The case of Re Concept Oil Services Limited has raised several issues surrounding intention to mislead and defraud in contractual negotiations compared to subsequent conduct. What can we learn from the decision when considering Section 423 actions?

The background

Re Concept Oil Services Limited (05/07/2013) was a case concerning deceit, misrepresentation and unlawful means conspiracy following misrepresentations from one contracting party to another prior to a contract for the purchase of crude oil being concluded.

Concept Oil was a Hong Kong company, which had contracted with EG UK, an English company, to buy crude oil from an oilfield owned by EG UK, and for the refinement of that oil in EG UK’s refinery in Kazakhstan. In the run-up to the contract, EG UK had made clear that it owned 100% of the shares in the subsidiary which was to refine the oil, and that EG UK was, and was to remain, an English company. These matters were known to be of importance to Concept Oil.

Following the framework contract’s conclusion, EG UK effectively divested itself of all assets, leaving EG UK as a shell. The first transaction involved the transfer of all EG UK’s assets to an Anguillan entity, which was achieved by filing a certificate and articles of continuation under the Anguillan International Business Companies Act 2000. Under Anguillan law, this purported to have the effect of "continuing" EG UK as an Anguillan company. EG UK also caused the transfer of the refinery to a BVI incorporated entity. Despite these transactions, EG UK and the EG Group continued to insist that EG UK remained the parent company of the group. As a result Concept Oil financed the tax liabilities of EG UK and continued to trade with EG Group.

The trading relationship terminated in 2010 after EG Group began to divert products, for which Concept Oil had made prepayments, to third parties. At this point, Concept Oil found out about the existence of the Anguillan company, at which point Concept Oil’s money had been spent and EG UK was an empty shell. Terminating the contract, Concept Oil claimed damages for deceit and conspiracy to cause loss by unlawful means, as well as claiming that the transactions were ones intended to put assets beyond the reach of creditors and therefore void under Section 423 of the Insolvency Act 1986.

The issues

The court essentially had to decide whether representations had been made as to EG UK’s status, and whether the representations had been relied upon by Concept Oil to its detriment. In respect of the Section 423 (transactions defrauding creditors) claim, the court had to decide both whether the transactions in question were at an undervalue, and whether the intention behind the transactions had been to put assets beyond the reach of EG UK’s creditors.

What did the court decide?

In respect of the deceit/misrepresentations claims, the court decided that EG UK and its officers had indeed provided assurances to Concept Oil about EG UK’s status and were well aware of the importance of such assurances to Concept Oil, and Concept Oil has relied upon them. EG UK’s director had positively misled Concept Oil about the changes to EG UK, and such deception had caused Concept Oil to fund EG UK, when it would not otherwise have done so. The resultant losses were over $11 million. The deceit allowed Concept Oil to rescind the tax loan agreement, and rendered EG UK, its directors liable for the loss suffered.

On the transactions defrauding creditors issue, the court agreed that the various transactions satisfied Section 423, which had extraterritorial effect since the transactions concerned had a sufficient connection with the UK.

The court ruled that the transfer of the assets and liabilities of EG UK to EG Anguilla via the purported "continuation" of EG UK in Anguilla, was a "transaction" within the meaning of section 423, of the IA 1986, as defined by section 436 of the IA 1986. This was because "transaction" includes an "arrangement", which had previously been widely construed interpreted as including "an agreement or understanding between parties, whether formal or informal, oral or in writing [and] the wide definition of "transaction" in the context of section 423 is entirely consistent with the statutory objective of remedying the avoidance of debts" (Feakins and another v DEFRA [2005] EWCA Civ 1513).

The court also found that the transactions had been made to put assets beyond the reach of a person who either was making, or may at some time in the future make, a claim against EG UK, or otherwise to prejudice the interests of such a person.

The "continuation" in Anguilla was the first step of a series of changes to the corporate structure of the EG group, the overall purpose of which was to put those assets beyond the reach of the group’s creditors, specifically Concept Oil. The transaction had, as a substantial purpose (if not its dominant purpose), putting the assets outside the reach of creditors or otherwise prejudicing creditors.

As Concept Oil was a "victim" of the transaction within the meaning of Section 423(5) of the IA 1986, it was entitled to declarations under Section 425 that (i) the purported substitution or succession of EG Anguilla for EG UK under the framework contract agreement was void and of no effect; (ii) the purported transfer to EG Anguilla of EG UK’s property and/or the succession of EG Anguilla to that property was void and of no effect and (iii) that property so transferred and its fruits and proceeds was held on trust by EG Anguilla for EG UK. Similar declarations were also made in respect of the other corporate transactions within EG Group (including the transfer of the refinery).

What does this mean for practitioners?

There is no doubt that the threshold for establishing a Section 423 claim is a high one - more akin in many ways to the criminal burden of establishing matters "beyond reasonable doubt". Provided that sufficient evidence can be put before a court, however, Section 423 represents a powerful tool to unpick transactions at an undervalue designed to leave creditors without recourse to company assets. This is both because Section 423 has no two year time limit (unlike Section 238), does not have a precondition of establishing insolvency of the transferor at the time (or as a result of) the transaction, and contains a range of remedies beyond mere damages (including the re-vesting of assets), and is capable of taking effect in respect of assets located in another country.

This decision provides welcome clarification of the factors required to be established, and a timely demonstration of the extent of the assistance the courts can offer when a case for a transaction defrauding creditors has been established.