s. 423 of the Insolvency Act 1986 and MENTAL STATE considered - 4Eng Ltd v Harper & Ors  EWHC 2633 (Ch) (26 October 2009)
Whilst sitting in the Chancery Division the Honourable Mr Justice Sales has handed down his judgment in 4Eng Ltd v Harper & Ors  EWHC 2633 (Ch) (26 October 2009). The case concerns section 423 of the Insolvency Act 1986 and attempts by creditors to set aside certain transactions entered into by Mr Barry Simpson transferring property owned by him to his wife. The section states:
"Transactions defrauding creditors
(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if -
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
(b) he enters into a transaction with the other in consideration of marriage [or the formation of a civil partnership]; or
(c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself."
Mr Justice Sales makes a number of interesting points in his judgment regarding the nature and purpose of s.426 IA86. He states: "A claim under s. 423 is a claim for some appropriate form of restorative remedy, to restore property to the transferor for the benefit of creditors, who may then seek to execute against that property in respect of obligations owed by the transferor to them. In an appropriate case, an order might be made to require the transferee to pay sums or transfer property direct to the creditors, if the position in relation to execution is clear and any further costs associated with execution ought to be avoided. But often the appropriate order will be for the transferee to pay sums or transfer property back to the transferor, leaving the distribution of those sums or property as between the creditors of the transferor to be governed by the general law. This may be particularly important if the transferor is bankrupt or in liquidation (or about to become bankrupt or go into liquidation) and has a range of creditors not all of whom are before the court on the application made under s. 423. In the present case, 4Eng primarily seeks orders requiring Mrs Simpson to pay monies and restore property to Mr Simpson to assist it in then executing against those monies and property."
He goes on to observe that:
"The trigger for an order to be made under s. 423 and s. 425 is that it is established that the transferor has entered into a transaction at an undervalue as defined in s. 423(1) in circumstances where the transferor entered into that transaction for the purpose of putting assets beyond the reach of a person who is making or might make a claim against him (s. 423(3)(a)) or of otherwise prejudicing the interests of such a person in relation to such claim (s. 423(3)(b)) (which I will refer to compendiously as "a relevant purpose")."
In terms of mental state the judge notes first that, "The statute does not specify any particular mental state or action on the part of the transferee as an ingredient of the trigger conditions for liability, but that does not mean that such matters are irrelevant for defining the extent of the liability to be imposed, or the order to be made, at the next stage in the analysis, when the court considers the question of remedy under s. 423(2) and s. 425." He then goes on to state that, "In my judgment, the nature of any order and the extent of the relief granted by the court under s. 423(2) and s. 425 should take into account the mental state of the transferee of property under a relevant transaction (or of any other person against whom an order is sought) and the degree of their involvement in the fraudulent scheme of the debtor/transferor to put assets out of the reach of his creditors. The principles in the application of this statutory regime should reflect in this respect general principles inherent in other areas of the law."
In relation to the facts under consideration in 4Eng he notes: "I conclude that up to about April/May 2003, Mr Simpson did not deal with his assets and effect transfers to Mrs Simpson for a relevant purpose; but that from that time on significant transfers of assets by him into Mrs Simpson's sole name were arranged for such a purpose."
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