It is well known that courts are extremely reluctant to “pierce the corporate veil” and disregard the fundamental principle of English company law that a company has a separate legal personality from its members. The only circumstance where piercing the corporate veil is permissible is where a person deliberately frustrates or evades a legal obligation or liability by interposing a company under their control (this is known as the “evasion principle”). Under the evasion principle, the courts will intervene to deprive the company or its controller of the advantage it would otherwise have obtained by (abuse of) a company’s separate legal personality.

There are surprisingly few instances where courts will find that the evasion principle is engaged, and it is far more common that courts will instead look behind a company to understand what is being concealed and then apply ordinary legal and equitable remedies to the facts. Where a fraud has been committed, it can be difficult to determine what remedy is the most appropriate, especially when piercing the corporate veil is not an option. One such remedy which has been increasingly (and successfully) used by victims of fraud is section 423 Insolvency Act 1986 (“IA 1986”). This applies where a debtor enters into transactions at an undervalue (or no value) for the purpose of putting assets beyond the reach of the debtor’s creditors or other persons who are making, or may make, a claim against it (commonly referred to as the “Prohibited Purpose”).

A raft of recent cases demonstrate the courts’ willingness to exercise a wide discretion in respect to section 423 claims. In one case in particular, Integral Petroleum S.A. v Petrogat and others [2023] EWHC 44 (Comm), the Commercial Court decided that de facto directors of Petrogat (the First Defendant) were jointly and severally liable to Integral (the Claimant) for illegitimate transfers and withdrawals (“Transfers”) made to defraud Integral.

There was a fraught history between the parties, which resulted in Integral being awarded several Partial Awards and a Final LCIA Award in 2018/2019 (it had the benefit of a significant judgment debt). Despite assurances that Petrogat could satisfy the Partial Awards, it transpired that the Transfers had taken place while the LCIA arbitration was ongoing, resulting in the dissipation of all of Petrogat’s assets. In May 2021 Integral obtained a worldwide freezing order (“WFO”) against the Second to Fourth Defendants (one of whom was the registered owner and sole (de iure) director of Petrogat, and the other two were classed as its de facto directors). Integral subsequently served particulars of its section 423 claim.

The Defendants failed to comply with the disclosure requirements of the WFO and refused to provide any information regarding the company that received the Transfers, which the Defendants referred to as “Company A”. Integral then applied for an Unless Order that required the Defendants to fully comply with the disclosure orders contained in the WFO or have their Defence struck out. This was granted by Cockerill J in March 2022 and the Defendants were also debarred from defending Integral’s claim.

Integral then applied for judgment without trial, pursuant to CPR r. 3.5(5) and the judge determined that the Transfers were transactions defrauding creditors within the meaning of section 423 IA 1986. With reference to sections 423(2) and 425 IA 1986, the court then applied broad discretionary powers in determining that it was not confined to grant relief against persons (namely, Company A) who had directly benefited from the Transfers. Distinguishing Wilson v Masters International Limited [2009] EWHC 1753 (Ch) and Johnson v Arden [2018] EWHC 2633 (Ch) where the court did not consider that it had the jurisdiction to make the orders sought, and noting the views of Stephen Gee KC in Commercial Injunctions (7th edn) at 13-037, the judge considered that the facts of the case allowed the court to make an order against the Second to Fourth Defendants who were likely to have been involved in the Transfers (as Petrogat’s de iure and de facto directors) but may not have received any benefit.

Again, referring to Gee in Commercial Injunctions at 13-031, the judge observed that it was not necessary that the Prohibited Purpose (under section 423(3) IA 1986) is the only, dominant, or predominant purpose and that no adjective should be read into the statutory language. Referring to other cases, the judge also noted that a transaction may have more than one purpose: the Prohibited Purpose is not sacrosanct and need only be a (and not the sole) purpose positively intended, rather than a consequence. Although there was no real risk that Integral would not have satisfied the Prohibited Purpose requirement, given the facts, the judge’s favourable interpretation of the statute is encouraging for potential claimants.

The court found that it was appropriate to draw adverse inferences that the Second to Fourth Defendants had received a benefit from the Transfers, given their general conduct and refusal to identify Company A. The judge concluded that, on the balance of probabilities, they each received sufficient benefit to justify the court making orders under against them under section 423 and holding them all jointly and several liable for the sum owed to Integral.

The judge also observed that, if the court did not reach this conclusion and make such an order against the Second to Fourth Defendants, it would have the startling consequence that their refusal “in breach of the court’s orders, to disclose information about Company A and its assets, and about their own assets, would have the effect of depriving the court of the ability to grant effective relief.”

The case demonstrates how useful and effective a section 423 claim can be when seeking relief where fraudulent transfers have been made and innocent parties are left out-of-pocket. The court has shown a willingness to use wide discretionary powers to ensure that the parties who appear to be behind fraudulent transactions are properly held to account.

The judgment is available here.