Transactions Defrauding Creditors: Section 423 Insolvency Act 1986 and Comparative Perspectives

Transactions Defrauding Creditors: Section 423 Insolvency Act 1986 and Comparative Perspectives

Introduction

The statutory action to unwind transactions defrauding creditors in the United Kingdom is now centred on section 423 of the Insolvency Act 1986 (“IA 1986”). Although located in insolvency legislation, the remedy is not confined to formal insolvency and, as the Court of Appeal observed, “stands alone as a broad commercial law measure”[1]. Its function is the modern embodiment of the Elizabethan fraud on creditors legislation and is paralleled, though not replicated, in Irish law. Recent appellate jurisprudence — culminating in the Supreme Court’s decision in El-Husseiny v Invest Bank PSC (2025) — has clarified fundamental questions concerning the section’s ambit, purpose requirement and remedial range. This article offers a critical analysis of those developments, drawing on leading authorities such as BTI v Sequana, JSC BTA Bank v Ablyazov, and cognate doctrines illustrated in Paulin v Paulin.

Historical and Statutory Framework

Section 423 was enacted to replace the Victorian and Tudor era fraudulent conveyance rules and to give effect to the recommendations of the Cork Committee[2]. Its Irish antecedents lie in section 10 of the Conveyancing Act 1634 (Ireland) and, in the bankruptcy context, section 139 of the Bankruptcy Act 1988 (Ireland). Unlike the preference and undervalue provisions applicable only upon insolvency (IA 1986 ss.238–241, 339–342), section 423 is free-standing; no insolvency gateway is required. The provision therefore serves as “a general creditor-protection mechanism of last resort”[3].

Elements of Section 423

The Meaning of “Transaction”

“Transaction” is expansively defined in section 436(1) IA 1986 to include “a gift, agreement or arrangement”. The Supreme Court has now confirmed that the word is not confined to dealings with assets already beneficially owned by the debtor; it extends to arrangements by which a company controlled by the debtor disposes of its property at an undervalue (El-Husseiny, 2025)[4]. This clarification endorses the first-instance analysis in Invest Bank PSC v El-Husseini (2022) and rejects earlier suggestions of a beneficial-ownership restriction.

Transaction at an Undervalue

A debtor enters into a transaction at an undervalue if (a) they make a gift, (b) receive no consideration, or (c) receive consideration “significantly less” than they provide (s.423(1)(a)–(c)). Valuation issues featured prominently in BTI 2014 LLC v Sequana SA in the Chancery Division[5]. Rose J applied a commercial rather than balance-sheet test, holding that an intra-group dividend which eliminated an inter-company debt could fall within paragraph (c) when measured against the actual economic value transferred. The Court of Appeal in Sequana (2019) approved that approach and described the statutory test under s.423 as materially identical to that under ss.238 and 339[6].

The Purpose Requirement

Section 423(3) adds a mental element: the impugned transaction must have been entered into for the purpose of (a) putting assets beyond the reach of a current or potential claimant, or (b) otherwise prejudicing the claimant’s interests. The authorities establish that:

  • Subjective purpose is required but need not be the sole or dominant purpose; it suffices that it is a substantial purpose[7].
  • Dishonesty is unnecessary; the provision targets effects aimed at defeating creditors, even if advice has been obtained[8].
  • The court may infer purpose from objective circumstances, as illustrated in JSC BTA Bank v Ablyazov where the transfer of £1.1 million to a minor was found not to satisfy the purpose test on the facts, despite being a gift[9].

Applicants and Standing

By virtue of section 424 IA 1986, standing extends beyond office-holders to “victims” of the transaction. Banca Carige v Banco Nacional de Cuba confirmed that a single prejudiced creditor has locus standi even when no insolvency proceedings are afoot[10]. Conversely, Jyske Bank v Spjeldnaes emphasised that a section 423 claim is not an “insolvency proceeding” for procedural purposes, a distinction relevant to cross-border recognition[11].

Limitation

No bespoke limitation period is prescribed. Following Hill v Spread Trustee, claims are actions on a specialty within section 8 of the Limitation Act 1980, yielding a twelve-year period[12]. However, where the substance of relief sought is purely monetary, a six-year period under section 9 may apply (Nolan v Wright)[13]. Section 32 postponement for deliberate concealment, as applied in Giles v Rhind, remains a powerful tool where the debtor has masked the transaction[14].

Remedial Discretion

Section 425 empowers the court to make “such order as it thinks fit” to restore the pre-transaction position and protect victims. Orders may:

  • Set aside the transfer and re-vest property;
  • Impose personal monetary liability on transferees;
  • Affect third parties not party to the transaction, subject to good-faith protections (s.425(2)).

The breadth of the discretion mirrors the equitable concern with abuse of legal process. In Paulin v Paulin, the Court of Appeal upheld the annulment of a self-induced bankruptcy designed to frustrate matrimonial relief, demonstrating the judiciary’s intolerance for manipulative financial stratagems[15]. Although grounded in bankruptcy jurisdiction, Paulin is often cited in section 423 cases as an analogue for analysing abuse of process.

