Supreme Court Broadens Scope of Section 423 IA 1986: Debtor Need Not Directly Own the Transferred Asset

Introduction

In El-Husseiny & Anor v Invest Bank PSC ([2025] UKSC 4), the United Kingdom Supreme Court resolved a long-contested question about the interpretation of section 423 of the Insolvency Act 1986 ("IA 1986"). The case revolved around whether section 423 could apply when a debtor arranges for a company under his control to transfer property for no or inadequate consideration, thereby diminishing the value of his own shareholding but not transferring assets he owned personally.

The appellant, Mr. Ahmad El-Husseini ("the Debtor"), was indebted to Invest Bank PSC ("the Bank") under Abu Dhabi judgments. The Bank identified several valuable properties in London that were either directly or indirectly controlled by the Debtor through companies or trusts. Suspecting that titles to these properties had been transferred without proper consideration, the Bank sought relief under section 423. The pivotal question before the Supreme Court was whether section 423 can be engaged even if the debtor himself does not directly own the transferred property.

The appellants contended that section 423 should be limited strictly to a debtor’s own assets, while the Bank claimed that an arrangement orchestrated by a debtor (in which a company his shares control transfers property) should fall within the statutory prohibition against transactions at an undervalue. Ultimately, the Court upheld a broad interpretation of section 423 and dismissed the appeal.

Summary of the Judgment

The Supreme Court unanimously held that section 423 extends beyond straightforward cases in which the debtor personally transfers his own property. It also applies to situations where the debtor arranges, agrees, or procures a company that he owns to transfer an asset for no or inadequate consideration. Although the particular claim brought by the Bank did not succeed at trial on factual grounds (the Bank failed to prove the necessary purpose), the Supreme Court nonetheless delivered judgment on the general legal issue due to its wider public importance.

Key points from the decision include:

The overarching purpose of section 423 is to protect creditors from actions intended to place assets beyond reach or otherwise prejudice their interests.
Section 423 does not require that the transferred asset be beneficially owned by the debtor; an indirect transfer achieved through a corporate vehicle also falls within its ambit so long as the debtor arranged or entered into a transaction at an undervalue with the requisite intent set out in subsection (3).
The statutory definition of “transaction” for section 423 is expressly broad, encompassing not only direct gifts but also any agreements or arrangements that result in the debtor receiving no, or significantly inadequate, consideration.
This ruling aligns with the protective function of section 423(3), ensuring that creditors can seek remedies when debtors manipulate corporate structures to diminish assets available for enforcement.

Analysis

A. Precedents Cited

The Court engaged with a series of case authorities and statutory provisions to reach its determination:

Clarkson v Clarkson [1994] BCC 921: Discussed in relation to transactions at an undervalue under section 339 of the IA 1986. The Court clarified that Clarkson’s focus on transfers of property belonging to the debtor does not confine section 423 to identical requirements, given its broader, remedial purpose.
JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176 and Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981: Examined for the meaning of the debtor’s purpose under section 423(3). The Court reiterated that the debtor must “positively intend” to put assets beyond remaining creditors or otherwise prejudice them.
In re MC Bacon Ltd [1990] BCLC 324: While primarily analyzing section 238 IA 1986, it informed the Court’s interpretation of “transaction at an undervalue” because the definition of “transaction” in the Insolvency Act applies commonly to sections 238, 339, and 423.
Delaney v Chen [2010] EWCA Civ 1455: Demonstrated that a broad mental element alone does not suffice to bring every debtor action within section 423; there must also be an objective showing that the transaction was indeed at an undervalue with the proscribed purpose.

In addition to these cases, the Court analyzed the legislative history stretching back to the Fraudulent Conveyances Act 1571, the Law of Property Act 1925, and the Cork Report (Cmnd 8558), which collectively shaped today’s statutory framework aimed at preventing debtors from frustrating the legitimate claims of creditors.

