A Trusting Disposition …. s.127 Insolvency Act 1986 in the Supreme Court
Introduction1. On 1 February 2017, the Supreme Court delivered its judgments in Akers and others v Samba Financial Group  UKSC 6. The case is rare example of the country’s highest Court considering in some detail the operation of s.127 of the Insolvency Act 1986. Although the section is well known to all practitioners of insolvency law, it is helpful to repeat here the key words of the section: “any disposition of the company’s property, …, made after the commencement of the winding up is, unless the court otherwise orders, void.
2. Samba reached the Supreme Court on an application by the defendant, Samba Financial Group (“Samba)”, for a stay on jurisdictional grounds of a claim brought by the joint official liquidators of Saad Investment Co. Ltd (“SICL”). SICL is a Cayman Islands company. On 18 September 2009, SICL was wound up by the Grand Court of the Cayman Islands. The provisional liquidation and then liquidation of SICL was recognised in this jurisdiction under the UNCITRAL Model Law on 20 August 2009 and 25 September 2009. The relevant transaction which was attacked on the basis of s.127 occurred on 16 September 2009. The commencement of the winding-up for the purposes of s.127 was treated as being the date of first recognition of the Cayman proceedings in England and Wales. The transaction was therefore ‘in time’ for the purposes of s.127.
The facts3. Prior to the transaction, Mr Al-Sanea, a Saudi Arabian citizen, was the legal owner of shares valued at US$318 million in a number of Saudi banks (“Shares”). Mr Al-Sanea was the registered owner of the Shares at the Saudi Arabian Securities Depositary Centre. As a result of six transactions which occurred during the period 2002 to 2008, Mr Al-Sanea came to hold the legal interest in the Shares on trust for SICL. It was common ground in the Supreme Court that the transactions were governed by Cayman law, but that the lex situs of the Shares was the law of Saudi Arabia, which does not recognise trusts.
The transaction4. On 16 September 2009 Mr Al-Sanea transferred all of the Shares to Samba, and in so doing he purported to discharge personal liabilities which he owed to Samba. The joint liquidators of SICL brought proceedings against Samba seeking to overturn the transaction. Although Samba was served as of right in the jurisdiction in August 2013, it then sought to stay the proceedings.
Supreme Court’s decision5. In the Supreme Court, Lord Mance gave the lead judgment with short concurring judgments given by Lords Neuberger, Sumption and Collins. The case has this unusual feature, in that, in both the High Court and the Court of Appeal, and, it seems, during the course of oral arguments before the Supreme Court, the parties proceeded on the basis that ‘at this stage’, whether or not the transaction was a disposition for the purposes of s.127 was not in issue. As Lord Sumption points out, oral argument in the case therefore proceeded on an ‘artificial basis’. After the close of oral arguments, the Supreme Court invited written submissions as to whether or not the transaction was a disposition for the purposes of s.127.
6. The term ‘property’ in the Insolvency Act 1986 is of course defined in s.436. As with s.127, there is no doubt that s.436 is also well known to all practitioners of insolvency law, yet it is helpful to reproduce here the key words of the section: “property includes … things in action … and every description of property … and every description of interest … arising out of, or incidental to, property”. The Supreme Court endorsed the conclusion in Bristol Airport v Powdrill  Ch 744 at 759D that “[I]t is hard to think of a wider definition of property”. Similarly, the Supreme Court had no difficulty in accepting that s.127 creates a “prima facie right to recover”, and secondly that save in exceptional circumstances there must be some special factor which allows the disposition to be ratified and that is if it is in the general interest of unsecured creditors (Express Electrical Distributions v Beavis  1 WLR 4783).
7. In Samba, the position as regards the Shares can be summarised as follows. Before the transaction, Mr Al-Sanea was the legal owner of the Shares and SICL was the beneficial owner of the Shares. After the transaction, Samba was both the legal and beneficial owner of the Shares. Plainly, the liquidators’ challenge could not focus on the legal ownership, since that had never been owned by SICL. Instead, the attack focused on the beneficial ownership. Before the transaction, SICL was the beneficial owner of the shares, after the transaction it was no longer the beneficial owner. So the argument went, for SICL to lose the beneficial ownership of the Shares as a result of the transaction must mean that the transaction amounted to a disposition for the purposes of s.127 of property within the meaning of s.436.
8. Presented in that way, the joint liquidators’ case plainly has its attractions. Indeed, Lord Mance remarked that he “… found this a difficult issue. On the one hand, it can be said that ‘trust assets’ have been ‘misappropriated’, ‘misapplied’, ‘dissipated’ or, in terms of art 11(d) of the Convention1, ‘alienated’” (para. 45). Similarly, Lord Neuberger also commented that “… it is fair to say that the word ‘disposition’ is linguistically capable of applying to a transaction which involves the destruction or termination of an interest. Etymological analyses can fairly be said to be suspect in this sort of context, but it seems to me to involve a perfectly natural use of language to describe SICL's interest in the shares as having been “disposed of” by the transfer of those shares to a bona fide purchaser” (para.66).
1 The Convention on the Law Applicable to Trusts and on their Recognition, scheduled to the Recognition of Trusts Act 1987.
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10. Secondly, and perhaps more controversially, the fact that SICL’s interest in the shares was extinguished (which in real terms means a loss to SICL’s unsecured creditors) is not a situation which calls for the protection of s.127. That is because:
11. Viewed in that way, the outcome of Samba is logical and in some respects defensible. It does however leave this tension: in Samba, the factual situation appears to have been that Mr Al-Sanea was “closely involved” with SICL. His act of transferring the legal title to the Shares to Samba effectively destroyed SICL’s interest in the shares, to the detriment of the unsecured creditors. That act could have been performed by Mr Al-Sanea knowingly and with the deliberate intention of destroying SICL’s interest. There is no doubt that SICL retained a personal claim against Mr Al-Sanea for breach of trust, but that may not be as valuable as a proprietary claim to the shares. The decision leaves open the door for a person in Mr Al-Sanea’s position to deliberately extinguish a company’s interest in an asset to the detriment of the company’s unsecured creditors.
12. That is the position looking at the transaction from the SICL / Mr Al-Sanea perspective. Of course, as the Supreme Court made clear, and looking at the transaction from Samba’s perspective, Samba only escapes a claim against it by SICL if Samba can establish that it was a bona fide purchaser of the shares for value and without notice of SICL’s rights. That appears to have been the factual position in Samba. If Samba had known of SICL’s beneficial interest, and therefore Samba was not equity’s darling, the outcome of the case may have been different, in that SICL might have retained a proprietary claim against Samba (although there still wouldn’t have been a s.127 disposition).