Landmark judgment by Supreme Court on s.423 of the Insolvency Act 1986

Introduction

The Supreme Court of the United Kingdom recently delivered a landmark judgment in El-Husseiny and another v Invest Bank PSC [2025] UKSC 4. This decision provides crucial clarification on the scope and application of section 423 of the Insolvency Act 1986, particularly concerning transactions defrauding creditors. The ruling has significant implications for creditors seeking to challenge transactions that place assets beyond their reach, even when those assets were not directly owned by the debtor at the time of transfer.

This article explores the background of the case, the legal principles at stake, the Supreme Court’s reasoning, and the broader implications of the ruling.

Background of the Case

The case arose from an attempt by Invest Bank PSC, an Abu Dhabi-based financial institution, to enforce judgments obtained against Mr. Ahmad El-Husseiny, a businessman who owed the bank approximately £20 million. The bank alleged that Mr. El-Husseiny had orchestrated transfers of valuable assets, including London properties, in an attempt to shield them from creditors.

Invest Bank relied on section 423 of the Insolvency Act 1986, which allows creditors to challenge transactions made at an undervalue when such transactions are intended to put assets beyond the reach of creditors or otherwise prejudice their interests. However, a key issue in this case was whether section 423 could be applied to transactions where the debtor did not own the transferred assets but arranged for their disposal through an entity under their control.

Legal Issues and Section 423 of the Insolvency Act 1986

Section 423 is designed to prevent individuals from frustrating creditors' claims by transferring assets at an undervalue. The provision states that a transaction is challengeable if it is entered into:

For no consideration or at significantly less than market value; and
With the purpose of putting assets beyond the reach of creditors or otherwise prejudicing their interests.

The case raised two central questions:

Does section 423 apply to transactions where the debtor arranges for an entity they control to transfer assets?
What level of intent is required to satisfy the purpose test under section 423?

Lower Court Decisions

The High Court initially ruled in favor of Invest Bank, finding that Mr. El-Husseiny’s involvement in the transactions demonstrated a clear intention to frustrate creditor claims. However, the Court of Appeal overturned this decision, holding that because the assets were not legally owned by Mr. El-Husseiny at the time of transfer, section 423 could not apply.

The Supreme Court granted Invest Bank permission to appeal, considering the wider implications of the ruling for creditor protection.

The Supreme Court’s Judgment

The Supreme Court unanimously allowed the appeal, reinstating the High Court’s decision. The key findings were as follows:

1. Scope of Section 423:

The Court confirmed that section 423 can apply even if the debtor did not legally own the transferred assets, provided they had sufficient control over the entity making the transfer. The Court emphasized that the purpose of section 423 is to prevent transactions that effectively frustrate creditor claims, irrespective of the precise legal ownership of the assets.

2. The Purpose Test:

The Court reaffirmed that for a transaction to fall within section 423, it is sufficient if the debtor had a substantial purpose of putting assets beyond creditors' reach. It does not need to be the sole or dominant purpose. In this case, the evidence demonstrated that Mr. El-Husseiny played a central role in orchestrating the transfers with the clear intention of evading Invest Bank’s enforcement efforts.

3. Practical Implications for Creditors:

The judgment provides a significant boost to creditors by clarifying that debtors cannot evade section 423 simply by using corporate structures to transfer assets. If a debtor is found to have played a key role in facilitating such transfers, the transaction can still be set aside under section 423.

Broader Implications of the Judgment

The ruling has far-reaching consequences for creditors, debtors, and insolvency practitioners.

1. Enhanced Protection for Creditors

The decision strengthens the ability of creditors to challenge transactions designed to frustrate enforcement. Creditors no longer need to prove direct ownership by the debtor at the time of transfer, as long as there is sufficient evidence that the debtor controlled or influenced the transaction.

2. Increased Scrutiny of Corporate Structures

The judgment underscores the willingness of the courts to pierce the corporate veil where necessary to prevent abuse of legal structures. Debtors who use companies or trusts to conceal asset transfers may now face greater scrutiny.

3. Potential Expansion of Insolvency Act Remedies

Although section 423 has traditionally been used in insolvency contexts, this ruling may encourage broader use of the provision in other commercial disputes where assets are transferred to evade creditor claims.

4. Impact on Commercial Transactions and Due Diligence

Businesses engaged in complex corporate structuring must now exercise increased diligence when conducting transactions that involve asset transfers. Legal and compliance teams will need to ensure that transactions do not inadvertently fall within the scope of section 423.

Conclusion

The Supreme Court’s decision in El-Husseiny v Invest Bank PSC represents a major clarification of section 423 of the Insolvency Act 1986, reinforcing the court’s commitment to preventing transactions that undermine creditors’ rights. By confirming that section 423 applies to transactions orchestrated by debtors even where they do not directly own the assets, the ruling significantly strengthens creditor protection.

This case serves as a reminder to debtors, creditors, and insolvency practitioners of the importance of understanding the legal consequences of asset transfers. The judgment will likely have a lasting impact on commercial litigation and insolvency law, ensuring that those who seek to evade legitimate creditor claims cannot do so through artificial structures.

As the legal landscape continues to evolve, this ruling will undoubtedly serve as a key precedent for future cases involving fraudulent asset transfers and creditor enforcement actions.