Mohammed Saleem Khawaja v Stela Stefanova & Ors

A trust instrument is not a sham merely because it is executed to protect property from enforcement, provided the settlor genuinely intends the trust to take effect. A transaction may nevertheless fall within Insolvency Act 1986, section 423 where it is entered into, even alongside a genuine succession purpose, to put assets beyond the reach of a person making or likely to make a claim. The prohibited purpose need not be dominant or sole. Where section 423 is established, the court may set the transaction aside and restore the position that would have existed without it. The discretion to make an interim charging order final must be exercised equitably, considering all relevant circumstances and the interests of affected parties.

The petitioner sought to enforce unpaid costs orders against the first respondent’s flat by making an interim charging order final. The first respondent relied on a trust deed executed in favour of her daughter shortly before disclosure orders were expected to reveal her financial dealings and the finances of companies connected with the dispute.

The court had to determine whether the deed was a sham, whether it was a transaction defrauding creditors under section 423 of the Insolvency Act 1986, and whether the interim charging order should be made final.

1. The trust deed was not a sham. The court applied the principle that a sham requires a subjective intention to create rights and obligations different from those appearing in the document, together with an intention to give a false impression to third parties or the court. Ms Stefanova genuinely intended her daughter to acquire an interest and intended the deed to be effective. The deed was therefore not void as a sham.
2. The deed was nevertheless a transaction within section 423. A settlement of property into trust is a transaction, and the daughter gave no consideration, so it was entered into at an undervalue. Ms Stefanova knew that Mr Khawaja was making, or might make, substantial claims concerning Dermamed, Biotech and costs. She feared that those claims might be enforced against the flat and executed the deed partly to prevent that outcome. Under Insolvency Act 1986, section 423(3), the prohibited purpose need not be dominant or sole, and proof of fraud is unnecessary.
3. Mr Khawaja was a victim of the transaction because the purpose was specifically to defeat enforcement by him. The court exercised its power under section 423(2) to set the deed aside and declare it void ab initio and of no effect. Section 425(1)(a) was not necessary, but would support an order vesting the property absolutely in Ms Stefanova.
4. Under CPR 73.10A, the interim charging order was made final in the sum of £92,586.73. The costs orders had remained unpaid for a substantial period, no realistic third-party debt remedy was available, and the charging order would not prejudice Barclays Bank’s priority charge. A charging order did not itself determine whether the property should be sold.