El-Husseiny v Invest Bank PSC [2025] UKSC 4
The Supreme Court has handed down its much-anticipated judgment in El-Husseiny v Invest Bank PSC [2025] UKSC 4 . As the judgment (written jointly by Lady Rose and Lord Richards) records, the appeal raised an issue of general of public importance on the construction of s.423 of the Insolvency Act 1986 (“IA 1986”).
This judgment is particularly significant because it is the first time that s.423 has been considered in detail at Supreme Court level, almost 40 years after the legislation was enacted, and the Court’s detailed analysis of s.423 and related provisions is likely to be an important reference point for future cases.
Daniel Warents, Niamh Davis, and Professor Graham Virgo KC (hon) appeared for the appellants, instructed by Nathanael Young of Longmores Solicitors. Although the appeal was dismissed, the Court’s reasoning in addressing the appellants’ arguments draws attention to a number of important aspects of the operation of the statutory scheme which have now either been clarified or will have to be clarified in future cases.
Background
The underlying proceedings arose from Invest Bank PSC’s (“the Bank”) claim to enforce UAE judgments for c.£20m in England against Mr Ahmad El-Husseini (“Ahmad”) and related claims against Ahmad’s family and others in respect of various assets that had been transferred to them at the instigation of Mr El-Husseini. The Bank alleged that it was entitled to recover the assets so transferred either under s.423 or alternatively on the basis that the recipients held relevant assets on trust for Mr El-Husseini.
Some of the assets transferred at Ahmad’s instigation had, prior to their transfer, been owned beneficially by companies whose shares were in turn owned by Ahmad.
In the context of a jurisdiction challenge and various amendment applications by the Bank, Andrew Baker J determined that, in principle, a debtor could enter into a transaction at an undervalue by causing a company whose shares he owned to transfer assets belonging to the company to another person, notwithstanding the fact that the debtor had no beneficial interest in the asset so transferred (“the Corporate Asset Ruling”).
The Court of Appeal (Singh, Males, and Popplewell LJJ) dismissed an appeal by two of Ahmad’s sons (Alexander and Ziad) against the Corporate Asset Ruling.
The Court of Appeal also allowed a cross-appeal by the Bank concerning the capacity in which Ahmad had acted. Andrew Baker J had determined at first instance that a person acting qua director of a company did not personally “enter into” any transaction for the purposes of s.423 (“the Capacity Ruling”). The Court of Appeal overturned the Capacity Ruling and held that, in principle, a person acting qua director of a company could, without more, “enter into” a transaction for the purposes of s.423. The Court of Appeal’s decision on that issue was not appealed to the Supreme Court and is unaffected by the Supreme Court’s judgment.
Alexander and Ziad obtained permission to appeal against the Corporate Asset Ruling to the Supreme Court. That appeal was heard in May 2024 and has now been dismissed for reasons explained in the judgment of Lady Rose and Lord Richards.
Before the Supreme Court handed down its judgment on 19 February 2025, the Bank’s claims proceeded to trial at first instance. The Bank’s claims against the asset recipients were dismissed by Calver J in their entirety on 21 November 2024 (see Invest Bank PSC v El-Husseini [2024] EWHC 2976 (Comm)). The Bank’s s.423 claims were rejected because the Bank had failed to establish that Ahmad had acted for the purpose of prejudicing his creditors’ interests so that the purpose requirement in s.423(3) was not satisfied. The Bank has not appealed against Calver J’s decision and is now out of time to do so. Therefore, by the time that the Supreme Court handed down judgment, the appeal had become academic. Nonetheless, the Supreme Court decided to give judgment because “the general importance of the issue on the appeal is such that judgment should be given”.
The Corporate Asset Ruling
The Supreme Court has now provided a definitive ruling on the specific issue raised by the appeal by upholding the Corporate Asset Ruling.
Therefore, it is now clear that where a debtor causes a solvent company whose shares he owns to transfer its own corporate assets to another person for no (or insufficient) consideration and this causes a diminution in the value of the debtor’s shares this conduct will fall within the scope of the “transaction at an undervalue” test in s.423(1).
The Court explained (at [35]) that such conduct prejudices the creditor’s ability to enforce its claim against the debtor and removes an asset that might otherwise have ultimately become available for enforcement through the processes of execution which can be pursued against the debtor’s shares.
The Court determined (at [33] – [36]) that, on what it called a straightforward reading of s.423, such conduct falls within the scope of the “transaction at an undervalue” test in s.423(1).
The Court’s conclusion on the Corporate Asset Ruling brings welcome certainty on this issue.
Other issues considered by the Supreme Court
In the course of its judgment, the Court identified and analysed various aspects of the operation of the statutory scheme that are also likely to be of interest to practitioners. Some of these issues, and their potential implications, are considered below.
