Supreme Court confirms broad interpretation of section 423 Insolvency Act 1986 relating to transactions defrauding creditors

The Supreme Court has confirmed that s.423 of the Insolvency Act 1986, which provides for the avoidance of certain transactions where they have been entered into for the purpose of defrauding creditors, has a broad application and covers not only transactions entered into by the debtor personally, but also those entered into via the debtor's company: El-Husseiny and another v Invest Bank PSC [2025] UKSC 4.

The court substantially agreed with the Court of Appeal's reasoning on this issue, considering that the purpose of s.423 – ensuring that redress is given where there is an intention to put assets beyond the reach of creditors – would be frustrated if the narrow interpretation proposed by the debtor were to be adopted, such that the debtor itself would need to enter into the transaction. The language of s.423 also supported this interpretation: the debtor's case required a significant limitation on the operation of the provision, which the court would expect to be spelled out in the wording of the section if intended.  

This decision will come as welcome confirmation for creditors who are looking to enforce judgments against debtors with complex corporate structures, as it shows that a claim under s.423 cannot be thwarted by the introduction of a company structure between the debtor and the assets which are the subject of enforcement.

The decision does not, however, clarify what is arguably the most frequent source of contention in s.423 cases, which is the mental element required – ie the need to prove that the debtor intended to defraud creditors by putting assets beyond the reach of an actual or prospective creditor or otherwise prejudicing the interest of creditors. In this case, before the Supreme Court's decision was handed down, the High Court had separately determined that the debtor had no such intention and therefore dismissed the action. However, the parties had not requested the Supreme Court to refrain from giving judgment on the appeal and, given the general importance of the issue on appeal, it considered that judgment should be given.

Background

Invest Bank PSC (the "Bank") had obtained judgments in the UAE against the debtor, Mr El-Husseini, and had identified valuable assets in England which it sought to enforce against, including houses in central London and companies owning those houses. It alleged that Mr El-Husseini had transferred them to other people, to put them beyond the reach of the Bank. It sought relief under s.423 against him and various connected parties.

Section 423 is engaged (in summary) where a debtor has entered into a transaction on terms that provide for the debtor to receive no consideration, or significantly less than the consideration they have provided, for the purpose of putting assets beyond the reach of creditors or otherwise prejudicing their interests. In such circumstances, the court can make an order to restore the position or protect the interests of the victim.

After proceedings had been issued, Mr El-Husseini (and two other defendants) applied to set aside service of the Bank's s.423 claim on the basis that there was no serious issue to be tried. In that context, the High Court had to consider two issues of law, namely:

1. was s.423 engaged where the relevant assets were not legally or beneficially owned by the debtor but instead by a company owned or controlled by him; and
2. does a debtor "enter into a transaction" for the purpose of s.423 when all his actions are carried out via a company, rather than him personally?

The High Court sided with the Bank on the second issue, finding that s.423 only applies where the debtor acted separately in a personal capacity and not as an instrument by which his company acted. It sided with Mr El-Husseini on the first issue, finding that "transaction" should be interpreted broadly, so that s.423 could be engaged where the relevant assets were not legally or beneficially owned by the debtor. The Court of Appeal allowed the Bank's appeal on the second issue and dismissed the Mr El-Husseini's appeal on the first issue, as explained in further detail in our article on that decision here.

Mr El-Husseini was granted permission to appeal on the first issue.

Decision

The Supreme Court (Lord Hodge, Lord Hamblen, Lord Stephens, Lady Rose and Lord Richards) unanimously dismissed the appeal.

While several transfers of assets were included in the claim, to consider the legal point which was the subject of the appeal, the judgment focused on a single transfer by way of example: the transfer of a property (9 Hyde Park) owned by Marquee Holdings Limited ("Marquee"), a company which was owned entirely by Mr El-Husseini. It was alleged that he arranged for Marquee to transfer the ownership of the property to one of his sons, Ziad, for which Ziad paid nothing.

The court considered that, on a straightforward reading of s.423(1) and the broad definition of "transaction" in s.436(1) as including “a gift, agreement or arrangement”, the Marquee disposal would fall within the terms of s.423(1), as Mr El-Husseini had made an arrangement with Ziad on terms that provided for the former to receive no consideration. The court considered Mr El-Husseini's submissions under three headings:

1. Textual indicators within the wording of sections 423 to 425

Section 423(1)(a) refers to the debtor making a "gift" to another person or "otherwise" entering into a transaction for no consideration. Mr El-Husseini argued that "gift" should be read across to the entirety of the subsection, implying that only transactions which involved the transfer of a proprietary interest by the debtor would engage the provision, and he could not make a gift of 9 Hyde Park because he did not own it. Rather, Marquee did.

