Significant judgment bringing clarity to the issue of the liability of trustees of a trust under Section 423 Insolvency Act 1986 in civil proceedings which are not insolvency proceedings

In Invest Bank P.S.C. -v- Ahmad El-Husseini, Virtue Trustees (Switzerland) AG and others Mr Justice Calver has provided important guidance in a claim under Section 423 Insolvency Act 1986 (“Section 423”), under which the court has the power to override the property rights of innocent recipients of properties such as the trustees of a trust.

Virtue Trustees (Switzerland) AG (“Virtue Trustees”), a Swiss professional trustee, part of the KENDRIS fiduciary and family office services group, has been completely vindicated following an attempt to deploy Section 423 to attack a perfectly legitimate international trust structure.

Despite the claim being framed under Section 423, the proceedings are not insolvency proceedings, but civil proceedings in the Commercial Court division of the High Court in London. The Claimant, Invest Bank P.S.C., a UAE bank based in Sharjah (“the Bank”), alleged that the First Defendant, Ahmad El-Husseini, owed it around £19 million under personal guarantees and that Mr El-Husseini had transferred various assets to members of his family at an undervalue, as well as transferring a valuable London property owned by one of Mr El-Husseini’s offshore companies to a discretionary trust set up by Virtue Trustees for Mr El-Husseini’s former wife and sons (“the Trust”). The Bank’s case was that it was the victim of serious wrongdoing by Mr El-Husseini involving the dissipation of these assets worth tens of millions of pounds and that the transfers of properties (including to the Trust) were made for the purpose of defeating the interest of the Bank which had substantial claims against Mr El-Husseini (“the Alleged Purpose”). The proceedings were brought against Mr El-Husseini’s former wife and four sons, as well as against Virtue Trustees as the trustee of the former Trust (which had been wound up by the time of the proceedings, and the assets distributed to the beneficiaries).

Virtue Trustees argued that the timing of the transfer of the London property into the Trust was solely connected to impending tax changes under the Finance Bill 2017 due to come into effect from 6 April 2017, which provided that UK residential property owned indirectly by a non-UK domiciled individual was to be brought within the scope of inheritance tax. As a result, non-doms holding residential property assets in the UK in offshore companies (by which the properties were ‘enveloped’) were in late 2016 and early 2017 taking steps to restructure enveloped property by settling the shares of the offshore companies into discretionary trusts. Otherwise, after 6 April 2017 the shares in an offshore company would have attracted an immediate tax charge of 40% upon the demise of the non-dom. As with many very wealthy people, their main concerns were (1) minimizing their tax liabilities and (2) to provide sufficient funds for their children. Virtue Trustees was advising numerous clients with similar concerns at that time. Its position was that the Trust was not set up for any Alleged Purpose, but as part of appropriate, legitimate estate planning.

Six weeks before trial, the Bank amended its claim for the sixth time, to plead new allegations that Virtue Trustees was on notice that the London property was transferred into the Trust for the Alleged Purpose. The Bank even went so far as to assert that Virtue Trustees apparently understood that Mr El-Husseini did not want his assets to be vulnerable to claims by present or potential future claimants and that senior members of Virtue Trustees allegedly discussed internally Mr El-Husseini’s Alleged Purpose and thereby acted improperly in carrying out transactions which resulted in the London property being settled into the Trust (all allegations dismissed by the Judge).

That very late amendment resulted in a huge further disclosure exercise and taking extensive further witness statements, as well as the need for consequential amendments to be made to the Defences.

It was only at trial that the Bank put forward a new case alleging that one of Mr El-Husseini’s main companies was insolvent or at least in “significant financial difficulties” in early 2017 which led Mr El-Husseini to consider that the Bank would or might make claims against him in the future. The Bank then toned down the assertion in its closing arguments by saying that the company was suffering from a “liquidity crunch or crisis” at the relevant time, notwithstanding that the company was solvent. The Defendants however asserted that Mr El-Husseini’s construction companies, Commodore UAE and associated companies, were thriving, with Commodore the second largest construction company in Abu Dhabi at the relevant time, having a long list of blue chip clients and a book of substantial construction contracts. The Bank’s internal records showed that this business had net assets of AED 175.6 million at the relevant time and so was financially sound up until the time when Mr El-Husseini left the UAE in April/May 2017. The Bank’s own evidence demonstrated that subsequently Mr El-Husseini fell out with the majority shareholder in Commodore, who went on to take over Commodore before shutting it down, with the company becoming insolvent.

Virtue Trustees knew Mr El-Husseini to be a highly successful construction professional, who in early 2017 was looking to implement his long-term estate planning, finally prompted by the prospect of significant tax charges under the forthcoming new legislation in April 2017. This was a time when the trust industry was busy setting up numerous such trusts for non-doms.

In a detailed judgment, Mr Justice Calver has found that various properties were transferred by Mr El-Husseini to members of his family for genuine estate planning reasons, including the valuable London property which was settled into the Trust. The Bank also failed to make out its case that other assets were transferred for the Alleged Purpose. In his judgment the Judge found that Virtue Trustees “was indeed” an “innocent third party recipient” of the London property with the proceeds of sale of that property then being distributed to beneficiaries of the Trust in good faith and without notice of the Alleged Purpose (which Mr El-Husseini did not have). The Judge held that the Bank failed to prove any of its claims against the Defendants, including Virtue Trustees, and dismissed all claims against them.

This judgment provides important guidance on how to bring claims under Section 423, including how to plead and prove these claims, the limits of inferential claims and the principles to be followed when seeking to draw adverse inferences.

It is now hoped that potential creditors will think more carefully before trying to use Section 423 to reverse asset transfers and drag innocent trustees of this type of discretionary trust into proceedings.

This hard fought case was met by the unwavering resolve of Virtue Trustees in full knowledge that it had done nothing wrong and had nothing to hide. It is difficult to know what professional trustees in the position of Virtue Trustees could have done to avoid being drawn into long-running High Court proceedings in the UK, and even though the proceeds of the Trust had long ago been distributed to the beneficiaries.

We are delighted at the dismissal of all claims against Virtue Trustees and the other Defendants. This was a fantastic Edwin Coe team effort, led by Joanna Osborne, with Eleanor Stark, James Hibbert, Harry Collins and Kiya Komorowska.

Our Property & Trusts Litigation team has considerable experience in this specialist area of law. For further information, please contact Joanna Osborne or any solicitors in Edwin Coe’s Property & Trusts Litigation team.

Tiffany Scott KC of Wilberforce Chambers provided the most careful and astute guidance throughout, assisted by the superb Emma Hargreaves from Serle Court Chambers.

 

If you aren’t receiving our legal updates directly to your mailbox, please sign up now