Malik and others v Messalti

Property – Beneficial interest – Charging order – Appellant appealing against final charging order in favour of respondent over beneficial interest in property pursuant to section 423 of Insolvency Act 1986 – Whether “person making claim” in section 423(3) referring only to “person” known to appellant when transferor entering into relevant transaction – Appeal dismissed The appellant appealed against a final charging order (FCO) made in favour of the respondent over the appellant’s beneficial interest in a property at 11 St Claire Road, London. The property was registered in the joint names of the appellant and his wife having been purchased as a family home. The appellant’s case was that, although he previously held a beneficial interest in the property, he had divested himself of that interest by means of a trust deed in favour of his four children (the intended appellants), so that he no longer had an interest in the property that could be made subject to the FCO. The judge concluded that the purpose of the trust deed was to protect the family home from creditors, and future creditors, which was a prohibited purpose. Accordingly, section 423 of the Insolvency Act 1986 (which empowered the court to grant relief in respect of transactions at an undervalue if satisfied that a purpose of the transaction was to put assets beyond the reach of creditors or otherwise prejudice them) enabled him to make an order setting aside the effect of the trust deed and make the FCO. The appellant argued that a “person who is making, or may at some time make, a claim…” in section 423(3) referred only to “a person” that was known to the appellant at the time that the transferor entered into a relevant transaction. Held: The appeal was dismissed. (1) A person entered into a transaction at an undervalue under section 423 if they made a gift to another person or otherwise entered into a transaction with another for no consideration. Whenever a person transferred an asset at an undervalue, the effect of that transaction was to put the asset beyond the reach of creditors or potential creditors: the transferor no longer owned the asset transferred and the loss of the asset was not matched by equivalent proceeds of realisation. However, that effect was not enough to trigger the operation of section 423. Rather, achieving a result specified in section 423(3), had to be a purpose of the transaction.  If it was shown that a transferor foresaw that a transaction would have the result of putting assets beyond the reach of creditors, that was evidence that the transaction was entered into for a prohibited purpose. However, it was evidence only and not determinative, since the question remained one of “purpose” rather than “effect” or “foreseeability”: JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176 considered. (2) The appellant supported his construction of section 423 by reference to: the plain meaning of the words; the statutory context surrounding the section; the “functional construction rule” that each component of a statute had to be given effect according to its legislative function; considerations of the “mischief” behind the section; and the eiusdem generis rule. The focus of section 423(3) was on the “purpose” a transferor had for entering into a transaction. The concept of “knowledge” on which the appellant relied was not mentioned in section 423(3). The focus was not on the degree of knowledge that a transferor had of the persons who were making, or might make, claims against him. Nor did the section deal with difficult questions that might arise if the appellant was correct such as: (i) whether any knowledge had to be actual, or whether constructive knowledge would suffice; or (ii) whether the necessary knowledge had to be of creditors individually, or of a particular class or category of creditors. (3) There was a strong textual indication pointing against the appellant’s interpretation. A prohibited purpose could include a purpose of putting assets beyond the reach of persons who “may at some time make” claims against the transferor. There was an obvious conceptual difficulty in a transferor having “knowledge” of persons who were not yet making claims but “may” in the future. Considerations of statutory purpose pointed firmly against the appellant’s construction of section 423(3) which had a matter of public interest in mind and was concerned with transactions, entered into with a prohibited purpose, to put assets beyond the reach of creditors. Moreover, it was concerned to protect the position of both creditors already making claims at the time of the transfer as well as persons who “may” in the future make claims. Creditors, particularly future creditors, might well have no insight into which creditors the transferor did, or did not, know about. (4) Under the eiusdem rule, where a statute gave specific examples of something followed by more general words, the more general words were presumed to be addressing examples similar to those specifically mentioned. The concept of a person who “may make” a claim in section 423(3) was not a more general example of something previously mentioned specifically. A person “making” a claim was necessarily in a different situation from a person who “may make” a claim. The eiusdem generis principle was not engaged: Hinton v Wotherspoon [2022] EWHC 2083 (Ch) considered. Section 423(3) did not contain any statutory requirement for a transferor to have any particular knowledge of creditors. A transferor’s “knowledge” of a particular creditor or classes thereof was capable of shedding some light on the transferor’s purpose in transferring assets, just as considerations of “effect” or “foreseeability” were capable of shedding some light on that question. However, section 423(3) did not impose a statutory requirement to the effect that a transferor had to have knowledge of any or all actual or potential creditors for section 423 to apply. (5) The judge found that, in the light of the appellant’s intention at the time of the trust deed to engage in a course of litigation conduct which risked and resulted in actual cost judgments, it was more likely than not that the appellant feared future creditors in the light of the appellant’s future aims and thus that there might be further creditors in the future. The respondent was a creditor because the appellant pursued litigation against her and the court made a costs award in her favour. Accordingly, the judge appeared to have found that the respondent was within a class of potential future creditors that the appellant had in mind at the time of the trust deed. Michael Reason (instructed by Direct Access) appeared for the appellant; Timothy Becker (instructed by Direct Access) appeared for the prospective appellants; The respondent appeared in person. Eileen O’Grady, barrister Click here to read a transcript of Malik and others v Messalti