Unintended Consequences: JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov  EWCA Civ 1176
The Court of Appeal judgment in JSC BTA Bank v Mukhtar Ablyazov, Madiyar Ablyazov  EWCA Civ 1176 confirms the correct approach when assessing the ‘prohibited purpose’ element of section 423 claims.
- 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.
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.
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  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.”
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.
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
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
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.
Warranties on an indemnity basis: a question of damages
John and Simon take an in-depth look at warranties on an indemnity basis
Property Patter: The trendy option – FAQs on tenant CVAs
Listen in for the answers to FAQs on tenant Company Voluntary Arrangements
Disclosure and documents referenced in expert reports: a level playing field?
Sonia looks at the impact of the recent High Court decision in Zverev v Ace Group International Ltd
Property Patter: The “bubble wrap” option – FAQs on tenant administration
The team look at some key points on tenant administration.
Court clarifies the meaning of “value” within the context of s284 Insolvency Act 1986
Roger and Jess explore the meaning of “value” within the context of s284 of the Insolvency Act 1986 following recent clarification.
Dimitri A. Sonier
Charles Russell Speechlys successfully advises Europlasma on its restructuring plan
Paris restructuring and insolvency team help their client reduce net debt by 95%.
Durra Al Ali
“Subject to contract” wording in settlement negotiations: a label that sticks
Durra looks at the term “subject to contract” and how it was put to the test in Joanne Properties Ltd v Moneything Capital Ltd and another.
Dimitri A. Sonier
The French Government extends exceptional insolvency measures related to the COVID-19 crisis up to the 31st December 2021
Many of the measures of the French Ordinance No. 2020-596 were due to expire on 31 December 2020.
Recent case highlights the importance of correctly declaring dividends
Francesca looks at the importance of correctly declaring dividends
Privilege and Fraud – when can the iniquity exception override legal professional privilege?
Jason and Heidi look at when the can iniquity exception override legal professional privilege
Adjudicating Construction Disputes and Enforcement – Practical Tips for Insolvency Practitioners
Jason looks at adjudicating construction disputes and enforcement and offers practical tips for Insolvency Practitioners
Safeguarding search orders and the role of public interest: lessons to be learned from recent case law
Caroline looks at lessons to be learned from the recent decision in Calor Gas Ltd v Chorley Bottle Gas Ltd and others
Charles Russell Speechlys advises ALDO UK's administrators, RSM, on the sale of the business and assets
Our Corporate Restructuring & Insolvency team has advised ALDO UK's administrators, RSM, on the sale of the business and assets.
French reform on provisional enforcement by Law and why it matters to civil and commercial disputes strategy in France
Simone looks at the French reform on provisional enforcement by Law and why it matters to civil and commercial disputes strategy in France.
Turbulent Times for Virgin Atlantic!
Hannah looks at Virgin Atlantic's plans for a private-only solvent recapitalisation
COVID-19: security for costs in an economic downturn
Caroline looks at a recent case where a party seeks to use COVID-19's economic consequences to support their security for costs application.