Section 423 – the legal power tool that protects creditors continues to evolve

Section 423 of the Insolvency Act 1986 is one of the ‘avoidance’ provisions contained in insolvency legislation that enable the court to reverse transactions which prejudice creditors. Here Nat Young, Partner specialising in insolvency and dispute resolution, explains a provision that can be used to help any business that is owed money – well beyond the insolvency scenario itself – but continues to provoke questions around its interpretation.

The wide terms in which section 423 is drafted makes it a powerful resource for creditors, enabling them to recover money from third parties that have had dealings with the debtor. Since those third parties may not know of the debtor’s purpose, though, it also creates a risk for all sorts of apparently valid transactions.

Traditionally, the main way parties and their lawyers have taken into account the avoidance provisions is by checking for the bankruptcy of one of the participants, informally or by means of a bankruptcy search. However, this is ineffective to deal with s423, where bankruptcy is not a prerequisite, and even very old transactions can come under review. This makes it important to identify the limits of s423 – including the precise meaning of ‘transaction’ as it’s used in the legislation.

The wording of section 423 mirrors sections 238 and 339, both of which concern transactions at an ‘undervalue’ in the case of both company and individual insolvency. Many lawyers therefore assumed that section 423 was similarly limited to cases where there was a transaction at an undervalue. Similarly, it was widely assumed that decisions on sections 238, 339 and 423 could be read across to other sections.

The Court of Appeal had decided in Clarkson v Clarkson that section 339 applies only to property. If the same interpretation of the statute was adopted across sections 238, 339 and 423, this meant that section 423 transactions also had to involve the debtor’s own property.

However, in Invest Bank v El Husseini the Court of Appeal took a different path. In that case, it was faced with a situation where the debtor’s company was said to have transferred certain property in order to thwart his own creditors.

The Court decided that section 423 did not need to involve transactions with the debtor’s own property. It could be engaged where the debtor had the relevant purpose, but in relation to property he did not own beneficially. The same words (‘enters into a transaction’) were to be interpreted differently in section 423, compared to sections 238 or 339. This was said to be justified by reasons of policy, in that a broader interpretation of the words in section 423 would subject more transactions that prejudiced creditors to scrutiny.

The notion that the same words in the same statute should be interpreted in different ways in different sections was always going to be controversial. Also, given the impact of s423 on innocent third parties, it makes it harder still to advise on transactions. How can a party to a transaction address the risk that the other party is intending to prejudice creditors? Or even that one director of the other party is seeking to prejudice one of his creditors?

In this context, it’s perhaps unsurprising that Invest Bank is under appeal to the Supreme Court, with a hearing in May 2024. This will be the first time the Supreme Court has had to consider the scope of section 423 directly, so its decision is keenly anticipated. Whatever it decides, advisors, creditors and directors should all take note. It will undoubtedly shape the law for years to come.

Here to Help

Insolvency is a highly complex area of law, with strict processes to follow, so creditors should always seek expert legal advice at the earliest opportunity. Section 423 of the Insolvency Act 1986 is an ‘avoidance’ provision that can be used to help creditors claw back assets that debtors have  sought to dispose of.

To discuss how we can help with insolvency, please contact Nat Young who specialises in Insolvency and Dispute Resolution who will be happy to advise.