Transactions defrauding creditors: the use of corporate structures to defeat creditor claims

Judgment creditors should be aware that the English Court of Appeal has given guidance on the proper construction of s423 Insolvency Act 1986 (transactions defrauding creditors)¹. This guidance will be relevant where it is alleged that a debtor has transferred assets through corporate structures in order to defeat the claims of creditors, including judgment creditors.

In essence, the Court may grant relief in respect of a transaction entered into at an undervalue by a debtor for the purpose of either putting assets beyond the reach of its creditors or otherwise prejudicing the interests of creditors.  Applications for relief can be made not only by insolvency officeholders (liquidators and administrators of a corporate debtor and bankruptcy trustees of an individual debtor) but also by victims of the transaction (such as judgment creditors).  It applies generally, and not only in the context of formal insolvency proceedings.  Any relief granted will be with a view to restoring the position prior to the transaction. 

In this case, the Court of Appeal was concerned with allegations that an individual debtor had taken steps to disguise his (beneficial) ownership of assets (including real estate, shares and cash) or to cause them to be transferred within his family with a view to putting them beyond the reach of, or otherwise prejudicing the interests of, his creditors. 

Crucially, certain of these assets were not held and transferred by the debtor but by a company said to have been wholly owned or controlled by him.  This raised the question of whether the transfer of such an asset beneficially owned by the company could constitute a transaction entered into by the debtor (in respect of which the Court could grant relief, if the remaining statutory elements were satisfied).

Court of Appeal's decision

As preliminary points of law (no trial having yet taken place), the Court of Appeal held that for the purposes of s423 Insolvency Act 1986²:

• A debtor could be found to have entered into a transaction even though the asset which was alleged to have been disposed of (at an undervalue) was not beneficially owned by the debtor.
• If a debtor caused a company (which was owned and controlled by the debtor) to transfer an asset owned by the company, such steps by the debtor were capable of constituting a transaction entered into by the debtor, even though the debtor was no more than the instrument by which the company acted.
• If a debtor had done more than cause the company to transfer an asset (such as the debtor being party to an agreed wider plan pursuant to which an asset would come to be transferred by the company), whether the debtor had entered into a transaction (by virtue of this agreed plan) would depend on the facts of the case.

Implications

The question of whether any specific transfer will constitute a transaction entered into by the debtor will turn on the facts.  However, the Court of Appeal's decision does support the protective purpose of s423 Insolvency Act 1986, which a debtor might otherwise seek to sidestep by simply using companies which it owns or controls to transfer its assets away.