The Court of Appeal (Singh, Males, and Popplewell LJJ) has delivered an important judgment on the interpretation of s.423 of the Insolvency Act 1986 in Invest Bank PSC v El-Husseini  EWCA Civ 555.
The appeal arose from on-going Commercial Court proceedings brought by a UAE bank in which it alleges, inter alia, that a Lebanese businessman said to owe c.£20m to the bank caused certain companies to transfer corporate assets to benefit his ex-wife and children in circumstances that are said to fall within the scope of s.423.
Daniel Warents (instructed by Nathanael Young of Longmores Solicitors) appeared for two of the alleged debtor’s children before the Court of Appeal.
In a wide-ranging and interesting judgment, Singh LJ (with whom Males and Popplewell LJJ agreed) determined that s.423 can, in principle, apply even where the alleged “transaction at an undervalue” does not involve the transfer of any asset which belongs beneficially to the debtor.
Whilst this decision has been welcomed in some quarters (see “No fraudster’s charter to use companies to defeat creditors”) on the basis that it supposedly upholds the purpose of s.423, its full impact remains to be seen.
In particular, it was common ground between the parties (and apparently accepted by the Court of Appeal) that for the purposes of the related provisions of s.238 and s.339 of the Insolvency Act 1986 (which define the concept of a “transaction at an undervalue” using materially identical language to the language used in s.423) there can be no “transaction at an undervalue” unless the relevant person has given away (for nothing or at an undervalue) property which belonged beneficially to that person: see Re Brookmann Home Ltd  BCC 122 (s.238) and Clarkson v Clarkson  BCC 921 (s.339).
Singh LJ therefore took the view that he should interpret the “transaction at an undervalue” concept in a materially broader way in s.423 than it has previously been interpreted in ss.238/339 cases. Notwithstanding Singh LJ’s contrary views, it is doubtful, in the light of previous Court of Appeal decisions (especially National Bank of Kuwait v Menzies  2 BCLC 306, 219-320, Agricultural Mortgage Corp v Woodward  BCC 688, 695, Re Thoars (decd) (No 2)  1 BCLC 331, §§102-107, Delaney v Chen  BPIR 39, §15, BTI v Sequana  2 All ER 784, §54) whether it was open to Singh LJ to take that course.
If the concept of a “transaction at an undervalue” in s.423 has indeed now taken on a life of its own, practitioners will need to exercise great caution with regard to the previously widely held assumption that case law on that concept was generally applicable across all of ss.238/339/423.
However, if the Courts take the view (in the light of Singh LJ’s judgment) that the same approach should be taken to interpreting the scope of the “transaction at an undervalue” concept in cases under ss.238/339 then difficult issues are likely to arise whenever a person involved in the management of a company (even a solvent company) plays some role in causing that company to part with an asset for less than full market value (including common scenarios such as the payment of dividends, ex gratia payments made to company employees, fire sales to generate cash-flow, and the provision of corporate guarantees by a parent company to assist an ailing subsidiary). In those circumstances, it may be that s.339 is engaged so that a trustee in bankruptcy can bring a claim even though a liquidator of the company whose asset was transferred could not have brought a claim under s.238. It is doubtful that Parliament intended s.339 to essentially override s.238 in this way but that may well be the unintended consequence of Singh LJ’s reasoning.
If (which is a common occurrence) a trustee in bankruptcy brings parallel alternative claims under s.339 and s.423, the question will arise whether precisely the same alleged conduct would amount to a “transaction at an undervalue” within the meaning of s.423(1) but would not amount to a “transaction at an undervalue” on the materially identical wording of s.339(3). Singh LJ was apparently untroubled by that difficulty but, inevitably, the Courts will have to grapple with it at some stage. The Court of Appeal’s decision in Invest Bank v El-Husseini may therefore give rise to significant challenges with regard to the coherent interpretation of the statutory clawback scheme as a whole.
The Supreme Court is presently considering an application for permission to appeal against the Court of Appeal’s decision.
Daniel Warents (instructed by Longmores Solicitors LLP) for the 3rd and 4th Defendants