The Court applied sections 423-425 of the Insolvency Act 1986 (IA) to the transfer of an interest in a Ukrainian television station. When analysing the Defendant's actions the Court considered the transaction was made for a prohibited purpose.

Background

New Media Distribution Company SEZC Ltd a company incorporated in the Cayman Islands and largely owned by Mr Gusinski was party to three television programming licence agreements with Iota Venture LLP, a partnership jointly owned by Mr Gusinski's limited liability company and a limited partnership owned by a Mr Kagalovsky . On Mr Kagalovsky's instructions Iota's interest in the television station was transferred to him and he then began to default on the licence agreement payments.

The Transaction resulted in litigation in New York brought by New Media and Mr Gusinski's Nominee for overdue licence fees and damages on termination as well as breach of contractual duties on effecting the transfer. Both Claimants obtained judgments that were appealed but subsequently Mr Gusinski's Nominee entered into a settlement agreement.

Subsequently New Media brought a claim in England under S.423 IA 1986 alleging the Transaction was a Transaction Defrauding Creditors. By the time of trial it was accepted that the Transaction was at an undervalue therefore the two main issues were:

  • Was New Media a victim of the Transaction and therefore had standing to bring a claim?
  • Was the purpose of the Transaction a purpose within S. 423 (3) IA 1986?

"Victim" of the transaction

Defined in S.423 (5) IA 1986 as “a person who is, or is capable of being, prejudiced by”

the transaction in question, Mr Kagalovsky argued that New Media was not a victim by way of two main points:

  • New Media's judgment debt was compromised by virtue of the Settlement Agreement;
  • New Media was a corporate vehicle of Mr Gusinski.

The court considered that it was clear from the terms of the Settlement Agreement that it did not compromise the New Media proceedings as it was never the parties' intention for the agreement would cover the New Media claim. The agreement contained precise terms and therefore could not then be found to extend or compromise any judgment debt arising from New Media's claim.

When considering point 2 above, the court did not consider the underlying ownership of New Media to be of any effect to the standing of New Media to bring the claim. Stating that "the ownership and control of New Media is irrelevant to these proceedings", Mr Justice Marcus Smith confirmed that New Media was a legal entity it is own right and therefore capable of bringing the claim it had brought.

Overall the court held that New Media fulfilled the definition of "victim" within the meaning of the IA and therefore had standing to bring the claim.

"Purpose" of the transaction

In his judgment Mr Justice Marcus Smith agreeing with previous case law confirmed that on review of the "purpose" of the transaction the court need not be satisfied that the prohibited purpose was the sole purpose, or even the dominant purpose of the transaction. "It is sufficient simply to ask whether the transaction was entered into by the debtor for the prohibited purpose." When reaching their decision, the court had regard to the below points, concluding overall that Mr Kagalovsky's purpose was within S. 423 of the IA 1986.

Firstly Mr Kagalovsky's explanation for the transaction was "advanced very late in the day." Noting that the explanation failed to feature in Mr Kagalovsky's original defence nor the subsequent amended defence filed months later, the court considered it odd given the importance of the explanation of purpose to S.423 proceedings that Mr Kagalovsky's intentions were not so forthcoming.

Furthermore, the court observed Mr Kagalovsky's "broad-brush" explanation for the transaction as "long on assertion and very short on actual fact and detail". Going so far as to confirm that "it would have been helpful to know whether there was an objective basis for Mr Kagalovsky's belief". Mr Justice Marcus Smith confirmed none was established before him.

In addition the court had regard to the failure of Mr Kagalovsky to propose an objective basis for his alleged purpose during cross-examination of New Media's witness. On the absence of any alternative basis, the court confirmed that when viewed objectively the transaction looked "like an attempt to put assets beyond the reach of New Media" and therefore directly into the realms of S. 423 proceedings.

Conclusion

Considering it impractical for the position to be restored in the literal sense (by returning the television station into the direct ownership of Iota), the court considered the appropriate relief was an order for Mr Kagalovsky to pay $4,571,059.54 to New Media. Overall this decision has provided further clarity on how the court reviews the underlying purpose of the transaction prior to its completion. It highlights the importance for individuals seeking to defend claims for Transactions Defrauding Creditors, to be able to plead their purpose and supporting statements with sufficient objectivity and particularity to pin point their exact reasoning at any given time prior to the transaction.