Disattribution heresy?

Overview

In this case, the Court of Appeal considered the appropriate interpretation of section 423 of the the Insolvency Act 1986 in the context of an appeal where the Judge was argued to have committed "disattribution heresy”.

Background

Invest Bank PSC, a public shareholding company established in the UAE and listed on the Abu Dhabi Securities Exchange, had judgments debts of c.AED 96 million (equivalent to c.£20 million) against Ahmad Mohammad El-Husseini (“Ahmad”), a Lebanese businessman.

In the High Court proceedings the Bank sought to pursue primary debt claims against Ahmad and secondary claims involving certain other defendants (family members of Ahmad), for relief relating to assets (the “Claim Assets") against which the Bank sought to enforce Ahmad’s liability to the Bank. The Claim Assets involved:

(1) two London properties;

(2) the proceeds of sale of another property which were ultimately transferred to to Ahmad’s wife at the relevant time;

(3) shares in the eighth defendant, Commodore UK; and

(4) US$15 million in cash said to have been held by Medstar Holdings SAL, a Lebanese company that appears to have been owned and controlled by Ahmad at all material times.

The Bank alleged that Ahmad took steps in relation to the Claim Assets in 2017 to disguise his (beneficial) ownership of them or to cause them to be transferred within his family with a view to putting them beyond the reach of his creditors.

The High Court’s Decision

In dealing with various pre-trial applications, the High Court Judge had to address two issues of law. One of these issues related to the well-established principle of separate legal personality of a company. Specifically, where an asset transferred at an undervalue is held by a company and an individual by whom it acts in respect of the transfer does so by virtue of his sole ownership or control of the company, is there, without more, and on the proper construction of s.423(1), a transaction entered into by the individual, either with his company or with the transferee (or both)? It was agreed that the facts as pleaded by the Bank should be assumed to be true for the purpose of these preliminary applications.

The Judge ultimately accepted the Defendants’ arguments that, when the individual in question does no more than act as the instrument by which his company acts, he is not treating with his company, or directing or instructing it to act, he is his company. There is thus no transaction to which the individual, as distinct from the company, is privy. Accordingly, section 423 of the Insolvency Act 1986 (described in further detail below) is not applicable unless the debtor acted separately in a personal capacity and not only as the instrument by which his company acted.

The Bank appealed.

The Issue Before the Court of Appeal

The primary issue before the Court of Appeal was the interpretation of section 423(1) of the Insolvency Act 1986. Section 423(1) states that the section “relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if”, among other things: “(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration; … (c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth of the consideration provided by himself.” Section 424(1)(a) provides that an application for an order under section 423 can be made by, amongst others, a "victim of the transaction".  

The Bank argued that, among other things, section 423 is a wide-ranging statutory provision, unconstrained by concepts of insolvency or company law, which should be given a purposive interpretation. Its plain protective purpose is frustrated by an interpretation which countenances sophisticated debtors stripping their holding companies of assets without their creditors having recourse to the remedial powers of section 423.

The Bank also argued that the expression “enters into” has been construed widely such that the relevant person had to have in some way been a party to or involved in the transaction in issue. In other words, the debtor need not be privy to the formal act of asset transfer if it can be shown he took some step or act of participation or involvement in the transaction.

Finally, the Bank argued that the analytical focus of the caselaw concerning personal liability of acts done on behalf of a company is on whether the person's acts (and intentions) satisfy the requirements for that person to incur the relevant liability. The answer does not differ whether the relevant conduct involves a corporate entity or an individual principal. The personal liability of directors for fraudulent misrepresentations made on behalf of a company is a powerful example of this.

The Court of Appeal’s Decision

The Court of Appeal found that the Judge “fell into the error of assuming that, because the company can only act through a human person, and because in law the act is treated as the act of the company, it could not also have some legal significance when it comes to the individual debtor.”

The Judge relied on the separate legal personality of a limited company, and the principle that the company's assets are not owned in any sense by the shareholders. Mr McGrath, who was acting for the Bank, made it clear that he did not disagree with any of those fundamental propositions, but submitted that the Judge’s analysis was wrong in law because it committed "disattribution heresy”. Citing authors Neil Campbell and John Armour, Mr McGrath argued that there is an important distinction which must be drawn between the "identification doctrine" (a technique for attributing an agent's acts to a company) and "disattribution" of those acts from the agent.

The identification doctrine was originally developed as a means of attributing the acts or knowledge of senior management to a company. It served a useful purpose but was articulated in problematic terms. The doctrine asks whether the agent is acting "as the company", implying that it is possible for a person to "identify with" a corporate persona more completely than simply acting as an agent. They suggest that this language, coupled with the artificial nature of corporate personality, gives rise to a "metaphysical" notion in which an agent identified with the company is seen as "embodying" the company.

According to the Court of Appeal, “the correct legal position is that, while the separate legal personality of a company must be respected, and while the shareholders have no ownership of the company's assets, it does not follow that the director has not done anything at all. Clearly he has as a matter of fact. The question which then arises is whether those factual acts have any legal significance. Sometimes they will have significance because there may be a personal legal wrong committed by the director … But, in my opinion, the significance of those factual acts may be that some other legal consequence is to be attached to the doing of those acts, depending on what the context is.”

Here, the context was whether the debtor's acts could fall within the terms of section 423. In the Court’s judgement, they were capable of doing so. The language was very broad. The Bank's interpretation also better served the purpose of the legislation, which could otherwise be easily frustrated through the use of a limited company to achieve the debtor's purpose of prejudicing the interests of his creditors.

The Court therefore allowed the Bank's appeal, but emphasised that this was on a narrow issue of law. It amounted simply to saying that the Judge was wrong to prevent the Bank from pursuing its claim as pleaded on this issue. Other issues of fact and law remain to be established at a trial on the whole of the evidence.

Judges: Lord Justice Singh, Lord Justice Males and Lord Justice Popplewell

Counsel: Paul McGrath KC of Essex Court Chambers and Marc Delehanty of Littleton Chambers (instructed by PCB Byrne LLP) for the Claimant; Daniel Warents of XXIV Old Buildings (instructed by Longmores Solicitors LLP) for the 3rd and 4th Defendants