Transactions defrauding creditors under section 423 of the Insolvency Act 1986 must have as their purpose the intention of putting assets beyond the reach of a person who is making, or may make, a claim but that person need not be known at the time of the transaction.
This principle was considered in Malik and others v Messalti [2024] EWHC 2713 (Ch); [2024] PLSCS 190.
The case concerned a property at 11 St Claire Road, London, acquired by the appellant, Kamran Malik, and his wife in March 2003 and an application by the respondent, Farida Messalti, for a final charging order over it. An interim charging order over the property was made in February 2021 for a costs order of £21,000.
However, Malik claimed to have divested himself of any beneficial interest in the property by a trust deed executed on 10 November 2008 in favour of his four children so that he no longer held an interest in the property that could be made subject to an FCO.
At first instance the judge decided the purpose of the trust deed was to protect the family home from creditors and future creditors, which was a prohibited purpose. The trust deed contained express provisions restricting Malik’s right to use the property to raise funds to pay creditors, so he clearly had creditors in mind when entering into it. There was no other satisfactory explanation for the trust deed, and Malik intended to engage in a course of litigation conduct that could lead to adverse costs against him. The judge set aside the effect of the trust deed as a transaction at an undervalue under section 423 and made the FCO. Malik appealed.
A person enters into a transaction at an undervalue, under section 423, if they make a gift to another person or otherwise enter into a transaction with another for no consideration. The court may make such order as it thinks fit to restore the position and protect victims but must be satisfied that the purpose of the transaction was to put assets beyond the reach of a person who is making, or may at some time make, a claim against them.
Malik argued that only a person known to him at the time of the transaction could make a claim. The appeal judge disagreed, dismissing the appeal. The focus of section 423 was on the purpose that a transferor has for entering into a transaction, not on the degree of knowledge they have of the persons who are making, or may make, claims against them.
Louise Clark is a property law consultant and mediator
