Commercial Court finds that s.423 claims in respect of transfers of corporate assets do not raise a serious issue to be tried

The Commercial Court (Andrew Baker J) has handed down judgment on a jurisdiction challenge in Invest Bank v El-Husseini [2022] EWHC 894 (Comm).  Daniel Warents (whose oral submission to the Court were said to have been “very well presented”)  acted for the first, third, and fourth defendants (instructed by Streathers Solicitors LLP).

The proceedings concern the claimant bank’s attempts to enforce UAE judgments for c.£20m (alleged to have arisen from personal guarantees said to have been given by the first defendant) in England with a view to enforcing that claim (a) against various assets alleged to be held by other defendants on trust for the first defendant and (b) by means of various claims under s.423 of the Insolvency Act 1986.

This judgment is particularly noteworthy because of the Court’s welcome re-affirmation of the orthodox company law principle that a shareholder/director of a company (even a sole shareholder/director) does not, without more, “enter into” a transaction for the purposes of s.423 IA 1986 when that company disposes of its own asset (judgment, paragraphs 19-21).  The Court pithily described the contrary notion as the “self-dealing fallacy”.  This provides clarification that obiter dicta apparently endorsing the self-dealing fallacy in the earlier case of Akhmedova v Akhmedov [2021] 4 WLR 88 do not (in so far as they do in fact endorse the self-dealing fallacy) represent a correct statement of the law.  As a consequence, the Court found that various claims under s.423 IA 1986 which were said to involve the disposal of assets beneficially owned by certain companies alleged to have been controlled by the first defendant did not (as formulated by the claimant) give rise to a serious issue to be tried.

The judgment is also notable for:

• The Court’s clear guidance (judgment, paragraph 51) as to the importance, especially in the Commercial Court, of the need to plead, one claim at a time and one allegation at a time, the essential ingredients of each claim (as required by section C1.1 of the Commercial Court Guide).
• The Court’s expression of its expectation (judgment, paragraph 10) that “[w]here a claimant has presented its case in fully pleaded form, prepared by experienced solicitors and counsel expert in the field, the defendants and the court are entitled to proceed on the basis that the case pleaded is the best case it is thought can be pleaded, unless and until an application (or revised application) to amend is put forward”. Thus, the Court rejected (judgment, paragraph 130) “a general plea that if the Bank’s pleading was deficient, the Bank ought to be given an opportunity to improve it rather than have claims rejected at this stage”, ultimately finding that “[i]t is fair and appropriate to judge the viability of [the claimant’s] proposed claims by reference to what it has pleaded, or has proposed by the amendment application it should be allowed to plead”.
• The Court’s rejection of the “novel suggestion” (judgment, paragraph 115) that it was unnecessary, in the context of a jurisdiction challenge, to establish a serious issue to be tried in relation to each pleaded cause of action where the same form of relief was sought based on distinct causes of action (in this case, a declaration as to the beneficial ownership of UK real property arising from allegations that the property was held on either (i) express, or (ii) resulting, or (iii) constructive trusts). Thus, the Court re-affirmed the well-established principle that for the purposes of obtaining permission to serve a claim out of the jurisdiction (or defending a jurisdiction challenge) a claimant must demonstrate that there is a serious issue to be tried in relation to each individual cause of action.
• The Court’s acceptance (judgment, paragraph 119(3)) that the “natural and obvious inference” to be drawn in a case where a property is held by a company for legitimate tax planning reasons (in this case, inheritance tax planning for a non-domiciled person) is that the company is intended to be the beneficial owner of that asset, especially where the company has filed tax returns on that basis. This approach provides re-assurance that where companies own assets for legitimate tax planning reasons such companies will not, without good reason, be found to be trustees of unexpected and unwanted trusts which may have adverse tax consequences for all concerned.  As a consequence, the Court held that assets previously beneficially owned by a company could not, following a transfer of those assets, be held on a resulting trust for the first defendant.

Barristers

Daniel Warents