Unintended Consequences: JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov [2018] EWCA Civ 1176
The Court of Appeal judgment in JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov [2018] EWCA Civ 1176 confirms the correct approach when assessing the ‘prohibited purpose’ element of section 423 claims.
Summary
- Under section 423 of the Insolvency Act 1986, the court can make an order if it is satisfied (i) that there has been a transaction at an undervalue (TUV); and (ii) that transaction was entered into for the purpose of prejudicing the interests of creditors (the Prohibited Purpose).
- The Prohibited Purpose does not have to be the sole rationale for a transaction. However, the consequence of a transaction is not the purpose of a transaction: a TUV that has the consequence of putting assets of the defendant beyond the reach of creditors is not necessarily caught by section 423. That is so even if the consequence was foreseeable or was actually foreseen by the defendant at the time of the transaction. For section 423 to apply, it must be shown that the defendant positively intended to bring about the consequence.
First Instance
JSC BTA Bank (JSC) and Mukhtar Ablyazov (Mr Ablyazov) were engaged in a long running dispute from 2009 onwards.
In February 2009, Mr Ablyazov transferred £1.1 million to his son (the Transfer) to help him pursue an application for a UK Tier 1 investor visa. Mr Abylazov’s son invested those funds into UK gilts and, as a result, became eligible for (and later obtained) an investor visa.
JSC challenged the Transfer on that basis that it was a transaction defrauding creditors pursuant to section 423 IA86 and should be set aside.
The first instance judge dismissed the section 423 claim. The court held that “whilst Mr Ablyazov may perhaps have been conscious that a by-product of the Transfer would be (as it was) that the Fund would be placed out of the hands of potential creditors including [JSC], this was not a substantial purpose of his making the transfer.”
The judge’s reasoning was based, in part, on his factual finding that Mr Ablyazov would have likely made the Transfer to enable his son to obtain the investor visa even if he was not at risk of a claim being made against him by JSC.
JSC appealed. It argued that, amongst other things, (i) the test for assessing Prohibited Purpose had been incorrectly applied; and (ii) in any event, as Mr Ablyazov was aware of JSC’s claims, there was an ‘evidential burden’ on Mr Ablyazov to show that there was no Prohibited Purpose in relation to the Transfer.
Appeal
JSC’s appeal was dismissed. The court held that the first instance judge had correctly assessed the Prohibited Purpose limb. It made the following observations:
- The ‘dual purpose’ test set out in Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981 is correct i.e. where the transaction was entered into by the defendant for more than one purpose, the court does not have to be satisfied that the Prohibited Purpose was the dominant purpose, let alone the sole purpose, of the transaction.
- “It is not enough to bring a transaction at an undervalue within section 423 that the transaction had the consequence of putting assets of the debtor beyond the reach of creditors. That is so even if the consequence was foreseeable or was actually foreseen by the debtor at the time of entering into the transaction.”
- “Evidence that the debtor believed that the transaction would result in putting assets beyond the reach of creditors may support an inference that the transaction was entered into for the purpose of doing so, but the two things are not the same.”
The court also rejected the argument that there was an evidential burden on Mr Ablyazov. It confirmed that “there is no rule of law to the effect that, if the debtor knew at the time of entering into the transaction that he was facing claims, the judge must find that the transaction was entered into for the prohibited purpose unless the debtor adduces evidence to show otherwise.”
Comment
Section 423 claims are highly fact dependent. Here, the first instance judgment took into account several factual findings. For example, Mr Abylazov’s son’s visa application process had been started well before Mr Ablyazov became aware of JSC’s claims; and the funds emanated from a BVI company – had Mr Ablyazov wanted to keep the funds out of his creditors’ reach, it would have been ‘safer’ to leave them in the BVI.
Nonetheless, this judgment confirms the dual-purpose test set out in Hashmi and underlines the distinction between purposes and consequences.
Although the consequence of a transaction might be that the defendant’s assets are put beyond the reach of their creditors, it does not follow that that was the purpose of the transaction. This is the case even if the defendant was aware of the consequence.
Accordingly, when considering section 423 claims, ‘victims’ should take into account the need to show that the defendant positively intended the consequence. Proving that positive intention will likely involve extensive investigation and analysis.
Our thinking
Jessica Williams
Administrators beware where more than 20 redundancies are planned
The case of Palmer has confirmed that an insolvency practitioner in the role of an administrator can be prosecuted.
James Hyne
Charles Russell Speechlys named in Global Restructuring Review’s GRR 100 2021
Restructuring and Insolvency team ranked in Global Restructuring Review
Georgina Bernard
Privy Council confirms ability of courts to grant freezing injunctions in aid of foreign proceedings – but beware the minority report
Georgina looks at the landmark Privy Council judgment on freezing and interim injunctions
Georgina Bernard
PSV 1982 Limited v Langdon: A Warning for Directors in Breach of Section 216 Insolvency Act 1986
Georgina takes a look at PSV 1982 Limited v Langdon
Hanh Nguyen
Insolvencies and rising prices: the energy retail market in flux
Hanh and Sara take a look at the energy market
Charles Russell Speechlys successfully advises the Joint Liquidators of LB GP No.1 Ltd in Lehman Brothers litigation before the Court of Appeal
LBGP is a company within the Lehman Brothers Group, whose purpose was to raise regulatory capital for parts of the Group.
Georgina Bernard
Court of Appeal reviews key principles to consider when making a non-party costs order
James Hyne
Global Restructuring Review feature the firm’s involvement advising the joint liquidators of LB GP No 1 Limited in the Lehman Brothers’ sub-debt appeal
The Lehman Brothers’ sub-debt appeal continues with guarantor question.
Denis Meyer
The importance of anticipating the restructuring of State Guaranteed Loans
Denis looks at the importance of anticipating the restructuring of State Guaranteed Loans
Hannah Edwards
Phase out of temporary restrictions on use of winding up petitions
Hannah takes a look at the recent UK Government announcement on statutory demands and the presentation of winding up petitions
Gabrielle Shovlin
Be careful what you reference: when witness evidence waives privilege
Gabrielle looks at the recent decision in Scipharm Sarl v Moorfields Eye Hospital NHS Foundation Trust and its impact on privilege
Rory Partridge
Weighing in on the importance of attention to detail in service cases
Rory looks at recent judgments that have emphasised the need to follow correct procedure when serving documents in court cases
Emma Humphreys
Property Patter: the whys and wherefores of receivership
What is a fixed charge receiver?
Jessica Williams
Temporary restrictions on winding-up petitions extended until 30 September 2021
As the restrictions are extended, read what it means for you here.
Emma Humphreys
Property Patter: the news so far on landlord challenges to retail CVAs
We review some of the recent high-profile landlord challenges to tenant CVAs,
Daniel Moore
No “New Look” in the latest landlord challenge to a tenant CVA
Daniel and Hannah look at the impact of the recent New Look CVA judgment
Sonia Kenawy
Adding claimants pre-service and amending outside the limitation period: pitfalls for the unwary
Sonia looks at a recent High Court judgment and its important guidance on the ability of claimants to be added to a claim before service
Joe Edwards
Damages-based agreements: an island of clarity in changing seas
Simon, Joe and Lauren look at a recent judgment which is a welcome island of clarity in the damages-based agreement sea of uncertainty.
Patrick Gearon FCIArb
Insolvency Legislation in the GCC
The interesting times of the last 14 months were preceded by the interesting times of the financial crisis of 2008/2009.
John Sykes
Warranties on an indemnity basis: a question of damages
John and Simon take an in-depth look at warranties on an indemnity basis