Joanna Lemos & Ors v Church Bay Trust Company Limited & Ors

Section 423 of the Insolvency Act 1986 requires proof that a transaction at an undervalue was entered into for a prohibited purpose. The purpose need only be one purpose, not the sole or dominant purpose, but a mere consequence is insufficient. The inquiry is fact-specific and concerns the disponor’s subjective intention, which may be inferred from the evidence.

A declaration correcting or recording a pre-existing trust may still be a transaction for no consideration. However, the absence of a pre-existing beneficial interest may make a prohibited purpose unlikely. A notice to prove alone does not ordinarily permit a positive allegation of forgery without fair and sufficiently early notice.

The claim was brought under section 423 of the Insolvency Act 1986 by Joanna Lemos, a judgment creditor of Christos Lemos, and his trustees in bankruptcy. It concerned a 1994 declaration by Christos relating to shares in a Liberian company which owned the family home. The claimants alleged that Christos had beneficially owned the shares and had transferred them to a trust for his wife, Kalliopi, to prejudice future creditors.

The judgment records earlier interim proceedings, including Cooke J’s discharge of an asset restraint order and the Court of Appeal’s temporary restoration of it in Lemos v Lemos [2016] EWCA Civ 1181; [2017] 1 P & CR 12. The central issues were beneficial ownership, prohibited purpose and relief.

The claim was dismissed. The court determined the three agreed issues under section 423 of the Insolvency Act 1986.

1. The evidence showed that 500 bearer shares had been issued in 1981: 450 to Kalliopi and 25 each to her parents. Christos later obtained custody of the certificates and thereby legal title while in possession, but he held any interest as trustee for Kalliopi. The three certainties were satisfied and the 1994 Declaration of Trust accurately recorded the position.
2. Following Invest Bank PSC v El-Husseini [2023] EWCA Civ 555, the absence of a beneficial interest did not prevent the Declaration of Trust from being a transaction under section 423(1)(a), since it provided for no consideration. However, the section 423(3) purpose inquiry remained subjective and fact-specific. A prohibited purpose need only be one purpose, but it must be more than a by-product or consequence.
3. The court also held that a notice to prove under the Civil Procedure Rules 1998, rule 32.19, requires proof of authenticity but does not itself permit a positive allegation of forgery. Such an allegation must be raised fairly and sufficiently early in pleadings or correspondence. The approach in Redstone Mortgages Ltd v B Legal Ltd [2014] EWHC 3398 was followed, while Eco3 Capital Ltd v Ludsin Overseas Ltd [2013] EWCA Civ 413 was distinguished. Both disputed letters were authentic.
4. The 1994 Transactions were intended to segregate and protect Kalliopi’s assets, not to put Christos’s assets beyond creditors or prejudice their claims. The prohibited-purpose requirement therefore failed. The court did not consider what relief would otherwise have been appropriate.

This was a first-instance claim. The judgment records that Cooke J discharged an asset restraint order and that the Court of Appeal temporarily restored it to allow a section 423 claim to be commenced in Lemos v Lemos [2016] EWCA Civ 1181 ; [2017] 1 P & CR 12 . The present court tried and dismissed the claim.