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:

1. 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.
2. “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.”
3. “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.