The recent case of Malik v Messalti [2024] EWHC 2713 (Ch) provides further guidance of the “purpose” test under s423 of the Insolvency Act 1986 (“s423”).
S423 concerns transactions defrauding creditors and is an important tool in an office holders’ armoury. Contrary to how the provision is named, there is no requirement to prove fraud or dishonesty; however, what must be established is:
1. A transaction at undervalue – s423 (1) (such as a gift or where the consideration received is significantly less than the value of the asset in question); and
2. The avoidance purpose s423 (3) – the court must be satisfied that the purpose of the transaction was to put assets beyond the reach of persons who are making or may make a claim or to otherwise prejudice creditors.
The “avoidance purpose” need not be the dominant purpose of the transaction.
There are several benefits to claims under s423 as against claims under s238 of the Insolvency Act (transactions at undervalue) – these include there being no requirement of insolvency and no concept of the “relevant time” (relevant time being the maximum of within two years of the onset of insolvency). Further, a claim can be brought by any party who is or is capable of being prejudiced by the transaction. This means that a potential claimant could look back over an extended period of time; although the length of time that has passed since the transaction could have an impact on evidencing the necessary elements under s423.
Each case will turn on its facts – the case of Malik v Messalti [2024] EWHC 2713 (Ch) involved an appeal against the Court’s finding that a trust deed entered into by Mr M in 2008 which divested himself of a beneficial interest in a property, although valid, constituted a transaction at undervalue under s423 and had been executed with the intention to protect against future creditors.
One of the arguments advanced by Mr M was that the “purpose” test was not satisfied because he had no knowledge of the status of the respondent as a creditor at the time of the trust deed (the respondent subsequently having obtained the benefit of a final charging order against Mr M’s beneficial interest in the property following separate litigation some years later).
The appeal Court considered the well-established principles around the “purpose” test – one of these being that if it is shown that a transferor foresees that a transaction will have the result of putting assets beyond the reach of creditors, that is evidence that it was entered into for the prohibited purpose (although not necessarily the effect of the transaction).
Mr M’s arguments were dismissed on appeal – the Court held that the focus of s423 (3) is on the “purpose” a transferor has for entering into the transaction. The focus is not on the degree of knowledge that a transferor has of parties who are making, or who may make a claim, against them (i.e. there is no requirement to have knowledge of a particular class of creditor). In the Court’s view, Mr M’s interpretation, if correct, would undermine the statutory purpose of s423 which was to protect the interests of both present and future creditors.
This latest judgment further confirms the potentially wide application of s423 and the policy reasons for its broad interpretation.
How can we help?
If you need additional information or support in your situation, our specialist insolvency litigation team can help.
