Supreme Court dismisses appeal in landmark Section 423 Insolvency Act case

With its ruling, the Supreme Court unanimously dismissed the appeal made by two of the sons of Ahmad Mohammad El-Husseini regarding how section 423 of the Insolvency Act 1986 (the Act) is to be interpreted. Section 423 offers remedies to creditors in circumstances where a debtor takes steps to defeat or prejudice their claims by entering into a transaction which, in broad terms, provides for the debtor to receive no consideration or consideration worth less than that provided.

The Court of Appeal had earlier interpreted section 423 by determining that: a person can 'enter into' a transaction where they act on behalf of a company; and that there can be a 'transaction' for the purposes of section 423 where the asset which is alleged to have been disposed of at an undervalue was not beneficially owned by the 'debtor’. With their appeal, the El-Husseini brothers asked the Supreme Court to assess whether that interpretation was correct.

Previously, in July 2021, Invest Bank PSC brought proceedings in the High Court to enforce a judgment previously obtained in Abu Dhabi against Ahmad Mohammad El-Husseini for approximately £20 million. Invest Bank had identified a number of houses in central London against which it wished to enforce the judgment. One such property was owned by Marquee Holdings Limited, of which El-Husseini was the only shareholder. Invest Bank alleged that, in June 2017, the property had been transferred to El-Husseini’s son, Ziad, for which he provided no consideration, monetary or otherwise. The result of this was to render El-Husseini’s shares effectively invaluable, meaning that Invest Bank’s ability to enforce its judgment was seriously prejudiced. Invest Bank therefore sought relief under section 423.

Ziad El-Husseini and his brother Alexander applied to set aside Invest Bank’s section 423 claim. In May 2022, it was held that the fact that the properties were owned by a company controlled by El-Husseini instead of by El-Husseini personally, did not prevent the transfer from falling within the scope of section 423. However, the High Court refused to allow Invest Bank’s case to proceed on the basis that El-Husseini had not acted in his personal capacity but only on behalf of Marquee.

Both parties appealed the High Court’s decision. Invest Bank did so on the basis that the capacity in which El-Husseini acted should not disapply section 423, and the El-Husseini brothers on the basis that they did not believe section 423 could apply in circumstances where their father had procured Marquee to transfer the property for no consideration, rather than transferring an asset which he owned. The Court of Appeal allowed Invest Bank’s appeal but dismissed the cross-appeal made by the brothers. The brothers appealed this to the Supreme Court.

On Wednesday, the Supreme Court found that the language and purpose of section 423 points clearly to the conclusion that section 423 is not limited to a dealing with an asset owned by the debtor but extends to the type of transaction considered in this case. As such, it rejected the appeal.

Specialists in contentious insolvency and asset recovery Gemma Kaplan and Bill Geiringer welcomed the clarity the judgment provides and said two important themes emerged from the court’s reasoning.

First, the brothers asserted that section 423(1)(a) has two parts: one for gifts and one for transactions without consideration, suggesting both must involve the debtor's property. The court disagreed. It said: “there is nothing in the wording of the provision that suggests that the word ‘gift’ governs the rest of the definition”.

The brothers also claimed that the concept of "consideration" in section 423(1)(a) is narrower than in general contract law, meaning it must move to or from the debtor. The court agreed on the narrower scope but rejected the argument, noting that Ahmad Mohammad El-Husseini provided consideration by arranging the property transfer.

The brothers also cited section 425(2), arguing that it implies the first transfer must be from the debtor. The court disagreed, stating section 423(1) would explicitly include this if intended.

Overall, the court supported Invest Bank's view that section 423(1) does not require the transaction to involve the debtor's property.

In addition, the court looked at the interrelationship between sections 423, 238 and 339 of the Act.

Sections 238 and 339 of the Act apply to transactions at an undervalue and are defined similarly to section 423. The main difference is that sections 238 and 339 do not require a mental element to be satisfied for the right to remedies to apply, unlike with section 423(3) where the purpose of the person’s actions fall to be assessed.

The court saw no reason to give different meanings to transactions at an undervalue in sections 238, 339, and 423 and disagreed with the brothers' argument that the purpose of section 423 should not be used to interpret provisions common to all three sections. The brothers also argued that the transaction at an undervalue test should exclude preferences given by a debtor to a particular creditor from sections 238, 339, and 423. However, the court found this unhelpful to their case, noting that the regimes for transactions at an undervalue and preferences are separate, and the Act allows for a transaction to be both a preference and a transaction at an undervalue.