In a decision with wide-reaching implications for creditors and insolvency practitioners, the UK Supreme Court has confirmed that debtors cannot hide behind corporate structures to protect assets from legitimate claims.
The Court has held that section 423 of the Insolvency Act 1986 can apply even when a debtor uses a company they control to transfer assets at an undervalue, even if those assets aren't held in the debtor's own name.
Case Overview
The case, Alexander Ahmad El-Husseiny & Ziad Ahmad El-Husseiny v Invest Bank PSC, arose from a debt of approximately £20 million owed by businessman Ahmad Mohammad El-Husseiny to UAE-based Invest Bank PSC, following personal guarantees on loans to two companies in the United Arab Emirates.
The bank alleged that Ahmad orchestrated the transfer of valuable London properties and company shares owned by companies under his control to his sons, Alexander and Ziad, for no consideration or for less than market value, in order to place them beyond the bank's reach.
Legal Question
Section 423 allows the court to set aside transactions made undervalue with the purpose of defeating creditors. The appellants argued that the section only applies if the debtor personally owns the asset at the time of transfer, and cannot be engaged when the transfer is made through a company.
What happened in the Court of Appeal?
The Court of Appeal rejected that argument, holding that the provision applies where a debtor acts through a company they control, even if they are not the beneficial owner. The appellants appealed to the Supreme Court.
Supreme Court Judgment
The Supreme Court unanimously dismissed the appeal. It held that:
- The term "transaction" in section 423(1) is not confined to dealings with assets owned by the debtor.
- It extends to transactions where a debtor enters into an arrangement under which a controlled company transfers assets for no consideration or at an undervalue.
- The statutory purpose is to prevent debtors from putting assets beyond the reach of creditors, whether held directly or indirectly.
The Court also noted that while "preferences" and "transactions at an undervalue" are separate concepts in insolvency law, the same transaction can fall into both categories.
The Supreme Court's judgment delivers a clear message: attempts to frustrate creditors through complex corporate structures will not succeed if the underlying intent is to avoid debt. By affirming that section 423 applies even when assets are held and transferred through controlled entities, the Court has reinforced the protective reach of insolvency law. This ruling strengthens the legal tools available to creditors and insolvency practitioners, ensuring that form cannot be used to obscure substance when it comes to asset recovery.
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