14 June 2021
Lending focus – June 2021 – 1 of 6 Insights
The High Court recently considered whether a creditor can be a victim to, and obtain relief for, a transaction which is reversed before the claim is even brought and the creditor is put back to the position they were in before the transaction took place.
The Bank of Cyprus entered into two facility agreements with Sofroniou & Maria Developers Ltd in 2004 and 2010 respectively, under which Mr Sofroniou (the First Defendant) was a guarantor.
In 2012, the Bank of Cyprus successfully issued proceedings demanding repayment of the amounts under the latter agreement. In January 2017, the Cypriot courts held that the First Defendant was jointly and severally liable for €708,721.49 plus interest and costs.
Four months later, in May 2017, the First Defendant transferred his entire shareholding in Central London Car & Taxi Hire Ltd to his wife, Ms Reid (the Second Defendant and together with the First Defendant, the Defendants) (the Share Transfer). Around the same time, the Cypriot judgment was registered in England. This was stayed in November that same year, pending the outcome of an appeal to the Cypriot Supreme Court.
In August 2018, the Second Defendant returned the share to the First Defendant (the Share Return). Nine months later, the Bank's rights relating to the claim were transferred to Gordian Holdings Ltd (the Claimant), and in December 2019, the Claimant commenced proceedings.
The Claimant sought a declaration that the Share Transfer was a transaction defrauding creditors within s 423 Insolvency Act 1986 (the IA 1986). This was done with a prayer for such relief as the Court thought fit for restoring the position to what it would have been if the Share Transfer had not been made, and for protecting the victims of the Share Transfer.
The Defendants in turn applied to strike out parts of the Claimant's claim, together with alternatively seeking "reverse" summary judgment, arguing that because of the Share Return, the Claimant had no claim under s 423. This argument was two-pronged:
This in turn made the attainable benefit of the claim so limited that the game was not worth the candle, making the claim an abuse of the Court's process and therefore worthy of strike-out.
The Court considered the two arguments in turn:
Section 424(1)(c) of the IA 1986 reads:
"An application for an order under section 423 [to restore the position to what it would have been if the transaction had not been entered into] shall not be made in relation to a transaction except […] by a victim of the transaction."
A 'victim' of a transaction at an undervalue is "a person who is, or is capable of being, prejudiced by [the transaction]" (Section 423(5) IA 1986).
The Defendants argued that, unless the Claimant was a person who was capable of being prejudiced by the impugned transaction at the date of the commencement of proceedings, they were not a victim. The Court disagreed on the following basis:
The Defendants argued that, as any remedy would be restitutionary, it would require the Court to set aside the transaction in question to put the Claimant in the position had the Share Transfer not occurred. As the Share had been returned, no relief could or would be granted. The court disagreed with this.
The Court considered the requirements for striking out and giving summary judgment. A court will not strike out a claim unless it is certain that the claim is bound to fail. A summary judgment should not be granted if a claim has a more than fanciful prospect of success. Here, the Court decided:
The Court therefore dismissed the Defendants' application.
Once a victim, always a victim is good news for creditors wishing to bring claims for transactions at an undervalue, particularly where the transactions have been reversed. This is also a word of warning to debtors who may be considering transferring assets, as the above sections of the IA 1986 have a wide ambit and apply to transactions whether the person effecting the transaction has become insolvent.
Further, while the Defendants put forward logical and – as even recognised by the Court – attractive arguments in favour of granting a summary judgment, the Court's hesitancy maintains the status quo. This serves as a useful reminder for debtors and creditors alike of summary judgments having one of the highest civil thresholds.
To discuss the issues raised in this article in more detail, please reach out to a member of our Banking & Finance team.
by Kate Bowden