Judgment creditors should be aware that the English Court of Appeal has given guidance on the proper construction of s423 Insolvency Act 1986 (transactions defrauding creditors)1. This guidance will be relevant where it is alleged that a debtor has transferred assets through corporate structures in order to defeat the claims of creditors, including judgment creditors.
In essence, the Court may grant relief in respect of a transaction entered into at an undervalue by a debtor for the purpose of either putting assets beyond the reach of its creditors or otherwise prejudicing the interests of creditors. Applications for relief can be made not only by insolvency officeholders (liquidators and administrators of a corporate debtor and bankruptcy trustees of an individual debtor) but also by victims of the transaction (such as judgment creditors). It applies generally, and not only in the context of formal insolvency proceedings. Any relief granted will be with a view to restoring the position prior to the transaction.
In this case, the Court of Appeal was concerned with allegations that an individual debtor had taken steps to disguise his (beneficial) ownership of assets (including real estate, shares and cash) or to cause 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.
Crucially, certain of these assets were not held and transferred by the debtor but by a company said to have been wholly owned or controlled by him. This raised the question of whether the transfer of such an asset beneficially owned by the company could constitute a transaction entered into by the debtor (in respect of which the Court could grant relief, if the remaining statutory elements were satisfied).
Court of Appeal's decision
As preliminary points of law (no trial having yet taken place), the Court of Appeal held that for the purposes of s423 Insolvency Act 19862:
- A debtor could be found to have entered into a transaction even though the asset which was alleged to have been disposed of (at an undervalue) was not beneficially owned by the debtor.
- If a debtor caused a company (which was owned and controlled by the debtor) to transfer an asset owned by the company, such steps by the debtor were capable of constituting a transaction entered into by the debtor, even though the debtor was no more than the instrument by which the company acted.
- If a debtor had done more than cause the company to transfer an asset (such as the debtor being party to an agreed wider plan pursuant to which an asset would come to be transferred by the company), whether the debtor had entered into a transaction (by virtue of this agreed plan) would depend on the facts of the case.
The question of whether any specific transfer will constitute a transaction entered into by the debtor will turn on the facts. However, the Court of Appeal's decision does support the protective purpose of s423 Insolvency Act 1986, which a debtor might otherwise seek to sidestep by simply using companies which it owns or controls to transfer its assets away.
"(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if (a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration; (b) …; or (c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself.
(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for (a) restoring the position to what it would have been if the transaction had not been entered into, and (b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose (a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or (b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.