Restructuring and Insolvency

Lefteris Kallou
February 2025

On 19 February 2025, the Supreme Court handed down its judgment in El-Husseiny and another v Invest Bank PSC which concerned itself with the construction of section 423 of the Insolvency Act 1986 (transactions defrauding creditors) (“Section 423”).

Section 423 is a powerful tool which provides recourse for creditors where a debtor transfers an asset for no consideration or at an undervalue for the purposes of putting the asset beyond the reach of creditors.

The fact that Section 423 is contained in the Insolvency Act 1986 is a red herring as it does not require the debtor to be insolvent or in an insolvency process to apply, and it can be brought by office-holders as well as a ‘victim of the transaction’. Furthermore, unlike other provisions in the Insolvency Act 1986, a transaction under Section 423 does not need to be within a specified period of time before the commencement of insolvency proceedings.

In the case of El-Husseiny the appellant attempted to argue that Section 423 could not apply as the property that was transferred belonged to a corporate vehicle and not himself. The Court disagreed and concluded that Section 423 is sufficiently wide to apply when a debtor causes their company to transfer the company’s assets at an undervalue, thereby resulting in the diminution of the value of the debtor’s shares. If this was not the case, it would prejudice a creditor’s ability to enforce a judgment against a debtor.

This judgment then went further and expanded the definition of ‘transaction, which is also found under sections 238 and 339 of the Insolvency Act 1986 (transactions at an undervalue with respect to administration, liquidation, and bankruptcy), thereby aligning the definition with Section 423. This was reached as it would be “impossible to think of circumstances in which a transaction was held to be within section 423(1) when it would also not appropriately fall within section 238 and 339” [para 64], and there is “no good reason for giving different meanings to transactions at an undervalue in section 238, 339 and 423” [para 72].

This is a welcomed decision for insolvency practitioners as they now appear to have greater scope from which to pursue debtors who may otherwise seek to hide behind corporate structures. It will also allow insolvency practitioners to look to set aside transactions under Sections 238, 339 and 423 even though the asset transferred was not beneficially owned by the debtor. We agree with the Court’s decision as had this decision not been reached, it would have undermined the purpose of Section 423.

The full judgment may be found here: https://www.supremecourt.uk/cases/uksc-2023-0080#judgment-details

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