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Transactions in Fraud of Creditors: The Foreign Element
Steven Gee, Barrister, Head of Chambers, and Ravi Aswani, Barrister, Stone Chambers, Gray’s Inn, London, UKIntroduction
For as long as law has existed people have not been paying their debts. In some cases the debtors go to considerable lengths to ensure that not only will a debt not be paid but also that they no longer have the assets with which to pay that debt. Section 423 of the Insolvency Act 1986 is a statutory jurisdiction which concerns transactions entered into at an undervalue for the purpose of prejudicing creditors. Its historical roots can be traced back to a statute of Elizabeth I, 13 Eliz. I c.5, which was replaced momentarily in the Law of Property Amendment Act 1924, Sch 3 Pt II, para 31, and then s. 172 of the Law of Property Act 1925. Under these sections a transfer subject to attack under the statute gave the transferee a defeasible title, good unless and until avoided through the proceedings brought to avoid it under the statute. Section 423 was introduced following the Cork Report (1982, Cmnd 8558, paras 1210-1220 and 1283-1284). Its regime provides for a form of class action on behalf of all the ‘victims’ of the transaction. These are any person who is or is capable of being prejudiced by it (s.423(5)). The section provides for the court to operate a discretionary jurisdiction to undo the consequences for the victims which would otherwise arise from the transaction caught by the statute. An order under s.423 may be to undo the transaction itself, avoiding it, or it may leave the transaction unaffected, with the transferee or his successors in title retaining good title to the transferred asset, and be some other order of which the consequences are to restore the original financial position of the victims.
A very important aspect of jurisdiction under s.423 is the protection afforded to third parties who have acquired an asset in good faith and for value. Under s. 425(2) a broad protection is accorded to third parties who were not parties to the transaction caught by the statute, and who have acquired an interest in the property, or who benefit from that transaction, in good faith for value and without notice ‘of the relevant circumstances’. The statute draws a distinction between such a third party, and a person who through being a party to the relevant transaction itself has directly benefited from it, for example through transfer of an asset to him at an undervalue. Even so the jurisdiction remains discretionary, and therefore, depending on the circumstances, the court may still allow a party to the impugned transaction to keep part of the benefit of it or even make no order against him.
The avoidance of transactions which have been entered into to defraud creditors has been a constant source of litigation both in England and abroad. It can be tempting for a debtor to take steps to render himself judgment proof against his creditors and it is human to give in to temptation. In England the jurisdiction under s.423 has become all the more important with the decision of the Court of Appeal in IRC v Hashmi [2002] 2 BCLC 11 that to establish the relevant purpose for s.423 to apply it is not necessary to show that prejudicing a creditor or a person who might make a claim against him was the ‘dominant’ purpose of the debtor; it suffices if this was a ‘substantial’ purpose. This is to be contrasted with the jurisdiction in Australia under section 121 Bankruptcy Act 1966 (Commonwealth) where the requirement is that the transferor’s ‘main purpose’ in making the transfer was:
(1) to prevent the transferred property from becoming divisible among the transferor’s creditors; or,
(2) to hinder or delay the process of making property available for division among the transferor’s creditors.
The jurisdiction under s.423 and how it is exercised has been considered in numerous cases. The purpose of the present article is to consider s. 423 when there is a foreign element.
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