Prohibited purpose of evading creditors could not be inferred, says court

Mukhtar Ablyazov had been the chairman of JSC BTA Bank, a bank in Kazakhstan, until early 2009. During his tenure, he was purported to have embezzled over $5 billion from the bank, of which only a small proportion has been recovered.

In the present claim the bank sought to recover £1.1 million which had been transferred by Ablyazov to his son, Madiyar, in February 2009. Madiyar had invested the funds in UK gilts allowing him to satisfy the criteria for a UK Tier 1 investor visa which was granted to him in May 2009. The bank sought to challenge the transfer of the funds to Madiyar arguing that it should be set aside under section 423 of the Insolvency Act of 1986 as a transaction defrauding creditors.

It was accepted at the first hearing in the High Court that the transfer was a transaction at undervalue. Therefore the key issue for the court at first instance was whether the transfer had been made for the purpose of putting assets beyond the reach of a person who is making, or may at some time, make a claim against Ablyazov - the 'prohibited purpose' as required for a transaction to be set aside under s423 IA 1986.

The judge found that while Ablyazov may have been aware that a consequence of the transfer would be to place the funds out of the hands of potential creditors, this was not a substantial purpose of the transfer. The judge therefore found that the bank's claim under s423 had failed. One of the relevant factors which the judge took into account in reaching this conclusion was that it was likely that Ablyazov would have made the transfer to enable Madiyar to pursue an investor visa, even if he was not at risk of a claim being made against him by the bank. Given this finding, the judge said that he was "unwilling too readily to infer" that the transfer was made for the prohibited purpose.

The bank appealed the High Court's findings, but the appeal was rejected by the Court of Appeal. The Court of Appeal was satisfied that the High Court had approached the 'prohibited purpose' test correctly, and gave the following helpful commentary on the test:

1. the test is whether the transaction was entered into for the prohibited purpose. If it was, then the transaction would fall within s423, even if it was entered into for one or more other purposes. The prohibited purpose does not have to be the sole or dominant purpose of the transaction;
2. however, it is not enough to bring a transaction within s423 that the transaction had the consequence of putting assets beyond the reach of creditors, even if the consequence was foreseeable or actually foreseen by the debtor at the time of the transaction. Carrying out an act in the knowledge of a likely consequence does not mean that the act is carried out for the purpose of that consequence;
3. a consequence is more likely to be perceived as positively intended if there is reason to think that it is something which the actor desired. This may support an inference that the transaction was entered into for that purpose, but such a conclusion is not a logical or legal necessity. It is a judgment which has to be based on an evaluation of all the relevant facts of the particular case.

One of the bank's grounds for appeal was that the judge should have approached the case on the basis that, given that Ablyazov was aware that claims were likely to be made against him at the time of the transaction, it should be readily inferred that the transfer was made for the prohibited purpose. The bank argued that there was an evidential burden on Ablyazov to show that this was not the case.

This argument was rejected by the Court of Appeal. The court found that there is no presumption as to the reversal of the evidential burden in s423 of the IA 1986, in contrast with s239 and 340 of the IA 1986 which deal with preferences for example. It was for the judge at first instance to decide what inferences he thought it right to draw from the evidence as a whole.

The bank's grounds for appeal also included that the judge failed to give appropriate weight to his findings of fact and that, had he done so, he would have concluded that the transfer had been made for the prohibited purpose. The Court of Appeal refused to interfere with the judge's evaluations of fact on these grounds. In doing so, the Court of Appeal referred to the firmly established principle that an appellate court should only interfere with findings of fact if satisfied that the conclusion was ‘plainly wrong’. The judge at first instance was much better placed to make the necessary evaluation based on his closer consideration of the evidence and ability to view the facts as a whole.

Rebecca James and Manpreet Khehra are restructuring experts at Pinsent Masons, the law firm behind Out-Law.com