Transactions Defrauding Creditors: Recent Cases

Introduction

Attempts by debtors to defeat their creditors and make themselves judgment-proof are not new. So stated the Supreme Court in El-Husseini & Anor v Invest Bank PSC [2025] UKSC 4.[[1]] Many might say that this is an understatement. Practitioners dealing with remedies arising on relationship breakdown are very familiar with situations where a party dissipates assets with a view to frustrating the court’s ability to make orders against those assets.

Section 423 Insolvency Act 1986 (section 423) is one of the tools available to the court as a means of combating such behaviour. It permits the court to unwind relevant transactions if they are found to have been made at least partly with the intention of placing assets beyond the reach of creditors. Whilst section 423 has significant parallels in the financial remedy jurisdiction with section 37 Matrimonial Causes Act 1973, it is nonetheless a powerful tool in the armoury of practitioners, and can be used in situations where section 37 is not available (e.g. costs orders in matrimonial proceedings, or claims under the Trusts of Land and Appointment of Trustees Act 1996 or Schedule 1).

This article examines the nature of the jurisdiction, its parameters (particularly in light of El-Husseini and the Supreme Court’s judgment) and its practical application, as seen in the judgment of Harrison J in the Schedule 1 case of Re P (A Child) (Financial Provision: s 423 Insolvency Act 1986) [2025] EWHC 1460 (Fam).

The legislation

Legislation designed to combat delinquent behaviour by debtors is almost as old as the behaviour itself; Justinian described the ‘actio paulina’ in Roman law, and the Fraudulent Conveyances Act 1571 represents an early example of such legislation in English law. As the Supreme Court stated in El-Husseini, the topic was one of those considered by the review of insolvency legislation by the committee chaired by Sir Kenneth Cork, which led to the publication of the Report of the Review Committee on Insolvency Law and Practice (the Cork Report). The Cork Report recommended reform to the remedies then provided by section 172 Law of Property Act 1925, which covered situations where ‘persons must be just before they are generous and that debts must be paid before gifts can be made’.

Those recommendations were adopted, but section 423 was not enacted in the Insolvency Act 1986 (IA 1986) exactly as suggested in the Cork Report. Part XVI, headed ‘Provisions Against Debt Avoidance’, comprises sections 423–425 and applies in England and Wales only; importantly, for these purposes, it applies even if the debtor is not in a formal insolvency process. The counter-consideration is that, unlike the provisions in the IA 1986 governing transactions at an undervalue and preferences, which may be avoided only in a formal insolvency, under section 423 the stricter requirements of section 423(3) governing the debtor’s intention must be satisfied. This distinction is also relevant to section 37 Matrimonial Causes Act 1973 (which omits the subjective element of the test).

Section 423 sets out the elements of the claim which must be established by a claimant; section 424 identifies those who may bring claims, while section 425 provides for the available remedies, on a non-exhaustive basis. Section 423 (Transactions defrauding creditors) provides as follows:

‘(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—

(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;

(b) he enters into a transaction with the other in consideration of marriage [or the formation of a civil partnership]; or

(c) he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.

(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for—

(a) restoring the position to what it would have been if the transaction had not been entered into, and

(b) protecting the interests of persons who are victims of the transaction.

(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—

(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or

(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.’

Section 436(1) defines ‘transaction’ for the purposes of the IA 1986 (and thus section 423) as including ‘a gift, agreement or arrangement’. That form of words means that the ambit of section 423 is broad and covers most scenarios where a debtor (defined by section 423(5) as the person entering into the transaction) might seek to place assets beyond the reach of a ‘victim of the transaction’.

Section 423(3) provides that the debtor must have entered into the transaction ‘for the purpose’ defined in that sub-section, i.e. placing assets beyond the reach of a person who is making a claim against him or prejudicing that person’s interests (described in Commissioners of Inland Revenue v Hashmi [2002] EWCA Civ 981, [2002] 2 BCLC 489 as the ‘statutory purpose’).

As the Court of Appeal stated in Hashmi at [22], section 423 is a carefully calibrated section forming part of a carefully calibrated group of sections. It only applies to transactions which are gifts or have a gratuitous element (section 432(1)). The transaction is only set aside for the limited purposes of subsections (2)(a) and (b). The onus is on the claimant to show the statutory purpose (subsection (3)), and although there is a very wide jurisdiction to make appropriate orders under section 424, these may not prejudice the interests of bona fide purchasers for value under subsequent transactions.