- Interrelationship between s.423 and ss.238/339
The Court of Appeal had suggested that the “transaction at an undervalue” test in s.423(1) had a broader meaning than the materially identically worded test set out in s.238(4) (which enables office-holders to claw back assets in the context of corporate insolvency) and s.339(3) (which enables trustees in bankruptcy to claw back assets in the contest of individual bankruptcy).
The Supreme Court rejected that approach and accepted (at [63], [64], and [72]) the appellants’ argument that the “transaction at an undervalue” test should bear the same meaning across all three provisions, going so far as to say (at [64]) that “[w]e find it impossible to think of circumstances in which a transaction was held to be within section 423(1) when it would not also appropriately fall within section 238 or 339” and (at [72]) that “we can see no good reason for giving different meanings to transactions at an undervalue in sections 238, 339 and 423”.
This provides helpful clarity for practitioners as the Court of Appeal’s approach had created great uncertainty as to whether authorities on s.423 could safely be relied on in cases under ss.238/339 and vice-versa.
It also follows from the Supreme Court’s analysis that the Corporate Assets Ruling is equally applicable to s.238 and s.339. This raises some interesting issues which will need to be fully worked out in future cases.
In particular, there are many circumstances where an individual shareholder could be involved in causing his company to enter into a transaction with a gratuitous element but for entirely honest reasons which are not directed towards prejudicing his creditors.
A common example is a situation where an individual causes his company to provide a corporate guarantee to assist either a sister company or an ailing subsidiary. In future, such guarantees may potentially be vulnerable to challenges under s.339 if the relevant individual subsequently becomes bankrupt within the time applicable to such challenges (potentially up to 5 years).
Other examples include the payment of dividends and ex gratia payments to employees. No doubt there will be other circumstances where companies make gratuitous payments for ostensibly legitimate reasons.
In the light of the Supreme Court’s analysis, where a shareholder is involved in such conduct this would appear to fall within the scope of the Corporate Assets Ruling and may therefore be vulnerable to challenge under s.238 (if a parent company causes the transaction by its subsidiary) or s.339 (if an individual shareholder is involved in causing the transaction by his company).
Further issues may arise if the company which makes the transfer would haven been able to rely on a defence under s.238(5) (on the basis that it acted in good faith for the benefit of its business) but its bankrupt shareholder cannot do so since there is no equivalent defence under s.339.
Issues of this kind will need to be worked out in future cases. It may be that defendants will ask the Court not to grant relief on discretionary grounds in such cases which will inevitably focus attention on the vexed (and surprisingly underdeveloped) question of the principles which should be applied to determine when relief should be refused (under s.238, s.339, or s.423) as a matter of discretion.
In the meantime, practitioners advising on corporate guarantees or other such conduct will need to consider whether there is a risk that the transaction at an undervalue provisions will apply because of the involvement of a shareholder who could be made bankrupt at some point in the future.
- Transactions which do not involve any transfer of assets
The Supreme Court has now confirmed that although a debtor must either make a gift or provide “consideration” to another person in order to fall within the scope of the “transaction at an undervalue” test, there does not need to be any transfer of property.
The Corporate Asset Ruling, as applied to the pleaded case in El-Husseiny, did in fact involve the transfer of assets to relevant defendants, albeit those assets were owned by Ahmad’s companies rather than directly by Ahmad.
However, the Supreme Court expressly endorsed (at [60]) as “unavoidable” the appellants’ concession that conduct such as the release of a debt or the surrender of a lease can also constitute a “transaction at an undervalue”. This apparently brings the operation of the “transaction at an undervalue test” into line with s.127 IA 1986 which applies to a “disposition” made by a company following the presentation of a winding up petition (see the obiter discussion in Akers v Samba [2017] AC 424, [74]).
Likewise, engaging a contractual liability (for example by providing a guarantee) is capable of constituting a transaction at an undervalue.
Logically, the provision of a service can also be a transaction at an undervalue. Indeed, the Court expressly found (at [47]) that a debtor who agreed to procure that his company would transfer an asset would (by giving that undertaking) provide consideration to the other person.
This opens up the possibility that a very wide range of activities may fall within the scope of the “transaction at an undervalue” test which may not previously have been considered as being vulnerable to challenge under s.238 or s.339.
For example, many individuals provide gratuitous care services to elderly or disabled relatives which (if they were not performed by a family member) would have to be paid for. In principle, if the carer was made bankrupt then a s.339 claim could be brought against the recipient of those services for the commercial value of the care they had received.
