Restructuring & Insolvency

Deconstructing 423 Claims – Part 2

This is the second of three linked law bites that seek to illustrate the wide application of section 423 Insolvency Act 1986 and dispel some of the widely held misconceptions regarding the successful prosecution of claims using that provision.

What constitutes a 423 ‘transaction’?

The TUV, for the purposes of sections 238/339, is relatively easy to identify as it generally involves a specific transfer of money or ownership in an asset.

The position is not always so straightforward in the context of claims brought under section 423 where, for liability to be established, the law requires the presence of the requisite purpose of avoiding creditors or future creditors.

Although, as stated in Part 1, it is not necessary to prove dishonest or fraudulent ‘purpose’, the section is primarily aimed at transactions which often exhibit such purpose. As such, they will often have been planned in such a way as to ensure that the valuable proceeds of the transaction are at several removes from the initial beneficiary by the time of formal insolvency. There are often third party vehicles established primarily, if not solely, for the purposes of receiving the fruits of such transactions and then paying the proceeds out under the guise of what is dressed up as a legitimate distribution to the ultimate intended beneficiary.

Establishing the ‘transaction’ to be impugned is not always straightforward, as such transactions are often orchestrated to disguise their true nature. However, the courts have demonstrated a willingness to interpret what constitutes a 423 ’transaction’ in a more flexible way than is the case for TUV claims.

In Hill v Spread Trustee Company Limited, the bankrupt had settled land on an accumulation and settlement trust for three purposes;

  • to provide for his daughter;
  • to defer tax on the difference between the value of the land at the date of settlement and the price of the land when eventually sold; and
  • to evade tax by pretending there was little difference between the current value of the land and the cost at acquisition.

The claim was defended on the basis that the settlement by itself did not effect any prejudice. It was argued that prejudice was instead caused by the subsequent deception of HM Revenue & Customs as to the true value of the land. The court however did not accept the distinction and held the settlement an essential part of the purpose.

His Honour Judge Weeks QC employed the following analogy:

“If I buy petrol, I can say that I do so for the purpose of making a fire, although I cannot make the fire without also buying matches.”

This approach was approved by the Court of Appeal in the same case where Lady Justice Arden confirmed:

“If the transaction is entered into with the requisite purpose, the fact that some other event needs to occur does not mean that the transaction cannot itself be within section 423(3)… It is enough if the transaction sought to be impugned was entered into with the requisite purpose. It is entry into the transaction, not the transaction itself, which has to have the necessary purpose.”

This approach received approval in a separate Court of Appeal decision in the case of Feakins v Department for Environment Food and Rural Affairs in which Lord Justice Parker asserted:

“In my judgement the judge was clearly right to find that the ‘plan’ or ‘arrangement’ which he identified… was a ‘transaction’ for the purposes of section 423.”

The judgement also relied on the fact that an ‘arrangement’ is included within the definition of ‘transaction’ by section 436 of the Act.

More recently, in the case of Griffin v Awoderu the court confirmed:

“…it is quite possible that the transaction was a continuing event that was made up of a series of individual components… The purpose of each individual component was to prevent the mortgagees from taking possession… I am satisfied that those individual events could properly be found to be part of a continuing arrangement by Mr Awoderu to do what he could to obstruct the mortgagees.”

The courts appear to recognise that a party transferring assets for the purpose of avoiding creditors will have in mind the need to alienate the proceeds sufficiently to obstruct any attempt to recover them. That exercise will often entail ownership of the asset passing through several hands. However, the net result of such an exercise is that the proceeds will ultimately find their way to a connected party and section 423 is being interpreted such that a series of transfers can, when the circumstances justify it, collectively constitute a ‘transaction’ for the purposes of the section.

For further information, please contact Martin Askew.