The statutory purpose need not be the only motivation for the transaction entered into by the debtor; it is sufficient if it was a purpose. In other words, the statutory purpose must be positively intended as opposed to being a mere by-product of the transaction, but it need not be the sole motivation for the transaction either. Whether the debtor had the statutory purpose is essentially a question of fact (see BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, [2019] 2 All ER 784 at [66]). In determining this question, the court must make primary findings of fact and then make a global evaluation of all the relevant facts (Henwood v Barlow Clowes [2008] EWCA Civ 577 at [68]). The test is a subjective one: per Sequana at [66]: ‘the purpose of a person in entering into a transaction is a matter of the subjective intention of that person: what did he aim to achieve?’

Invest Bank v El-Husseini

The case of El-Husseini v Invest Bank PSC cited above represents the first time that section 423 has been considered by the Supreme Court. It involved an argument about the meaning of the word ‘transaction’ in context and to what extent it can apply to transactions which the debtor did not enter into personally.

The facts can be summarised as follows. Invest Bank PSC (Invest), the claimant, brought High Court proceedings in 2021 to enforce a judgment worth approximately £20m previously obtained in Abu Dhabi against Ahmad Mohammad El-Husseini (Mr El-Husseini). Invest had identified several houses in central London against which it wished to enforce the judgment. One such property, 9 Hyde Park, was worth circa £4.5m and was owned by Marquee Holdings Limited (Marquee), a Jersey company of which Mr El-Husseini was the only shareholder.

Part of Invest’s case was that Mr El-Husseini had procured in 2017 that Marquee would transfer 9 Hyde Park to one of his sons (Ziad) for no consideration (as part of a far wider series of transactions involving assets under Mr El-Husseini’s control, to similar effect). The effect of this transaction was that Marquee transferred a valuable property to Ziad and received nothing in return, with the result that Mr El-Husseini’s shareholding in Marquee was reduced in value. Likewise, Mr El-Husseini received nothing in return for procuring the transfer of 9 Hyde Park to compensate for the reduction in the value of his shares in Marquee.

Mr El-Husseini’s case was that the transfer of 9 Hyde Park could not fall within section 423 because he, as the debtor, did not transfer any property that he himself owned.

Mr El-Husseini, Ziad and the other defendant to the Invest claim (Mr El-Husseini’s other son, Alexander) sought to defeat Invest’s claim at an interlocutory stage on the grounds that the claim did not have reasonable prospects of success on the section 423 point. In February 2022, Andrew Baker J dismissed that challenge, noting that there was no wording in section 423, or in the definition of ‘transaction’ in section 436 IA 1986, which limited section 423 to a transaction whereby a beneficial interest of the debtor was transferred:

‘in my view it is impossible to say that it is a pre-requisite of a transaction entered into by the debtor, for it to fall within section 423, that it concern an asset beneficially owned by the debtor, and cannot extend to an arrangement made with a view to a transferee acquiring at an undervalue an asset owned by a company owned by the debtor, with a view to putting that asset beyond the (indirect) reach of the creditor in any attempt they might make to enforce their rights against the debtor.’

The Court of Appeal dismissed Mr El-Husseini and Ziad’s appeal from this decision on several grounds. First, it required reading words into section 423 that were not there. Second, the word ‘transaction’ was defined broadly in section 436(1), and there was no reason to give a restrictive meaning to the broad terms used: ‘agreement or arrangement’. Third, the interpretation of section 423(1) was informed by the purpose of the section which was clear from subsection (3): the court should not interpret subsection (1) ‘in a way which would easily defeat the purpose of section 423 when read as a whole’. Fourth, there was no good policy reason to restrict the meaning:

‘The important point for present purposes is that, although section 423 finds itself in the same Act as those provisions which are concerned with bankruptcy or corporate insolvency, its scope is wider. There is no need for there to be any insolvency. The unfortunate reality of life is that even very wealthy debtors are sometimes unwilling, rather than unable, to pay their debts. They may well make strenuous efforts to use various instruments, including a limited company, for the purpose of putting their assets beyond the reach of a person who is making, or may make, a claim against them; or otherwise prejudicing the interests of such a person.’

Mr El-Husseini and Ziad appealed to the Supreme Court. They advanced several statutory construction arguments as to why the Court of Appeal was incorrect. First, they 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 Supreme Court rejected this submission, stating that ‘there is nothing in the wording of the provision that suggests that the word “gift” governs the rest of the definition’.

