even the dominant purpose.

However, victims may face difficulties arising from the court's rigorous approach to distinguishing a purpose from a consequence. Even where the consequence was known or foreseen, a victim must show that the defendant positively intended to bring about that consequence when entering into the transaction. In other words, the victim must prove the subjective intention of the defendant, which may involve substantial disclosure, detailed evidence and forensic investigation.

Where the defendant has entered into an insolvency process following the transaction, victims may wish to consider other potential routes to a remedy, including via an insolvency officeholder's claim in respect of a transaction at an undervalue or a preference. The statutory regime for both of these causes of action includes evidential presumptions which assist in satisfying the burden of proving the defendant's state of mind.

Andrew Cooke, a senior associate in our contentious restructuring, turnaround and insolvency team, considers the decision below.

Background

JSC BTA Bank, a Kazakh bank, was controlled by Mukhtar Ablyazov until his removal from office in 2009 following alleged embezzlement of over $5 billion. He subsequently moved to the UK, where courts in London have handed down almost 50 decisions in long-running proceedings between the Bank and Mr Ablyazov. The Bank secured judgment against Mr Ablyazov and took enforcement action to recover part of the judgment debt.

In connection with enforcement, the Bank identified transactions by Mr Ablyazov that might potentially be set aside. In February 2009, Mr Ablyazov had transferred £1.1 million to his son, Madiyar Ablyazov, who was resident in the UK on a student visa. Madiyar invested £1...