Piercing the corporate veil to unravel transactions defrauding creditors

The curiosity with claims based on transactions defrauding creditors is that a transaction can fall within its scope when a debtor is solvent and may never ultimately enter an insolvency process, and there is no requirement of fraud. Such claims fall under section 423 of the Insolvency Act 1986 (the act), and do require a debtor to have entered into a transaction at an undervalue (drawing on claims under section 238 and 339 of the act, in corporate and personal insolvency respectively) with the intention of putting assets beyond the reach of creditors.

Claims under section 423 can be brought both by insolvency officeholders (where the company or individual is in an insolvency process) and the victims of transactions, who have been prejudiced by a dissipation in the pool of assets available to meet their claim as creditors. One such case recently came before the Court of Appeal in Invest Bank PSC v El-Husseini [2023] EWCA Civ 555, when an Abu Dhabi based bank (Invest Bank PSC) pursued a claim against El-Husseini (the debtor) who was a businessman in the UK. The key question arising from this case was whether a transaction can fall within the scope of section 423 where the assets are transferred, not by a debtor, but by a third party under the control of a debtor.

The facts

The bank obtained various judgment debts against the debtor totalling around £20m, following proceedings brought by the bank in Abu Dhabi. The bank alleged that it had been a victim of fraud perpetrated by the debtor acting through a company of which he was sole director and shareholder. The alleged fraud involved the dissipation of millions of dollars’ worth of assets, following the transfer by the company of its assets (including properties, businesses and money) to members of the debtor’s family. The bank alleged that the debtor was the true beneficial owner of the transferred assets (as the controlling mind and owner of the company), and that the assets had been deliberately put beyond the reach of his creditors.

The decision

The court was asked to make findings on the following two issues as to whether:

1. A person (e.g. a company director) can be said to have entered into a "transaction" when the asset was not transferred by them, but by a third party (e.g. a company). 
2. A "transaction" could be entered into under section 423 where no assets beneficially owned by a debtor had been transferred.

The Court of Appeal determined that the language of section 423 was sufficiently broad to encapsulate transactions entered into by a third party, in circumstances where that third party is under the control of a debtor. The court considered that otherwise the legislation could easily be frustrated by debtors using limited companies to achieve the purpose of prejudicing creditors.

On the second issue, the court held that the word "transaction" was defined (under section 436 of the Act) to include a gift, agreement or arrangement, and therefore no transfer of assets was required to fulfil the criteria of section 423. Consequently, it was immaterial whether the assets transferred were beneficially owned by the debtor. The court considered that a broader interpretation should be given to the phrase “enters into a transaction” than is required for the purpose of sections 238 or 339 of the Act, as the scope of section 423 is wider and has no requirement of insolvency at all. In the circumstances, the fact that the debtor took steps to deplete the value of his shareholding in a company could be regarded as an "arrangement" for the purpose of section 423.

Implications

This Court of Appeal’s decision is significant, as it considerably increases the scope for claims under section 423. Its findings widen the ability for victims of transactions to pierce the corporate veil and pursue the "controlling mind" of a company for the dissipation of assets which the debtor does not beneficially own. However, the transaction will still need to be made with the requisite intent – i.e. to put assets beyond the reach of or otherwise prejudice the debtor’s creditors – so this decision does not give (potential) victims carte blanche to challenge directors on all corporate transactions which reduce the value of the company. Nonetheless, it remains a landmark decision which demonstrates the willingness of the court to fulfil the legislative intention behind section 423 and further safeguard creditors’ interests.