The appellants 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 Mr El-Husseini provided consideration by arranging the property transfer. The Supreme Court dismissed the appeal and found that the Court of Appeal had been correct to conclude that section 423 does not require a transaction to involve property directly owned by the debtor in order to come within the section’s ambit.

Whilst in some regards an unsurprising decision – it would seem peculiar if the debtor could evade the effect of the section by acting via a wholly owned company as opposed to personally, given the clear intention of the section – the Supreme Court’s conclusion in El-Husseini represents a useful reminder of the broad scope of section 423 and its usefulness in challenging transactions made by associates of, or companies controlled by, the relevant debtor.

By way of postscript (albeit preceding the Supreme Court’s decision, which had been an appeal against an interlocutory application), all of Invest’s claims failed at trial (see Invest Bank PSC v El-Husseini [2024] EWHC 2976 (Comm)) on the basis that they failed to make out that Mr El-Husseini had held the requisite statutory purpose, and so Invest’s victory in the Supreme Court will likely turn out to be a hollow one unless the trial judge’s judgment is successfully appealed. Mr El-Husseini did not appear at trial and elected not to engage with the proceedings once the appeal to the Court of Appeal, described above, failed; despite ‘haunting the trial like Banquo’s ghost’, Mr El-Husseini deprived the court of his evidence and disclosure.

Re P

Re P represents a useful example of the principles described in El-Husseini, where Harrison J was asked to apply the section in a Schedule 1 application. The applicant (M) sought an order under that section for the provision of a housing fund in the order of £1,050,000, periodical payments, security for maintenance in the sum of £6,000 per month, and a school fees order.

The parents met in 2015 and began a relationship shortly thereafter; they never married. They lived together until 2019 in the Czech Republic, their home country. P is the parties’ only child, and was aged 7 at the time of the hearing. P and M moved to England in August 2020, with F’s consent and financial support. M and P returned to the Czech Republic in August 2022, where she learned that F had started a new relationship – the parties’ relationship ended at this point, and M and P moved back to England in January 2023.

M issued her Schedule 1 application on 13 March 2024. It was found that F had failed to make full and frank disclosure of his assets (as well as breaching several orders relating to the payment of M’s legal fees). Harrison J therefore had to make findings in the absence of full information.

For the purposes of this article, it is sufficient to note that F argued that he had disposed of his assets into a trust (the Trust), which had been settled by F’s father, and that he therefore could not meet M’s claims. In essence, F’s wealth was chiefly derived from the sale of a successful business in the Czech Republic, in which he had been the sole shareholder (albeit with a minority shareholding held via a separate company within his control). Harrison J found that the sale of the business generated circa €73m, of which €16.7m was received by F personally. There followed a complex series of transactions culminating in the transfer of the majority of F’s wealth into the Trust, which was a discretionary trust stated to be for the benefit of F’s family. It is perhaps notable that the only substantial assets in the Trust were placed into it by F.

M argued that the Trust had been deliberately used (and even created, though this was rejected by Harrison J) as a vehicle to defeat her claims. As Harrison J stated at [98]:

‘I consider it inconceivable that the father would have alienated himself from his wealth to the extent he has done, so as to leave himself owning essentially no assets at all, not even the home in which he lives. In my judgement, the primary purpose behind all of the transactions which have led to the father’s assets being placed in trust has been to defeat the claims of creditors, in particular those of the mother which have loomed large at the time the transactions have been taking place.’

He found that a series of transactions entered into (all for nil or minimal consideration) by F amounted to transactions intended to defeat creditors.

Harrison J noted that this engaged the court’s jurisdiction under section 423. He adjourned the claim under this section, citing a hope that F might comply with the financial award that he made in M’s favour (which included a property fund worth £960,000; security for maintenance and school fees in the sum of £600,000, other capital sums totalling circa £205,000, plus ongoing maintenance payments), but signalled a willingness to revisit the point if F continued to breach orders.

While Re P did not in the event result in an order under section 423 (although it might have done, and may yet do so), the judgment of Harrison J is a clear exposition of the court’s approach to claims under section 423 in the family context (particularly where an order under section 37 Matrimonial Causes Act 1973 would not be available), and a demonstration of the section’s utility in attacking transactions made with the intention of frustrating claims by legitimate creditors. Whilst applications under the jurisdiction are not without their complexities – as the eventual denouement in El-Husseini shows – section 423 will remain an indispensable tool in the matrimonial finance armoury.

[[1]]: The case title renders the appellant’s surname as ‘El-Husseiny’, whereas the name appears in the body of the judgment as ‘El-Husseini’. The latter appears to be correct based on other judgments.