Out of reach? Supreme court confirms scope of section 423

The Supreme Court has confirmed that a transaction can be set aside under section 423 of the Insolvency Act 1986 (i.e. a transaction defrauding creditors) even where the asset which is put beyond the reach of creditors is not beneficially owned by the debtor.

In other words, the debtor does not need to beneficially own an asset which is transferred at an undervalue, so long as the effect of the transaction is the prejudice of their own creditors, and they intended the transaction to have such effect.

Section 423 of the Insolvency Act 1986 (the Act)

A transaction can be set aside under section 423 where:

• a debtor enters into a transaction at an undervalue (being a gift or transaction on terms where the transferor received no or significantly less consideration in value than that which was transferred)
• with the purpose of putting assets beyond the reach of its creditors, or otherwise to prejudice creditors’ interests

The wording of section 423 of the Act is silent as to whether the asset transferred must be beneficially owned by the debtor (the transferor). However, in most cases the debtor will prejudice their creditors by transferring an asset which they own to a third party for little or no value, with a view to frustrating their creditors. Such action is often taken by debtors in anticipation of insolvency or debt enforcement proceedings against them.

The issue

The issue before the court in El-Husseiny v Invest Bank PSC [2025] EWCA Civ 555 was whether section 423 can apply to a transaction where a debtor procures a company which he owns to transfer a valuable asset at an undervalue, thereby prejudicing their creditors by diminishing the value of their shares in the company. The case was referred to the Supreme Court on appeal by the recipients of gifts from the debtor, who argued that such transactions fell outside section 423 because the debtor did not personally own the asset transferred.

The facts

Invest Bank PSC (the Bank) obtained various judgment debts against Mr El-Husseiny (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.

In the High Court, the judge held that the fact that the relevant assets were not owned by the Debtor himself but by his company did not prevent the transfer from falling within the scope of section 423. However, the court found that the Debtor had not acted in a personal capacity but as agent for his company and therefore dismissed the Bank’s case.

The Court of Appeal allowed the Bank’s appeal against the latter ruling and confirmed that section 423 could apply where the Debtor had procured that the company transfer its property for no consideration (read our previous article on that judgment here). The case was then appealed to the Supreme Court.

The decision

The Supreme Court dismissed the appeal, on the basis that the scope of section 423 would be significantly restricted if it could apply only to the transfer of assets owned by the debtor individually. The court favoured a “straightforward” reading of section 423 and found that there was no implied requirement for the Debtor to dispose of property owned by him. It found that a transfer by a solvent company owned by a debtor of an asset for no (or inadequate) consideration necessarily results in a diminution in the value of the debtor’s shares in the company. While a transaction of this nature would not strictly put assets beyond the reach of a debtor’s creditors, it would have the effect of prejudicing creditors’ interests. Therefore, assuming the transaction was entered with the requisite intention, it could fall within the ambit of section 423 of the Act and be set aside.

The Supreme Court also noted that is it not uncommon for high-net-worth individuals to hold their wealth in limited companies in the same way as the Debtor, and so to restrict the application of section 423 to transfers of assets beneficially owned by the transferor would seriously undermine the purpose of the provision. The Supreme Court therefore agreed with the analysis of the High Court and the Court of Appeal on this issue.

Implications

The decision of the Supreme Court confirms the broad nature of section 423 of the Act and that assets transferred by owner-managed companies are potentially within its reach. In effect, this decision confirms that victims of these types of transaction can attempt to pierce the corporate veil and target corporate transfers of assets where they have the effect of reducing the value of a debtor’s shareholding. However, applicants will still need to overcome the hurdle of demonstrating that the transfer was made with the intention of prejudicing the debtor’s creditors. While such an intention can often be inferred, at a trial on the facts the High Court found that the Debtor in this case had not entered into the transactions with the purpose of prejudicing the Bank’s interests, and so the relevant transactions could not be set aside under section 423. That decision may yet be appealed, but it provides a sage reminder that the mental element under section 423 must still be proven to successfully set a transaction aside.