Transactions Defrauding Creditors: A Broad Approach
Is it worth the risk of attempting to use corporate structures for the purposes of moving assets beyond the creditors’ reach? An important ruling1 emphasises the reality that attempts to find inventive ways to place assets beyond reach will probably fall foul of the law.
Such transactions can be ‘undone’, such that the original position is restored and creditors can then pursue the assets for satisfaction of outstanding debts. Setting up companies to defraud creditors or deliberately move assets out of reach is not permitted.
Section 423 of the Insolvency Act 1986 specifically allows an application for an order to be made by a "victim of the transaction". The Court of Appeal has provided important guidance on the meaning of a ‘transaction’ for these purposes.
What’s the background?
A bank has alleged that the defendants took steps in relation to various assets which included properties, the proceeds of sale of another property, company shares and millions of US dollars.
In 2017, the main defendant (D) allegedly disguised his beneficial ownership or had assets transferred within his family to put them beyond reach of his creditors - including by means of a company that he wholly or partly owned/controlled (the company has since dissolved).
At issue was whether such acts by a debtor can fall within s423. The appeal judges allowed the Bank’s appeal on what amounted to a narrow issue of law, ruling that they were capable of doing so.
D argued that it cannot be said that a person "enters into a transaction" within the meaning of s423 unless the subject matter of the transaction is the transfer of assets or property which are beneficially owned by that person.
That, said Lord Justice Singh, was wrong. For instance, s423 uses very broad language and does not appear to require the transfer of any assets, let alone assets of which the debtor is the beneficial owner. ‘Transaction’ is also defined broadly, non-exhaustively and includes a gift, agreement or arrangement.
Nor is there any need for there to be an insolvency. Singh LJ said: “The unfortunate reality of life is that even very wealthy debtors are sometimes unwilling, rather than unable, to pay their debts. They may well 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 interests of such a person.”
In this particular case, the steps taken by D were capable in law of being regarded as being such an arrangement for the purposes of s423. The trial on the substantive claim – whether any of the specific transfers amounted to a transaction to defeat a creditors’ claim - has yet to be heard.
What does this mean?
The ruling sends a clear message to anyone looking for legitimate ways by which to move assets beyond reach, whether via a corporate structure, gift, transfer or other type of arrangement. Creditors can be reassured by this decision.
Before taking any steps to protect your assets or to pursue a debtor, it is always prudent to take robust advice from commercial solicitors.
1 Invest Bank PSC v El-Husseini and others (Invest Bank) [2023] EWCA Civ 555
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