Invest Bank PSC v Ahmad Mohammad El-Husseini & Ors

For the purposes of section 423 of the Insolvency Act 1986, acts by which a debtor causes a controlled company to transfer an asset at an undervalue may constitute the debtor’s own participation in a transaction. Attribution of those acts to the company does not deprive them of legal significance for the debtor.

A transaction under section 423 need not involve property beneficially owned by the debtor. Its broad meaning includes an agreement or arrangement and may encompass steps which diminish the value of the debtor’s shares. The provision must be construed in its distinct context and in light of its purpose of protecting creditors. Restrictions arising from the statutory regimes for corporate insolvency and individual bankruptcy do not necessarily apply.

The claimant bank sought to enforce alleged judgment debts against a businessman and obtain relief concerning assets said to have been placed beyond creditors’ reach. It alleged that the debtor had caused companies under his ownership or control to transfer assets at an undervalue for a purpose specified in section 423 of the Insolvency Act 1986.

At a preliminary stage, Andrew Baker J held in [2022] EWHC 894 (Comm) that acts performed only as the instrument through which a company acted could not, without more, amount to a transaction entered into by the debtor. He nevertheless held that section 423 could apply where the relevant assets were not beneficially owned by the debtor.

The bank appealed the first ruling. Two defendants appealed the second. The issues were whether acts attributed to a controlled company could also amount to the debtor’s participation in a transaction, and whether section 423 requires the property concerned to be beneficially owned by the debtor.

1. The bank’s appeal was allowed and the defendants’ appeal was dismissed. The bank’s pleaded section 423 claim was permitted to proceed. The court decided only preliminary issues of law; whether the statutory requirements were satisfied on the evidence remained for trial.

2. Attribution of a director’s act to a company does not mean that the director did nothing or that the act can have no legal significance for the director. Separate corporate personality and the company’s ownership of its assets remain fully respected. The legal consequences of the individual’s factual acts depend on the applicable legal context.

3. The broad language and creditor-protection purpose of section 423 of the Insolvency Act 1986 mean that acts by which a debtor causes a controlled company to transfer an asset at an undervalue are capable, without additional personal conduct, of amounting to the debtor’s participation in a transaction. The High Court had therefore erred by excluding the pleaded claim as a matter of law. This conclusion did not establish that the debtor had in fact entered into a qualifying transaction.

4. Section 423 does not require the subject matter of the transaction to be property beneficially owned by the debtor. Such a restriction would add words which Parliament did not enact. The definition in section 436(1), which includes a gift, agreement or arrangement, is non-exhaustive. Steps taken by a debtor to diminish the value of shares in a company may therefore constitute an arrangement.

5. Section 423 must be interpreted in its own statutory context. Unlike sections 238 and 339, it is not confined to corporate insolvency or individual bankruptcy, contains no equivalent prescribed time limit, and requires a purpose specified in section 423(3). Principles governing property in a bankrupt’s estate cannot automatically be transposed to it. Clarkson v Clarkson was therefore not binding on the beneficial-ownership issue because it concerned the meaning of property in a bankruptcy context.

6. The broad interpretation accorded with the protective purpose of Part XVI. Sections 423–425 establish a discretionary and flexible remedial regime with judicial safeguards. The gateways do not compel the court to grant relief or determine the form of any eventual order.

• Court of Appeal (Civil Division): In [2023] EWCA Civ 555, the court allowed the bank’s appeal and dismissed the defendants’ appeal.
• High Court, Commercial Court: Andrew Baker J held in [2022] EWHC 894 (Comm) that conduct attributable solely to a company could not, without more, constitute the debtor’s transaction under section 423 of the Insolvency Act 1986. He also held that the section did not require the assets to be beneficially owned by the debtor.