Insolvency Act 1986 Section 423 Claims

Section 423 of the Insolvency Act 1986 deals with fraudulent trading and transactions defrauding creditors. The section provides a remedy for the liquidator of an insolvent company to recover any losses suffered by the company as a result of the fraudulent or wrongful trading of its directors.

A Section 423 claim can be made against directors, shadow directors, or any other person who has been knowingly a party to the fraudulent trading.

Under section 423, if a director is found to have completed the transaction in question whilst knowing, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation, they may be held personally liable for the company’s losses incurred after that date. The liquidator may bring a claim against the director for these losses and any other compensation that may be ordered by the court.

It’s important to note that the claim brought under section 423 must be brought within two years of the date of the liquidation of the company, and that the claim is a personal claim against the director, rather than against the company itself.

Under the Act:

“(1)This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—

(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;

(b)he enters into a transaction with the other in consideration of marriage [For the formation of a civil partnership]; or

(c) he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.

(2) Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for—

(a) restoring the position to what it would have been if the transaction had not been entered into, and

(b) protecting the interests of persons who are victims of the transaction.

(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—

(a)of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or

(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.

(4)In this section “the court” means the High Court or—

(a)if the person entering into the transaction is an individual, any other court which would have jurisdiction in relation to a bankruptcy petition relating to him;

(b) if that person is a body capable of being wound up under Part IV or V of this Act, any other court having jurisdiction to wind it up.

(5) In relation to a transaction at an undervalue, references here and below to a victim of the transaction are to a person who is, or is capable of being, prejudiced by it; and in the following two sections the person entering into the transaction is referred to as “the debtor”.”

Legal Costs in Section 423 claims

In general, the losing party is responsible for paying the reasonable costs incurred by the winning party in Insolvency Act 1986 Section 423 claims.

The court has discretion, however, to make an order for costs that is different from the general rule. For example, the court may order that the costs be paid on an indemnity basis, which is a higher level of costs recovery, or it may order that the parties bear their own costs.

The court’s decision on costs will be based on various factors, including the conduct of the parties, the importance of the case, and the extent to which the winning party has succeeded.

If a costs order is awarded in your favor, you will become the receiving party and you will be required to serve a bill of costs on the paying party alongside a Notice of Commencement. Costs should be negotiated using Points of Dispute and replies, this is known as the process of detailed assessment.

If costs cannot be agreed between parties, the receiving party will be required to make an application to the court for a Detailed Assessment Hearing.

During the case management phase of you case, you will have been required to submit a costs budget. A legal costs budget is an estimate of the costs that a party to a legal proceeding is likely to incur over the course of the case. The costs listed within the budget should be reasonable and proportionate.

If a party’s legal costs budget is found to be unreasonable, the court may disallow some or all of the budgeted costs.

The court will consider a range of factors when determining whether a legal costs budget is reasonable, including the complexity of the case, the number of parties involved, the time spent on the case, and the hourly rates of the legal representatives. If a budget is found to be unreasonable, the court may order the party to revise the budget or reduce the budgeted costs.

In the case of Lemos and Ors v Church Bay Trust Company LTD, which was in relation to a Section 423 claim, issues were raised by the court in relation to both the claimant’s and the defendant’s costs budgets which were deemed disproportionate and unreasonable.

To prevent the costs from escalating further through arguments regarding the budgets, the judge decided that any comments related to both budgets could be considered during any assessment proceedings.

“… the court does not consider on the information currently available that the budgets are reasonable and proportionate. Reference can be made to this judgment (in final form) for the court’s comments upon the budgets for reference in any subsequent assessment proceedings.”

How can ARC Costs Assist?

ARC Costs have an experienced team of costs draftsmen and costs lawyers with the expertise to assist on costs matters in relation to Insolvency Act 1986 Section 423 Claims, whether you are the paying party or the receiving party.

We can provide assistance on drafting your costs budgets and bills of costs, ensuring they are reasonable and proportionate. We can also help you negotiate your costs with the other side by assisting in the drafting of points of disputes and replies.

We can be contacted using our email address at info@arccosts.co.uk, or by telephone on 01204 397302. For more information on legal costs, visit our services or legal costs page.

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