Sibir Energy Ltd & Ors v (1) Slocom Trading Ltd & Ors

A document is a sham only where all parties share a subjective intention that it should create rights or obligations different from those which it appears to create. A false recital or deliberate misdescription of history does not by itself make the operative agreement a sham.

Insolvency Act 1986 section 423 applies only to transactions at an undervalue. It does not invalidate a preference merely because the preference was intended to defraud creditors. In valuing an assignment, consideration may include an implied obligation by the assignee to exonerate the assignor from a corresponding liability to account for the assigned proceeds.

Tatik sold a French villa to Maritime as part of the settlement of Sibir's substantial fraud claim against Tatik's beneficial owner. Slocom, claiming as Derbent's assignee, alleged that Tatik owed a secured debt under a December 2008 loan agreement. It also alleged that Sibir and Maritime had unlawfully interfered with its contractual rights.

Roth J upheld the claims in [2012] EWHC 3464 (Ch). The defendants appealed on two grounds. They contended that the December loan agreement was a sham and that Derbent's assignment to Slocom was a transaction defrauding creditors under section 423 of the Insolvency Act 1986. The second ground depended upon whether Slocom had provided full value by assuming Derbent's liability to account for the loan proceeds.

1. The appeals were dismissed unanimously. The defendants had not proved that the December loan agreement was a sham. The burden lay throughout on the parties alleging the sham to establish a common subjective intention inconsistent with the rights and obligations appearing in the document.

2. The sham inquiry required identification of the rights and obligations which the agreement appeared to create and comparison with those which the parties actually intended to create. The operative clauses made Tatik liable to Derbent from the date of the agreement. The evidence did not establish that the parties intended different ongoing rights and obligations. The trial judge was entitled to find that their common intention, formed by August 2008, was that Tatik should assume the liabilities when that became possible.

3. A false account of history in recitals does not ordinarily make an agreement a sham where its operative provisions genuinely create the intended prospective rights and obligations. Nor does an ulterior purpose undo a transaction which the parties genuinely intended to effect. The judge was entitled to reach a factual conclusion lying between the rival evidential cases. That conclusion caused no procedural unfairness.

4. Section 423 of the Insolvency Act 1986 concerns transactions at an undervalue. Although the assignment had been intended to place the debt and security beyond Sibir's reach, section 423 did not apply merely because the transaction was a fraudulent preference.

5. Derbent was legally obliged to account to Willow Tree or the Kruglov family for the loan proceeds. On the proper construction of the assignment against its commercial background, Slocom impliedly undertook to exonerate Derbent from that liability. The entire agreement clause did not prevent that implication or make the express consideration clause exhaustive.

6. No novation involving the third-party beneficiaries was required. A purchaser may promise the seller that it will assume or discharge the seller's obligation to a third party. Slocom's exoneration obligation formed part of the consideration and was equivalent in value to the assigned rights because Derbent's accounting liability necessarily matched the value of the incoming loan proceeds.

1. Court of Appeal (Civil Division): The defendants' appeals were dismissed unanimously. The court upheld the rejection of the sham defence and the challenge under section 423 of the Insolvency Act 1986.
2. High Court, Chancery Division: Roth J upheld the claim in [2012] EWHC 3464 (Ch). He subsequently quantified Tatik's contractual liability and Sibir's and Maritime's liability for interference with contract, and declared that the villa remained subject to an equitable mortgage.