Transactions Defrauding Creditors: Court Of Appeal Favours Wide Interpretation Of S.423 Insolvency Act 1986

• Published date: 19 July 2023
• Law Firm: Herbert Smith Freehills
• Author: Mr Andrew Cooke and Matthew Leake

The English Court of Appeal has clarified the interpretation of two aspects of s.423 of the Insolvency Act 1986, the legislation which provides a mechanism for the avoidance of transactions which have been made for the purpose of defrauding creditors:Invest Bank PSC v Ahmad Mohammad El-Husseini [2023] EWCA Civ 555.

The court held that, for the purposes of s.423, it is possible for a debtor to enter into a transaction with a third party, even if in law their acts are regarded as those of a company which they control. Otherwise, debtors would be able to avoid the "clawback" provisions of s.423 simply by relying on a limited company.

The court also found that a "transaction" can be entered into for the purposes of s.423 where the assets transferred are not beneficially owned by the debtor. Section 423 is to be interpreted purposively. A narrow interpretation would defeat the purpose of the provision, which is to prevent transactions designed to prejudice the interests of creditors.

Indeed, the court noted that "transaction" is defined to include an "agreement" or "arrangement", both of which can be interpreted widely. So in many circumstances there may not need to be a transfer of assets at all, let alone of assets beneficially owned by the debtor, for the protection offered by s.423 to come into effect.

Background

Invest Bank PLC (the "Bank"), a public shareholding company established in the United Arab Emirates, asserts that it has judgment debts against the first defendant ("Ahmad") from proceedings brought in Abu Dhabi. The claims in those proceedings were brought on the basis of personal guarantees allegedly given by Ahmad in connection with two credit facilities. The judgment debts are said to amount to c.AED 96 million (c.'20 million).

The Bank brought proceedings in the English High...