Mohammed Saleem Khawaja v Stela Stefanova & Ors

The court considered whether a document titled the "Trust Deed" dated 7 December 2022 was a sham, whether it amounted to a transaction to defraud creditors within the meaning of section 423 of the Insolvency Act 1986, and whether an interim charging order over the respondent’s flat should be made final. The judge found the respondent an unreliable witness but accepted her genuine concern for her daughter. The Trust Deed was held not to be a sham because the respondent did subjectively intend to create an equitable interest for her daughter. However, the judge found on the evidence that the Trust Deed was executed, at least in part, for the purpose of putting the Property beyond the reach of a known claimant and therefore fell within section 423. The court declared the Trust Deed void ab initio under section 423 and made the interim charging order final in the sum of £92,586.73.

Parties and procedural posture:

• This was a first instance High Court (Chancery, Business and Property) hearing of an application to make an interim charging order final and to determine related issues arising from a contested deed of trust. The petitioner was Mr Mohammed Saleem Khawaja and the respondents included Ms Stela Stefanova, BiotechnologiesUK Limited and Dermamed Solutions Limited.

Nature of the application and issues for determination:

• The court was asked to determine three issues directed by ICC Judge Barber: (i) whether the Trust Deed was a document executed to give the appearance of creating trust rights different from the actual rights intended (a sham); (ii) whether the Trust Deed was a transaction to defraud creditors under section 423 of the Insolvency Act 1986; and (iii) whether the interim charging order should be made final.

Background and evidence:

• Following contested county court proceedings, Ms Stefanova had been found at preliminary stages to have agreed with Mr Khawaja that they would share profits of a business and to have disclosure obligations which she repeatedly resisted. A series of orders, third-party disclosure applications and freezing and enforcement steps followed. The Trust Deed declared that Ms Stefanova held her interest in the Highgate flat in trust for her daughter Victoria.
• The petitioner relied on surrounding circumstances, the timing and urgency of execution, extensive adverse findings in earlier judgments about non-compliance and disclosure, and the respondent’s conduct to contend that the Trust Deed was either a sham or a voidable transaction under section 423.
• Live evidence was heard from a solicitor for the petitioner and from Ms Stefanova, whom the judge found to be an unreliable witness in much of her evidence; her concern for her daughter was accepted as genuine.

Court’s reasoning and findings:

• On the law, the judge explained the distinction between a sham (requiring a common subjective intention that the document not create the apparent rights) and a transaction falling within section 423 (requiring a prohibited purpose of putting assets beyond the reach of persons making or likely to make claims).
• The judge found the Trust Deed was not a sham because Ms Stefanova did subjectively intend to create a beneficial interest for her daughter. The judge rejected the respondent’s account that the Trust Deed formed part of long-standing estate planning supported by contemporaneous written advice.
• On section 423 the judge found it more likely than not that the Trust Deed was executed, at least in part, to put the Property beyond the reach of the petitioner. The judge relied on the timing of execution (shortly before bankers’ disclosure and freezing order activity), the respondent’s awareness of likely claims for past withdrawals and costs, the respondent’s conduct and communications, and the role of a third party who prepared the deed. That prohibited purpose brought the Trust Deed within section 423.
• Exercising the broad remedial powers in section 423(2), the court declared the Trust Deed void ab initio and, in the exercise of its discretion under the civil procedure rules, made the interim charging order final in the sum of £92,586.73. The judge noted the minor beneficiary was a volunteer and that the court should act equitably, but concluded the statutory remedy was appropriate to restore the former position.

Subsidiary matters:

• The judge declined to determine detailed competing allegations about diversion of Dermamed’s business to Biotech and some other accounting matters, finding those issues appropriate for the final hearing of the company petition and not necessary to resolve the charging order and section 423 questions.

At first instance the court made the following disposals: (1) The Trust Deed dated 7 December 2022 is not a sham but was executed with the purpose of putting the Property beyond the reach of the petitioner; accordingly it falls within section 423 of the Insolvency Act 1986. (2) The Trust Deed is set aside and declared void ab initio pursuant to section 423(2), which restores the position as if the transaction had not been entered into. (3) The interim charging order over the Property was made final in the sum of £92,586.73. The court’s rationale rested on findings as to the respondent’s subjective intention, the timing and surrounding circumstances of the Trust Deed, earlier non-compliance with disclosure and enforcement steps, and the court’s broad remedial discretion under section 423.