B. Legal Reasoning

The Supreme Court’s reasoning turned on a careful reading of section 423(1) together with the definition of “transaction” in section 436(1). By using categories such as “agreement” or “arrangement,” Parliament deliberately expanded the reach of section 423 beyond the mere “gift” of property owned by a debtor. The Court held that:

No express reference to the debtor’s own asset ownership: The statutory language conspicuously avoids narrowing its scope to only property beneficially owned by the debtor. The Court reasoned that if Parliament had intended to limit the definition in that way, it would have included explicit text indicating so.
Purpose of section 423(3): The statutory objective, set out in section 423(3), is to prevent debtors from prejudicing creditors by putting assets out of reach. A narrow interpretation—requiring direct transfers of the debtor’s property—would undermine that purpose, as debtors could simply act through companies or surrogates and evade liability.
Transactional breadth: The term “transaction at an undervalue” was crafted to capture any relevant depletion of the debtor’s estate or overall net worth—this includes diminished shareholding value when corporate assets are transferred for no or inadequate consideration at the debtor’s instigation.

C. Impact

The Court’s decision significantly clarifies and potentially expands the scope of creditor protection:

Enhanced reach of section 423: Creditors faced with evasive debtors who orchestrate transfers via companies or trusts now have an affirmed legal basis to challenge those arrangements if they meet the criteria of undervalue and improper intent.
Consistency across sections 238, 339, and 423: The ruling suggests there is a unified framework for analyzing “transactions at an undervalue,” whether in general circumstances (section 423) or insolvency contexts involving administration, liquidation, or personal bankruptcy (sections 238 and 339).
Protection of third-party interests: Though the Court recognized that innocent transferees (or bona fide purchasers) might face some vulnerability, the statute provides limited protective mechanisms in section 425(2). The Supreme Court’s expansive reading ensures that fraudulent schemes cannot hide behind corporate structures, while bona fide purchasers retain a targeted statutory defense.
Practical implications for future disputes: Debtors and their advisers must be mindful that re-routing assets through controlled entities will not immunize them from section 423 scrutiny. Going forward, courts may be more willing to examine indirect movements of value when analyzing claims brought under this provision.

Complex Concepts Simplified

Some of the more intricate legal concepts central to this case include:

“Transaction at an Undervalue”: Any arrangement under which a debtor (or a company under his direction) provides significantly greater consideration than it receives. It can include gifts, forgone claims, or asset transfers that lack commensurate payment or value in return.
“Mens Rea” or the Required Purpose (section 423(3)): Section 423 mandates showing that the debtor intended to put assets beyond creditors or prejudiced them in some way. Even if a transaction fits the description of an undervalue, it is not voidable unless this actual subjective purpose is established.
“Capacity” versus “Beneficial Interest Point”: Earlier in the litigation, there was debate about whether the debtor must act in a personal capacity or a corporate-director capacity to trigger section 423. The Court of Appeal and Supreme Court confirmed that if the debtor, in his personal capacity, arranges the transaction—even if executed as a director of his company—it can fall under section 423, so long as the detrimental intent is present.
“Bona Fide Purchaser” Defense: Section 425(2) shields certain good-faith purchasers for value who were genuinely unaware of the illicit objective behind the transaction. However, a direct recipient from the debtor may not invoke this defense if no consideration was paid or if the recipient had knowledge of the debtor’s improper purpose.

Conclusion

The Supreme Court’s dismissal of the appeal in El-Husseiny & Anor v Invest Bank PSC solidifies an expansive interpretation of section 423 IA 1986. Its ruling prevents debtors from escaping liability by acting through corporate entities. Where a debtor procures a company he controls to transfer valuable property at an undervalue—thus depleting the worth of the debtor’s shares and prejudicing creditors—section 423 applies in full force.

This landmark decision harmonizes the broader policy goals underpinning fraudulent transfer legislation with the statutory text, reaffirming that the heart of section 423 is about preventing intentional prejudice to creditors in whatever form it might occur. Practically, creditors will be better able to seek redress, and potential transgressors must be wary that indirect strategies to dissipate assets still fall under the legislative prohibition.