A valid trust deed to transfer property was deemed a transaction to defraud future creditors.
Summary
Section 423 of the Insolvency Act 1986 allows for the court to overturn transactions that were made to defraud creditors.
The High Court considered whether the claimant had a valid s.423 claim to overturn the defendant's transfer of property. There were no creditors at the time of the transfer and no ongoing bankruptcy proceedings.
The court held the defendant transferred property to his wife to put assets beyond the reach of creditors.
Background
Ms Messalti, the claimant, obtained judgment against Mr Malik, the defendant, on 16 November 2016. Messalti obtained an interim charging order on 17 February 2021. Malik sought to stop the making of a final charging order.
Application for final charging order
Messalti applied for a final charging order over Malik's interest in a property. Malik argued that he had no beneficial interest in the property because of a trust deed executed on 10 November 2008. Malik owned the property in equal shares with his wife. The trust deed involved Malik giving his share of the property to his wife to hold the property on trust for his four children.
Whether Malik put assets beyond reach of creditors
Messalti defended her position in obtaining the final charging order by referring to section 423(3)(a) of the Insolvency Act 1986, arguing that Malik put assets beyond her reach as a creditor.
Malik argued that the trust deed had not been created to defraud creditors and that s.423 could not apply because he could not have reasonably foreseen that there would be any creditors in the future. Malik had no creditors and had no involvement with Messalti at the time the trust deed was created. Malik asserted that his purpose for the trust deed was solely for the benefit of his four children and not what Messalti claimed.
The County Court agreed with Messalti and the interim charging order was made final. Malik appealed to the High Court.
The court's decision
The High Court dismissed Malik's appeal.
The court considered that:
the trust deed contained express provisions dealing with Malik's duties to deal with any creditors and restricting his right to use the property to raise funds to pay creditors
Malik’s explanation that it was to "protect the family home" was consistent with a wish to keep it out of the reach of creditors
Malik's evidence as to how the idea for the trust deed had come about was treated “very cautiously”
Malik had it in mind to engage in a course of litigation conduct that could lead to adverse costs orders against him
The court held that Malik must have had creditors in mind when the trust deed was created. In this particular case, it was more likely than not that Malik "feared future creditors in the light of Mr Malik's future aims”.
The court held that s.423(3) did not require that Malik had knowledge of particular creditors or classes of creditors at the time of entering the transaction. Malik's actions of putting assets beyond the reach of creditors was sufficient to engage s.423(3). That was deemed to be his purpose for the trust deed.
Comment
Section 423 of the Insolvency Act 1986 is wide ranging and can apply whether the client is insolvent or not. It applies to any transaction made by a debtor at an undervalue and for the purpose of putting assets beyond the reach of creditors, or otherwise prejudicing the interests of those creditors.
All cases will have different circumstances. It cannot be said that everyone who executed a trust deed before the existence of any creditor did so with intent to defraud creditors, but there is a risk a creditor's claim could result in a court reversing the transaction.
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