Hotel Portfolio II UK Limited (in liquidation) v Marlborough Developments Limited & Ors

A transaction may fall within section 423 of the Insolvency Act 1986 where security is granted for no consideration. The grant of security can confer valuable proprietary rights on the chargee while diminishing the debtor’s free assets.

A purported compromise provides no consideration where the underlying claim is sham litigation, known to be meritless, and there is no genuine dispute. The prohibited purpose under section 423(3) need only be a purpose positively intended by the debtor. The court may grant wide, carefully tailored relief to restore the position and protect victims.

Hotel Portfolio II UK Limited, a judgment creditor of Andrew Ruhan, brought proceedings against Marlborough Developments Limited, Ozturk 2 Recoveries Limited and Dr Gerald Martin Smith. It alleged that they had colluded with Mr Ruhan to manufacture claims, obtain a substantial default judgment against him, and transfer or charge his assets so as to frustrate enforcement.

HPII sought relief under section 423 of the Insolvency Act 1986, injunctions for interference with its judgment rights, and orders under CPR 40.9 and CPR 3.4 to set aside the default judgment and strike out the Ozturk proceedings. The central issues were whether the arrangements were transactions at an undervalue, whether HPII was a victim, whether the Marex tort was established, and whether the default judgment and proceedings constituted an abuse of process.

1. Section 423 relief. The court found that the June Settlement, the two promissory notes, the June charge and the January charge formed one transaction, or alternatively a series of transactions. A charge can constitute a transaction for no consideration under section 423(1)(a), and can also involve the disposition of property rights for the purposes of section 423(1)(c). The court preferred the reasoning of Arden LJ in Hill v Spread Trustee Ltd and disagreed with the broader approach attributed to In re MC Bacon Ltd.
2. The apparent settlement consideration was illusory. The Ozturk claims were contrived and meritless, and the parties knew that the litigation was not genuine. In those circumstances there was no real dispute and no consideration for the supposed compromise. HPII was a person capable of being prejudiced by the transaction and therefore had standing under section 424.
3. The prohibited purpose under section 423(3) was established. Putting assets beyond HPII’s reach or prejudicing its enforcement rights was a purpose positively intended by Mr Ruhan. It need not have been the sole or dominant purpose, although a merely trivial purpose or unintended consequence would not suffice.
4. The court granted wide restorative relief under sections 423(2) and 425. The notes and charges were declared ineffective and set aside. Transfers, including the Minardi shares, were to be reversed, with further disclosure and affidavit obligations imposed on MDL and Ozturk.
5. Marex tort. Applying the elements identified in Lakatamia v Su, the court found that HPII had a judgment, that Mr Ruhan had breached the rights arising from it by non-payment, and that Dr Smith, MDL and Ozturk had knowingly procured, encouraged and assisted that breach with the necessary causal connection. Final injunctions were therefore granted.
6. Default judgment and abuse of process. HPII was directly affected for the purposes of CPR 40.9 because the default judgment materially and adversely affected its legally recognisable enforcement interests. The judgment was fraudulently obtained and was set aside. The Ozturk proceedings were contrived to misuse the court’s process and were struck out under CPR 3.4(2)(b) and the inherent jurisdiction.