Inland Revenue Commissioners (Respondents) v Hashmi and another (Appellants)

Inland Revenue Commissioners v Hashmi and another, decided in the Court of Appeal on 3rd May 2002, considered the issue of whether under section 423(3) Insolvency Act 1986 (transaction at an undervalue), the statutory purpose (of putting an asset beyond the reach of creditors) had to be the dominant purpose behind a transaction, or whether it would be sufficient for it to be a substantial purpose for the court to rescind the transaction. The Court of Appeal decided that the statutory purpose did not have to be the sole or predominant purpose, it would be sufficient that it had been a purpose and not merely a consequence of the transaction.

Section 423 provides that where an individual or company has made a transaction at an undervalue then the court may set aside that transaction if it can be shown that it was done in order to put the assets transferred out of the reach of creditors of the transferor.

In this case the Inland Revenue Commission (“IRC”) made an application under section 423 in respect of a trust deed made by Hashmi (deceased) whereby his son, the second defendant, received his beneficial interest in a property. At the date of execution of the trust deed the son was a minor and so the property had not vested in the boy’s name as intended. In a separate matter, an investigation of the IRC revealed evidence that Hashmi had not declared a substantial amount of profit from two of his businesses. The IRC argued that Hashmi made the transfer under the trust deed with the statutory purpose of putting the assets beyond the reach of a person who is making, or may at some time make, a claim against him, under s423(3) Insolvency Act, in this case the IRC.

At first instance it was held that there was no requirement that the statutory purpose be the dominant purpose behind the transaction, but that if that were necessary, the requirement was fulfilled in this case on the facts. The defendant appealed.

The appeal was dismissed. It was held that the crucial requirement was for the purpose under s423(3) to have been a purpose, rather than merely a consequence of the transaction which would not have been of any significance to the person or have made any contribution to his decision to effect the transaction. A trivial purpose would not suffice. In practice, however, it is often very difficult to distinguish after the event between a purpose and a mere consequence.

For further information please contact Inga West on +44(0)20 7367 3478 or at [email protected]