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Sections 423 of the Insolvency Act 1986
Sections 423 of the Insolvency Act 1986
Sections 423 to 425 of the Insolvency Act 1986 are contained within Part XVI of the Act which is headed ‘Provisions Against Debt Avoidance’.
Section 423, which has the sub-heading ‘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—
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.
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—
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.
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—
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.
In this section “the court” means the High Court or—
…
In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as “the debtor”.’
Section 424 of the 1986 Act enables an application under section 423 to be made, so far as material for the purposes of the present proceedings, by a person who is ‘a victim’ of the transaction (as defined at section 423(5)).
Section 425 addresses the orders which a court may make pursuant to section 423. It provides:
‘(1) Without prejudice to the generality of section 423, an order made under that section with respect to a transaction may (subject as follows)—
require any property transferred as part of the transaction to be vested in any person, either absolutely or for the benefit of all the persons on whose behalf the application for the order is treated as made;
(b) require any property to be so vested if it represents, in any person's hands, the application either of the proceeds of sale of property so transferred or of money so transferred;
(c) release or discharge (in whole or in part) any security given by the debtor;
(d) require any person to pay to any other person in respect of benefits received from the debtor such sums as the court may direct;
(e) provide for any surety or guarantor whose obligations to any person were released or discharged (in whole or in part) under the transaction to be under such new or revived obligations as the court thinks appropriate;
(f) provide for security to be provided for the discharge of any obligation imposed by or arising under the order, for such an obligation to be charged on any property and for such security or charge to have the same priority as a security or charge released or discharged (in whole or in part) under the transaction.
An order under section 423 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the debtor entered into the transaction; but such an order—
shall not prejudice any interest in property which was acquired from a person other than the debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or prejudice any interest deriving from such an interest, and
(b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.
For the purposes of this section the relevant circumstances in relation to a transaction are the circumstances by virtue of which an order under section 423 may be made in respect of the transaction.
(4) In this section “security” means any mortgage, charge, lien or other security.’
Thus it can be seen that in order to trigger the jurisdiction under section 423, it is necessary for the applicant to establish, on the balance of probabilities, that:
The respondent has entered into a transaction at an undervalue. This can include making a gift or entering into a transaction for no consideration;
and
The purpose of the transaction was either (i) to put assets beyond the reach of a person who is making, or may at some time make, a claim against them, or (ii) otherwise to prejudice the interests of such a person in relation to the claim which that person is making or may make;
and
The applicant is a ‘victim’ of the transaction, as defined in section 423(5).
It is not necessary to demonstrate that the purpose referred to in section 423 was the respondent’s sole, dominant or even substantial purpose for entering into the transaction, merely that it was ‘a’ purpose. It is possible that the respondent may have had more than one purpose for acting as he did: see IRC v Hashmi [2002] EWCA Civ 981, and JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176. ‘Purpose’, in this context, has been held to carry the same subjective meaning as the word ‘intention’ in the context of section 37 of the Matrimonial Causes Act 1973.
There is no requirement under section 423 to demonstrate that the respondent’s purpose was to prejudice the interests of the applicant specifically as opposed to those of other actual or potential creditors. Thus, there does not need to be a connection between the purpose of the transaction and the specific prejudice caused to the victim: Hill v Spread Trustees Co Ltd and Another [2006] EWCA Civ 542.
Once the jurisdiction is engaged the court has wide powers to restore the position to what it would have been if the transaction had not been entered into, and to protect the interests of persons who are victims of the transaction: see Chohan v Saggar [1994] BCC 134, Trowbridge v Trowbridge [2002] EWHC 3114 (Ch) and Mubarak v Mubarik [2007] EWHC 220 (Fam). Section 423 cannot, however, be used to put the applicant in a better position than they would have been had the transaction not taken place: see Ram v Ram (No. 1) [2004] EWCA Civ 1452 where it was held that the section could not be used to give the wife priority over other creditors in the context of her husband’s bankruptcy.
The powers of the court in this context extend to making orders against a third party who was not a party to the transaction in question, unless that third party received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances.