Where a Debtor Claims they Held Property on Trust for a Third Party

THE AUTHOR:
Emile Yusupoff , Junior Barrister at 36 Stone

The England & Wales High Court’s recent judgment in Crescent Gas Corporation Limited v (1) National Iranian Oil Company; (2) Retirement, Saving and Welfare Fund of Oil Industry Workers [2024] EWHC 835 (Comm) concerns a successful application under s.423 of the Insolvency Act 1986 (the “1986 Act”) and provides useful authority on the meaning of s.53(1)(b) of the Law of Property Act 1925 (the “1925 Act”).

The Parties’ Cases

The parent company of the claimant judgement creditor (“CGC”) had entered into a gas purchase contract with the defendant judgment debtor (“NIOC”), who breached this agreement by failing to supply any gas. CGC was assigned its parent’s rights, brought arbitral proceedings, and obtained an award against NIOC in 2021 for a principal sum of US$2,429.97 million. On 15 August 2022, CGC obtained permission to enforce the award as a judgment and sought instant relief in respect of a property known as NIOC House worth £80-104 million (the “Property”). NIOC purchased the Property in 1975 with monies belonging to a pension fund set up to benefit, inter alia, current and former employees of NIOC (the “Fund”). In August 2022, NIOC remained registered as the Property’s sole owner. On 23 August 2022, the Property was transferred to the Fund for no value (the “Transfer”).

CGC maintained that the Transfer fell under s.423 of the 1986 Act as a transaction intended to defraud creditors.

The defendants maintained that:

the Fund had always been the beneficial owner of the property, because:
under Iranian law, NIOC was the “amin” of an “amanat” (an amanat exists where an owner entrusts an asset to an amin but retains ownership); or
either under Iranian or English law, NIOC had held the Property on trust for the Fund; and
the purpose of the Transfer was not to put assets beyond CGC’s reach, but to reflect the Property’s true beneficial ownership.

Judgment

The Court found that the money used to purchase the Property had been taken from the Fund as a loan. The loaned money, and therefore the Property, belonged to NIOC, despite documentation showing that NIOC’s board subsequently understood the Fund to be the owner. Subsequent steps taken by NIOC between 1975 and 2022 were held not to have transferred ownership (despite NIOC’s counsel making submissions to the contrary). See: [47-52], [77], [89], [118], [135] of the judgment.

As a matter of Iranian law, and in contrast with English law trust concepts, an amin does not have legal ownership under an amanat arrangement. Accordingly, because the defendants could not establish that the Fund rather than NIOC had absolute ownership, the Property did not fall under an amanat. See: [150-157] of the judgment.

As to English law, it was undisputed that Art. 14 of the Hague Trust Convention meant that an Iranian entity could create a trust over English property despite Iranian law not distinguishing between legal and beneficial ownership. Nonetheless, the defendants failed to demonstrate that there had been a declaration of trust over the Property that could be enforced against CGC.

The Court held that the Fund had only acquired legal personality in 2019, meaning that there could be no declaration prior to then (see: [165-184] of the judgment). After 2019, there was a clear manifestation of intention to declare a trust in a document executed by NIOC’s attorney. However, s.53(1)(b) of the 1925 Act provides that: “a declaration of trust respecting any land or any interest thereon must be manifested and proved by some writing signed by some person who is able to declare such trust or by his will”. This contrasts with the position under ss.53(1)(a) and (c), which expressly provide for interests in land to be created or disposed of by signature by agents. Prior to this judgment, there had been no direct authority on the point of whether this linguistic distinction reflected a substantive distinction. The Court held that it did. NIOC’s counsel argued that no such distinction could be drawn because a company could only declare a trust through natural persons, i.e., its agents. The Court dismissed this argument on the basis that a distinction could be drawn between a company’s officers, who were persons “able to declare” a trust on its behalf, and mere agents. Accordingly, the document executed by the attorney was inadequate. Although subsequent signed writing by NIOC’s officers would have been sufficient to prove the trust (Taylor v Taylor [2017] EWHC 1080 (Ch), applied), there was no such writing. See: [185-200] of the judgment.

There was also a dispute over the effect of non-compliance with s.53(1)(b) of the 1925 Act. It was established that a trust could be made without compliance and that once there had been compliance the trust was retrospectively enforceable (Taylor, applied). Counsel for NIOC submitted that this meant that non-compliance with s.53(1)(b) only rendered a trust unenforceable where a beneficiary sought to enforce their interest against a trustee. This line of argument was dismissed, and it was accordingly held that no enforceable trust had been established. See: [201-213] of the judgment.

It was established that s.423 of the 1986 Act could be relied upon by a creditor when a purpose of a transaction is to put an asset beyond their reach, even if it was not the main purpose (JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176, followed). The timing of, and urgency in enacting, the Transfer meant it was clearly a purpose of NIOC to put the Property beyond CGC’s reach. See: [214-224] of the judgment.

The Court ordered NIOC to transfer the Property to CGC to help restore the position to what it would have been had the Transfer not occurred, as permitted by s.425 of the 1986 Act. Any rights that the Fund may have had against NIOC were insufficient to render this order prejudicial to the Fund. See: [228-231] of the judgment.

Comment

This case provides welcome authority on s.53(1)(b) of the 1925 Act. The distinction between the language of that subsection and ss.53(1)(a) and (c), is clear. If s.53(1)(b) was intended to allow for signature by mere agents, it could have said so in plain language as the preceding and following subsections do. Grammatically, it would not have been rendered insensible by the addition of the words “or by agent”. This distinction has a principled basis. Unlike the creation or disposition of a legal interest, or the disposition of an already-existing equitable interest, the creation of a trust involves a separation of legal and beneficial interest.

Various lessons can be drawn from this case. Most obviously, NIOC’s officers could have complied with s.53(1)(b) prior to 2022. To the extent that the position under s.53(1)(b) was formerly ambiguous, this judgment underlines the value of adopting a strict approach to complying with formalities: if there is any doubt over the need for a company’s officer to authorise or sign something themselves, err on the side of excessive precaution. More broadly, where ownership of an asset, or the relationship between related entities, is disputed, the importance of a clear understanding of historic transactions and accounting cannot be understated. The apparent long-standing belief at NIOC and the Fund (and among many of their historic Iranian and English legal representatives) that the latter was the owner of the Property simply did not square with the actual circumstances of the Property’s acquisition and the lack of an effective subsequent transaction. The above points are particularly acute for parties dealing with property in foreign jurisdictions. Different jurisdictions can have radically different laws of property, and the applicable law cannot be freely chosen in the same way that it can in the law of contract.

Further (perhaps obvious) lessons can be drawn from the conduct of the case. Adverse inferences were drawn against NIOC due to its failure to disclose key accounts and the refusal of its board to appear as witnesses (see: [43], [218], [222] of the judgment). Attempts by one of NIOC’s witnesses to use his statement to make NIOC’s case and to speak to matters beyond his own personal recollection were given short shrift (see: [23], [49], [84], [220] of the judgment). The Court held that it was not open to NIOC to run an alternative case, first articulated in closing submissions, regarding when the Fund came to own the Property (see: [71-74] of the judgment). Attempts by NIOC’s counsel to emphasise their expert’s more applicable expertise and to undermine the credibility of CGC’s expert based on his purported hostility to the Iranian regime were unsuccessful, with the Court remaining focused on the quality of the experts’ respective reasoning (see: [29-39], [165-175] of the judgment).

As for the general availability of s.423 of the 1986 Act in the enforcement of awards, this judgment does not break new ground. NIOC’s failure to hide behind purported trusts to avoid enforcement is a positive precedent for award creditors, but given the case turned on its specific facts, it is unlikely that it will be widely applicable.

ABOUT THE AUTHOR:

Emile Yusupoff  is a Junior Commercial Barrister at 36 Stone (part of the 36 Group), specialising in international commercial arbitration, international trade, and shipping. He is regularly instructed in arbitrations and English litigation as sole and junior counsel. He has spoken at international conferences and has had work on commercial and international trade law published in leading journals.