Interaction with Other Regimes

Company and Personal Insolvency Provisions

Sections 238 (companies) and 339 (individual bankruptcy) IA 1986 also target undervalue transactions, but they require insolvency and operate within vulnerability windows. David Richards LJ in Sequana stressed that the test for undervalue is “the same” under all three sections, promoting doctrinal coherence[16]. Nonetheless, the availability of section 423 outside insolvency explains the strategic preference for that route by creditors unable to trigger formal insolvency processes.

Family Law Avoidance Orders

Family courts possess a bespoke mechanism under section 37 Matrimonial Causes Act 1973 (“MCA 1973”). In Akhmedova v Akhmedov, Knowles J catalogued critical differences: section 37 targets inter-spousal asset shifts after financial relief proceedings begin, whereas section 423 has no such temporal constraint[17]. The overlap requires careful forum selection; however, High Court judges exercising the Family Division’s jurisdiction often invoke section 423 concurrently where third-party transferees are involved.

Directors’ Duties and Creditor Interests

The Supreme Court in BTI v Sequana (2022) linked section 423 policy to the evolving common-law “creditor duty” at or nearing insolvency[18]. While not construing section 423 directly, the Court acknowledged statutory provisions designed to prevent asset-stripping, reinforcing the complementary nature of directors’ fiduciary obligations and statutory avoidance powers.

Irish Perspective

Ireland has retained, with modifications, the Statute of Elizabeth tradition. Section 10 Conveyancing Act 1634 (as read with section 14 Conveyancing Act 1881) enables creditors to impeach fraudulent conveyances. In bankruptcy, section 139 Bankruptcy Act 1988 empowers the Official Assignee to challenge undervalue transfers within three years of adjudication, subject to a rebuttable presumption of intent to defraud. The Irish regime lacks a direct analogue to section 423’s broad standing provision; creditor actions therefore often rely on derivative suits or petitions to appoint a receiver. Comparative analysis suggests that adopting a section 423 style mechanism could enhance creditor protection without necessitating bankruptcy proceedings.

Policy Considerations and Future Directions

The trajectory of recent case-law indicates a judicial willingness to interpret section 423 purposively, ensuring it remains an effective deterrent against sophisticated evasion techniques:

  • El-Husseiny confirms statutory language should not be cut down by artificial ownership arguments;
  • Sequana links corporate governance duties to avoidance powers, suggesting possible convergence in future litigation against directors;
  • Procedural clarity on limitation and standing reduces tactical delay.

Legislative reform has been mooted to introduce a look-back period akin to ss.238/339, thereby tempering uncertainty, but any restriction must avoid undermining the section’s prophylactic reach.

Conclusion

Section 423 IA 1986 remains a potent, flexible weapon in the armoury of United Kingdom creditors faced with asset-dissipating debtors. The courts, culminating with the Supreme Court in El-Husseiny, have emphasised substance over form, ensuring that the statutory purpose — thwarting transactions undertaken with the intent to prejudice creditors — is not defeated by technicalities of ownership or corporate structure. Parallel Irish law, though rooted in older statutes, reflects similar policy goals but lacks the procedural elegance of section 423. Continued judicial vigilance, informed by comparative insights and aligned with directors’ evolving duties, will sustain the effectiveness of this critical creditor-protection mechanism.

Footnotes

  1. Jyske Bank (Gibraltar) Ltd v Spjeldnaes [2000] BCC 16 at 28.
  2. Cork Committee Report on Insolvency Law and Practice (Cmnd 8558, 1982) ch 33.
  3. Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542; [2007] 1 WLR 2404 at §53.
  4. El-Husseiny & Anor v Invest Bank PSC [2025] UKSC ___ at §§32-37.
  5. BTI 2014 LLC v Sequana SA [2017] EWHC (Bus) 253 (Ch) at §§705-730.
  6. BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112 at §54.
  7. Hashmi v IRC [2002] EWCA Civ 981 at §21; approved in Quinn Finance v Galfis Overseas [2012] NICh 3.
  8. Arbuthnot Leasing v Havelet Leasing (No 2) [1990] BCC 636.
  9. JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176.
  10. Banca Carige SpA v Banco Nacional de Cuba [2001] 1 WLR 2039.
  11. Rule 13.7 Insolvency Rules 1986; see Cooke v Dunbar Assets plc [2016] EWHC 611 (Ch).
  12. Hill v Spread Trustee, above n 3.
  13. Nolan v Wright [2009] EWHC 1360 (Ch) at §19.
  14. Giles v Rhind [2008] EWCA Civ 118.
  15. Paulin v Paulin & Anor [2009] EWCA Civ 221.
  16. BTI v Sequana [2019] EWCA Civ 112 at §54.
  17. Akhmedova v Akhmedov [2021] EWHC 545 (Fam) at §112.
  18. BTI 2014 LLC v Sequana SA [2022] UKSC 25 at §§344-345.