Dispute Resolution analysis: When the owners and controllers of a company refused to identify the recipient of payments made out of the company during the course of arbitration proceedings, their defence to a claim under section 423 of the Insolvency Act 1986 was struck out and judgment was entered against them.
Integral Petroleum SA v Pretrogat FZE and ors  EWHC 44 (Comm)
What are the practical implications of this case?
This case considers the application of both section 423 of the Insolvency Act 1986 outside of ongoing insolvency proceedings and also the sort of relief which it is appropriate to grant where a claim brought under that section succeeds. The High Court has endorsed the principles set out by ICC Judge Jones in Re Dormco SICA Ltd (in liquidation)  EWHC 3209 (Ch) to be applied in cases in which a transaction defrauding creditors is alleged. The judgment also focuses on two unusual features of this case. First, the fact that none of the individuals or companies involved were based in England and Wales. The judgment confirms that provided a sufficient connection to the jurisdiction can be demonstrated, an order can be made under sections 423 to 425. Second, the fact that none of the Defendants were direct recipients of the transfers which formed the subject matter of the claim. The Court noted that the restorative character of sections 423 to 425 would not generally be consistent with claims succeeding against persons who had received no benefit at all from transactions but had merely facilitated or directed them. However, incidental benefits, unrelated to direct receipt of funds, might still justify an order being made in such a claim against those incidental beneficiaries.
What was the background?
This is a dispute between two oil and petroleum trading companies, "Integral" and "Petrograt". Petrograt is owned by Mr Kanybek Beisenov, who is the sole de jure director. The two de facto directors of Petrograt are Mr Mahdieh Sanchouli and Ms Hosseinali Sanchouli. In September 2017, Integral (as buyer) and Petrograt (as seller) entered into a contract for the sale of fuel. Following a tip-off, Integral applied for and obtained an injunction preventing the conversion of the fuel. In breach of the injunction, Petrograt converted some of the fuel by diverting it to Iran. Mr and Ms Sanchouli were found guilty of contempt as a result and committed. In parallel, Integral commenced arbitration proceedings against Petrograt seeking relief in respect of the same conversion. In November 2019, Integral was awarded damages of USD$439,448.37 plus interest and costs. This award was enforced and judgment was obtained in November 2019 with the Court also ordering a receiver over Petrograt's assets by way of equitable execution. The receivers thereafter discovered that in around January 2019, Integral's assets had either been withdrawn or transferred to another company "Company A", incorporated in the UAE and owned and/or controlled by Mr and Ms Sanchouli and Mr Beisenov. In May 2021, Integral made an urgent, without notice application for a worldwide freezing order against Petrograt, Mr and Ms Sanchouli and Mr Beisenov in support of a substantive claim under section 423 of the Insolvency Act 1986 alleging that the transfers were transfers defrauding creditors. The worldwide freezing order was granted and then continued. The claim was defended. In May 2022, following an application by Integral, Cockerill J ordered that unless the Defendants identify Company A, their defence should stand struck out and they be debarred from defending the claim. They refused to identify Company A and, accordingly, the defence was struck out. Integral then applied for judgment on the claim pursuant to CPR r. 3.5(5).
What did the court decide?
The Court declared that the withdrawals and the transfers to Company A were transactions defrauding creditors within the meaning of section 423 of the Insolvency Act 1986. At least the bulk of the sums transferred to Company A were transactions at an undervalue, as required for a claim under section 423 to succeed. The Court rejected various explanations put forward by Ms Sanchouli for the making of the transfers and concluded that they were made for at least one of the "prohibited purposes" specified in section 423(3). As Integral had an outstanding claim against Petrogat, being pursued by arbitration, at the time of the transfers, the Court was satisfied that Integral was a victim of the transactions. Mr and Ms Sanchouli and Mr Beisenov were jointly and severally held liable to pay Integral the amount of the transfers up to the amount of the judgment obtained following enforcement of the arbitral awards. Applying Re Paramount Airways Ltd  1 Ch. 223 and Orexim Trading Ltd v Mahavir Port and Terminal Private Ltd  EWCA Civ 1660, the Court held that section 423 is not restricted to persons or property in England and Wales, however, an English Court will refuse to exercise its discretion to make an order unless it is satisfied that there is a sufficient connection with England and Wales. The relevant connection to England and Wales was present here, in light of the underlying contract between Integral and Petrogat being governed by English law, the English arbitration ultimately reflected in an English judgment and the fact that an English receivership order had been made. Although Company A would be the most obvious target for relief, it was appropriate to order relief against Mr and Ms Sanchouli and Mr Beisenov even though they were not the direct recipients of the transfers. The Court held that they each derived sufficient benefit from the transfers to justify the Court in making orders against them. The sums ordered should be paid directly to Integral and not to the receivers.
- Court: High Court of Justice, Business and Property Courts, Commercial Court (KBD)
- Judge: David Edwards KC (sitting as a High Court Judge)
- Date of judgment: 18 January 2023
Originally Published by LexisNexis
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