The court rejected this argument, holding that the word "gift" did not limit the transactions to which the second limb of s.423(1)(a) applied, as supported by academic commentary to the effect that, for these purposes, transactions for no consideration do not necessarily entail the transfer of an asset.

Mr El-Husseini also placed reliance on how s.423(1) specifies that the transaction entered into by the debtor may fall within the provision if it does not "provide for him" to receive any consideration. He argued that this creates a conundrum. If, in relation to 9 Hyde Park, Ziad had paid Marquee the full value of the house, there would be no diminution in value of Mr El-Husseini's shares because Marquee's assets had not been reduced but s.423 would still be engaged as Mr El-Husseini himself had received no consideration. Mr El-Husseini suggested that this could not have been the intention of the provision.

The court did not accept that this conundrum existed – if Mr El Husseini had undertaken to procure Marquee to transfer the property to Ziad, that amounted to consideration of very considerable value. If Ziad had agreed with his father to pay the full value of 9 Hyde Park to Marquee, that undertaking would have constituted consideration of equivalent value provided to Mr El-Husseini. Accordingly, s.423 would not be engaged.

Finally, Mr El-Husseini cited the defence in s.425(2), whereby a bona fide purchaser will not be prejudiced by an order under s.423, where the purchase is "from a party other than the debtor" and the purchaser is not "a party to the transaction" (in sections 425(2)(a) and (b) respectively). Mr El-Husseini submitted that this assumed that, in order to be caught by s.423, there must be someone who acquired property from the debtor and who was too proximate to the debtor to rely upon that defence, and the provision was intended to cover that person.

The court rejected this argument, saying if that was the drafter's assumption, s.423(1) would have been drafted to include it expressly. The court also noted that, in other places, the wording of s.423 appears deliberately to have avoided reference to the assets specifically of the debtor.  

2. The purpose of section 423

Mr El-Husseini acknowledged the importance of s.423(3), which makes clear the purpose for which s.423 was enacted – ie to provide remedies to a debtor whose purpose was to put assets beyond the reach of creditors or otherwise prejudice their interests – but warned the Court not to elevate its importance, such that it overrides the other elements of s.423.

The court accepted  that s.423(1) must be satisfied in accordance with its own terms, and its construction could not be dictated by the terms of s.423(3). Nonetheless, it was not to be construed in a linguistic vacuum, uninfluenced by its purpose as set out in s.423(3). The court considered that, where a transaction not only had the purpose of prejudicing creditors but had that effect, there was no reason why it should not fall within s.423(1) if that was permitted by a reasonable reading of the sub-section. Still less was there any reason to read into s.423(1) an implied restriction which would undermine the purpose of the section, as expressed in s.423(3), as the court considered Mr El-Husseini sought to do here.

3. The interrelationship between sections 423,238 and 339

Mr El-Husseini also relied on sections 238 and 339 of the Insolvency Act 1986 which provide remedies in the case of transactions at an undervalue where the debtor has subsequently entered administration or liquidation (s.238) or been declared bankrupt (s.339). In these three sections in the same statute dealing with transactions at an undervalue, the same language was used to identify the features of those transactions. Accordingly, he argued, the court should proceed on the basis that a common meaning was intended for them, and it was not appropriate to rely on the purpose of one section (as per s.423(3)), to construe a provision that was common to all three.

The court considered that there would be merit in this argument if it would result in distortions in the meaning of the common provisions as they appeared in the other sections, but they were unable to see any. They found it impossible to think of circumstances in which a transaction was held to be within s.423(1) when it would not also fall within sections 238 or 339.

Mr El-Husseini also argued that there was a common rationale for the transaction at an undervalue test in sections 238, 339 and 423, ie to distinguish such transactions from preferences given by a debtor to particular creditors ahead of an insolvency process (under sections 239 and 240). He argued that, since the mental element in s.423(3) could be satisfied in the case of a preference, the transaction at an undervalue test should provide an effective mechanism for excluding preferences from the ambit of sections 238, 339 and 423.

The court said that, even if this was right, it did not see how it would assist Mr El Husseini's case that a transaction at an undervalue must involve an asset belonging to a debtor. In any event, the court considered that there may be circumstances in which the same transaction falls, to some extent, within section 238 or 339 as a transaction at an undervalue and, to a different extent, within section 239 or 340 as a preference. An example is when a debtor transfers a property worth £100 to X for no consideration other than the discharge of the debtor's liability of £60 to X. If the transfer took place within the periods applicable under both relevant sections, it could be found to be a preference as to £60 and a transaction at an undervalue as to £40.