Transactions In Defraud of Creditors

Carillion Construction Limited v Hussain

In the recent case of Carillion Construction Limited v Hussain [2013] EWHC 685 a creditor of an insolvent company sought to obtain leave to sue the parent company under section 423 of the Insolvency Act 1986, a transaction in defraud of creditors.

Section 423 is of particular concern to holding companies, directors and individuals as it enables an application to court following corporate or personal insolvency for a transaction to be undone. This has the effect of fixing a solvent party with liability for the transaction.

Crucially there is no requirement for the debtor company or individual to be insolvent at the time of the transaction. This is fundamentally different to wrongful trading, preferences and transactions at an undervalue.

Also, and unlike preferences and transactions at an undervalue, the application has no specific time limits when the events occurred which give rise to the claim, although the usual 6 year limitation under the Limitation Act will apply.

A transaction is in defraud of creditors not if there is fraud, which is often very difficult to prove, but if:

• the transaction is a gift or at an undervalue; and
• the purpose is to put assets beyond the reach of creditors; or
• prejudices the position of creditors.

This is a very wide definition. Commentators classically describe the situation where an accountant transfers his home into the sole name of his wife upon being made a partner in his firm, and thereby acquiring personal liability for its debts, as falling within this definition.

Section 423 is classically used by liquidators and trustees in bankruptcy against the beneficiaries of transactions. There are however two classes of claimant who are often forgotten. Supervisors of voluntary arrangements may bring s423 claims and also creditors in liquidations, bankruptcies and voluntary arrangements may bring claims. Interestingly the claim may be brought in a voluntary arrangement even though the creditors are bound by the arrangement.

In the Carillion case Carillion attempted to use the section directly as a creditor. It failed as unlike a supervisor, liquidator or trustee it needed the leave of the court before commencing the claim. The court found that in order for a creditor to be given leave a relatively high hurdle had to be cleared, it was not enough to be a victim. It is only in exceptional cases that a party other than the office holder will be permitted to bring statutory claims. A creditor would have to establish that:

• the transaction fell within s423; and
• he is a victim; and
• there is a good reason why he should bring the proceedings.

However I would anticipate that where an office holder declines or is unable to take proceedings and the creditor can establish he has a prima facie case he would be granted leave to proceed. This should not be so rare.

Conclusion

This case is a timely reminder of the teeth of an application under s423. In particular its very wide ranging definition and application not just to liquidators and trustees but also to supervisors and creditors.

If you wish to discuss this, or any other matter, please call Gary Player on 01403 711869.

Share this article