El-Husseiny v Invest Bank: How can creditors utilise Section 423 of the Insolvency Act?

Traditionally, Section 423 (s423) of Insolvency Act 1986 has been a rarely used tool in a creditor’s arsenal when it comes to dealing with debtors in financial difficulties and there are concerns that actions may be taken to dispose of assets.

However, the recent case of El-Husseiny & others v Invest Bank has demonstrated how effective s423 can be. Laura Keegan, senior associate in our restructuring and insolvency team, explains more.

What is s423 and when does it apply?

Sometimes, when facing financial difficulties, a debtor may transfer their assets to a third party (often family or close friends) to avoid losing them – otherwise known as putting assets beyond the reach of creditors. This is where s423 comes in; it is a mechanism for creditors to challenge said transactions and recover the asset.

The requirements for a s423 claim are proving:

·        A transaction was made at undervalue

·        An additional intention to put assets beyond the reach of someone who is making (or may at some point in the future make) a claim

This is no easy task, which often means that a s423 claim is disregarded early on in any enforcement discussion.

Added to that is the fact that, if the debtor goes into a formal insolvency at some point prior to the conclusion of the claim, any recovery is paid into the insolvency estate and would be subject to the usual rules of priority when distributed.

Although the creditor would be able to recover the litigation expenses from the asset, they would not benefit from the full recovery themselves, if the debtor was to become insolvent in the interim.

Why is ‘El-Husseiny & others’ important?

The case of El-Husseiny & others in the Supreme Court has, however, made an important clarification on s 423, widening the scope of transactions that could be subject to proceedings.

Previously, there was support for the argument that the debtor must have had some proprietary interest in the transferred asset, whether that was a beneficial or legal interest, for the transaction to fall within the ambit of the section.

In El-Husseiny, the bank had obtained two judgments against Mr El-Husseiny in Abu Dhabi. Assets were located in England, which included 100% of the shares in an English company. The company, in turn, was the registered proprietor of a property worth £4.5m.

Following the bank obtaining judgment, the company transferred the property to Mr El-Husseiny’s son for no consideration. This devalued Mr El-Husseiny’s shares in the company as the company’s only asset was disposed of.

The bank brought proceedings against Mr El-Husseiny and his son, alleging a transaction defrauding creditors. The bank argued that Mr El-Husseiny entered into a transaction to sell the property for no consideration, devaluing his shares in the company and, therefore, preventing the bank from making any realisations.

The case was defended on the basis that Mr El-Husseiny hadn’t entered into a transaction to transfer any property in which he had an interest; the property was owned by the company, not El-Husseiny himself, and his shares had not been disposed of or transferred.

The court sided with the bank; it held that s423 requires a “transaction”, which is defined by s436 as any “gift, agreement or arrangement”.

How did the Court decide if the transaction fell under s423?

The consideration that Mr El-Husseiny provided was his agreement to procure the transfer of the property, valued at £4.5m; that was, in turn, the commensurate value of the consideration provided.

The wording of s423(3) was considered particularly important by the judge in determining how the section should be interpreted.

It was clear that the intent of the section was to enable challenge to transactions where there was the intention to put assets beyond the reach of a creditor who is making or may, at some point in the future, make a claim against the debtor, or otherwise prejudice their interests.

The wording of the section itself does not require some proprietary interest, beneficial or otherwise, to be disposed of for an order to be made under that section; the requisites are that the debtor entered into a transaction, gift, agreement or arrangement, for no, or significantly less value, with the intention of putting assets beyond the reach of creditors or prejudicing their interests.

Here, Mr El-Husseiny had procured the disposal of a property, which was the only significant asset of his solely owned company, thus devaluing the shares in that company deliberately, to avoid recovery by the bank.

Therefore, the transaction fell within the scope of s423 and relief was afforded accordingly.

The underlying issues regarding the use of s423 when there is a pending insolvency remain; judgment would still fall to be paid to an insolvency practitioner, if a formal insolvency is commenced.

However, where a debtor is deliberately trying to frustrate the recovery process, s423 now becomes a tool that shouldn’t be immediately dismissed.

For more information on anything discussed in this article, or on insolvency law in general, contact Laura using 0191 211 7970 or [email protected].