Court of Appeal applies rigorous approach to assessing purpose element of claims to set aside transactions defrauding creditors

Despite evidence that a defendant knew he was facing potential proceedings which could bankrupt him, at the time he transferred assets to his son, the Court of Appeal held that this was not sufficient to find that the transfer was made for the purpose of defrauding creditors. Consequently, the transfer could not be unwound under s423 Insolvency Act 1996: JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov [2018] EWCA Civ 1176.

This decision reconfirms previous authority as to the court’s approach where a defendant to a section 423 claim had more than one purpose when entering into the relevant transaction. The victim need only show that the purpose of defrauding creditors was a purpose, not the only purpose or even the dominant purpose.

However, victims may face difficulties arising from the court’s rigorous approach to distinguishing a purpose from a consequence. Even where the consequence was known or foreseen, a victim must show that the defendant positively intended to bring about that consequence when entering into the transaction. In other words, the victim must prove the subjective intention of the defendant, which may involve substantial disclosure, detailed evidence and forensic investigation.

Where the defendant has entered into an insolvency process following the transaction, victims may wish to consider other potential routes to a remedy, including via an insolvency officeholder’s claim in respect of a transaction at an undervalue or a preference. The statutory regime for both of these causes of action includes evidential presumptions which assist in satisfying the burden of proving the defendant’s state of mind.

Andrew Cooke, a senior associate in our contentious restructuring, turnaround and insolvency team, considers the decision below.

Background

JSC BTA Bank, a Kazakh bank, was controlled by Mukhtar Ablyazov until his removal from office in 2009 following alleged embezzlement of over $5 billion. He subsequently moved to the UK, where courts in London have handed down almost 50 decisions in long-running proceedings between the Bank and Mr Ablyazov. The Bank secured judgment against Mr Ablyazov and took enforcement action to recover part of the judgment debt.

In connection with enforcement, the Bank identified transactions by Mr Ablyazov that might potentially be set aside. In February 2009, Mr Ablyazov had transferred £1.1 million to his son, Madiyar Ablyazov, who was resident in the UK on a student visa. Madiyar invested £1 million of these funds in UK gilts, meaning that he qualified for a Tier 1 investor visa. He subsequently became a British citizen.

The Bank claimed that the transfer to Madiyar was a transaction defrauding creditors under section 423 of the Insolvency Act 1986 and sought an order that the transfer be set aside.

Section 423 allows the victim (often an insolvency officeholder but in this case the Bank as a creditor) of a transaction defrauding creditors (generally a transaction at an undervalue or a gift) to seek an order from an English court unwinding the transaction. The court only has jurisdiction to make an order if satisfied that the defendant entered into the transaction for the purpose of:

  1. putting assets beyond the reach of a person who is making, or may at some time make, a claim against him; or
  2. otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.

At first instance, the deputy judge concluded that the transfer to Madiyar was a gift but that Mr Ablyazov’s purpose when making the gift was to secure an investor visa for his son. While Mr Ablyazov appreciated when making the gift that this might prejudice the interests of judgment creditors, that was a by-product of the gift rather than its substantial purpose. As a result, the deputy judge could not make an order under section 423.

The Bank appealed.

Decision

The Court of Appeal upheld the deputy judge’s order.

Following Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981, the Court of Appeal confirmed that section 423 can be engaged in “dual purpose” cases – the victim under section 423 need only establish that a purpose of the transaction fell within the section 423 test, not that this was the sole purpose. There is no requirement that the statutory purpose is a “dominant” purpose, or a “substantial” purpose. Where the judges in Hashmi had referred to a “real substantial purpose”, they did so simply in order to distinguish a purpose from a consequence. Though the deputy judge made reference to Mr Ablyazov’s “substantial” purpose, he had identified the correct legal test following Hashmi. The issue for the Court of Appeal was whether the deputy judge had correctly applied the test.

Because he found as a matter of fact that Mr Ablyazov would have made the gift whether or not it would have put money beyond the reach of his creditors, the deputy judge was unwilling too readily to infer that this was the purpose of the gift. The Court of Appeal confirmed that this was the correct approach. Even though Mr Ablyazov knew that the gift would put assets beyond the reach of his creditors, the court could not assume that was his purpose unless the Bank proved otherwise. It is for the victim to prove that this was the defendant’s purpose. This is clear from the wording of section 423 when contrasted with other provisions of the Insolvency Act 1986. For example, section 239 creates a presumption that a defendant has entered into a preference for the purpose of favouring a particular creditor where that creditor is associated with the defendant. Where Parliament had specified a presumption in section 239 but not done the same in section 423, this reflected Parliament’s intention that no presumption should be applied in a claim under section 423.

The Bank also argued that the deputy judge should have drawn adverse inferences in relation to Mr Ablyazov because he had lied. Though he did not attend trial to give evidence, Mr Ablyazov had provided a witness statement in which he stated that the £100,000 gifted to his son which had not been invested in gilts was to be used for university fees and living expenses. The deputy judge rejected this evidence, finding that this £100,000 had been intended to cover dealing costs of acquiring £1 million worth of gilts. The Bank argued that, where the deputy judge rejected Mr Ablyazov’s evidence as to the purpose behind the gift of £100,000, it should draw an adverse inference that the purpose of the entire gift was to put money out of reach of creditors.

The Court of Appeal rejected this argument. It was clear that the deputy judge had treated Mr Ablyazov’s evidence about his purpose in making the gift as effectively worthless. It did not follow that the deputy judge could infer that the gift was made for the statutory purpose. The deputy judge had to assess the defendant’s rationale for the gift on the facts before him. That was the province of the judge, not the Court of Appeal.

The Bank, finally, argued that the deputy judge had not reached the correct conclusion based on his own factual findings. The deputy judge had found that when Mr Ablyazov made the gift, he knew that he would be facing claims against him in England. Further, he found that Mr Ablyazov had demonstrated a consistent willingness to do all he could to prevent the Bank from being able to enforce against his assets. However, the deputy judge concluded that Mr Ablyazov’s purpose was solely connected with securing an investor visa for his son: there were major advantages to holding an investor visa over a student visa; the investor visa had been sought even before Mr Ablyazov had been removed from office by the Bank; and, to Mr Ablyazov who was accused of embezzling over $5 billion, it was unlikely that he would have gone to great lengths to put only £1.1 million out of the reach of his creditors.

While the Court of Appeal concluded that the facts as determined by the deputy judge could have supported a finding that Mr Ablyazov’s purpose was to put assets out of reach of creditors, it was properly within the deputy judge’s discretion to determine that this was not his purpose. The deputy judge had sat through the trial and was conversant with all the evidence. The Court of Appeal would not interfere with his judgment unless it was a decision that no reasonable judge could have reached, which was not the case here.

Andrew Cooke
Andrew Cooke
Senior associate
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