Akers v Samba Financial Group

February 1, 2017

A transfer of legal title to shares in breach of trust was not a ‘disposition’ and so was not void under section 127 of the Insolvency Act 1986

Corporate insolvency – winding up – shares held on trust – transfer of legal title – void dispositions – section 127 Insolvency Act 1986

Shares in Saudi Arabian banks were held on trust for a Cayman company. The trustee transferred those shares to the respondent, Samba, to discharge a debt owed by the trustee in breach of trust after proceedings winding up the company had been commenced.  The company received nothing as a result of the transfer.

The insolvency proceedings were recognised by the English court and the liquidator sought a declaration that the transfer of shares was void under section 127 of the Insolvency Act 1986.

At first instance and in the Court of Appeal the issue was whether the claim should be stayed on forum non conveniens grounds because of questions regarding the validity and effect of the trusts on property in Saudi Arabia.  The Supreme Court confirmed that a validly created trust was not rendered invalid merely because the lex situs of the trust property did not recognise trusts.  The court then focused, for the first time, on whether the transfer of the shares held on trust was a disposition within section 127 at all.

The court held that section 127 applies to situations in which assets legally owned by a company are disposed of.  It does not apply to situations where a trustee in breach of trust transfers legal title to assets to a third party even if that has the effect of overriding the company’s beneficial interest. Therefore, the transfer of legal title to the shares was not itself a disposition of the company’s interest. The company’s rights under the trust remained in existence and were enforceable after the transfer. In so far as those rights ceased to be enforceable, that was because those trust rights had always been vulnerable to a transfer to a bona fide purchaser for value without notice.

The result of this case is surprising and appears to have the effect of removing from the scope of section 127 transfers of assets held on trust for insolvent companies when those transfers are made for value and to a third party without notice of the interest.  Assets so dealt with will not, then, be divided equally among creditors.  It remains to be seen whether companies or their owners will attempt to structure their affairs to take advantage of this.