Similarly, lawyers often provide pro bono services which have obvious commercial value (implicitly recognised by the availability of pro bono costs orders). If a lawyer assists a client on a pro bono basis and the lawyer subsequently becomes bankrupt then, in principle, it appears that a s.339 claim could be made against the pro bono client.
Again, it may be that the Court would refuse to make a restorative order in such cases on discretionary grounds but, if so, future cases will need to establish appropriate principles to determine how that discretion ought to be exercised.
- The destination of “consideration”
The Court noted (at [45]) that “consideration” in the contractual sense of the term does not need to be received by a contractual counter-party in order to constitute valid consideration. Thus, there is a perfectly valid contract if a debtor agrees to pay £1,000 to a bank in return for the bank discharging the debtor’s son’s debt of £1,000 owed to the bank. That is so even though the debtor would receive no personal benefit.
The Court accepted (at [47]), however, that for the purposes of the “transaction at an undervalue test” consideration provided by the counter-party transaction must actually benefit the debtor in order to be taken into account in determining whether the transaction was at an undervalue.
In a situation where the debtor causes the company to transfer an asset to a third party and the third party pays full value to the company, the Court reasoned (at [47]) that in such circumstances the debtor would receive full consideration because the payment to the company would ensure that there was no diminution in the value of his shares.
More generally, however, where the counter-party to the transaction provides “consideration” to someone other than the debtor there will have been a “transaction at an undervalue” even though there would have been valid “consideration” in the contractual sense. This apparently resolves the point left open on a summary judgment application in the first instance case of Payroller v Little Panda [2019] BPIR 205.
- A statutory conspiracy claim?
It was common ground before the Supreme Court that there could not be a “transaction at an undervalue” unless another person (aside from the debtor) was involved, at least as a recipient of some form of benefit pursuant to the transaction. This was on the basis that the statutory language in the “transaction at an undervalue” test is repeatedly qualified by reference to the involvement of another person.
Thus, it was also common ground that there would not be a transaction at an undervalue if the debtor unilaterally destroyed his own asset (e.g. by throwing a valuable painting on a bonfire) even though this would prejudice creditors and even if it was intended to have that effect.
Likewise, there would be no “transaction at an undervalue” if a debtor drank his own valuable wine collection with the aim of ensuring that his creditors would never be able to enforce their claims against it. That would be so even if the debtor’s friend assisted him in carrying the wine up from his cellar so that the debtor alone could drink it because the friend would receive no benefit in those circumstances.
The Court (at [57]) noted these examples and the appellants’ submission that, as a result, s.423 is “not a kind of statutory conspiracy claim which requires only some sort of combination between the debtor and another person”. Although the Court did not directly express a view on these points, it appears from other passages of the judgment (see for example [42] – [43]) that the Court accepted that some form of gift or “consideration” must be provided by the debtor to another person in order for there to be a “transaction at an undervalue”.
This analysis may have some bearing on a related, but distinct, issue namely the controversial question of whether a person who has not received any benefit as a result of a “transaction at an undervalue” but is otherwise involved in it in some way is amenable to an order for relief under s.423 (or ss.238/339). There are conflicting authorities on this point. In Johnson v Arden [2019] 2 BCLC 215 relief was refused on the basis that the defendants had received no benefit from the alleged transaction at an undervalue. By contrast, in Integral Petroleum v Petrogat [2023] BPIR 1122 it was determined that a defendant could be made liable even if it could not be established that he received any benefit (at least in circumstances where the defendants knew who had received a benefit and failed, in breach of an order of the Court, to disclose the identity of the recipient).
- The operation of the statutory bona fide purchaser defence
Section 425(2) contains a statutory bona fide purchaser defence to a s.423 claim in certain circumstances where a defendant has acted in good faith and has paid some (but insufficient) consideration for the property or other benefit which they have received. Similar defences apply to s.238 and s.339.
At [49] – [52] the Court drew attention, in the course of its analysis, to the express restrictions on the operation of that statutory defence.
In particular, under s.425(2)(a) the defence can only be invoked in relation to the receipt of an interest in property if that property was “acquired from a person other than the debtor”.
Thus, the defence is not available to a defendant who receives property directly from the debtor pursuant to a transaction at an undervalue.
However, in circumstances where the Corporate Assets Ruling applies, the defence will in principle be available to a defendant who has acted in good faith and has provided some (but inadequate) consideration to the company in return for property received from the company because in that scenario the defendant will have acquired the property “from a person other than the debtor”.
To read the full judgment of El-Husseiny v Invest Bank PSC [2025] UKSC 4 please click here.
Daniel Warents, Niamh Davis, and Professor Graham Virgo KC (hon) appeared for the appellants, instructed by Nathanael Young of Longmores Solicitors.
