Secured status, vesting orders and the limits of section 375 of the Insolvency Act 1986

ICC Judge Agnello KC dismissed a creditor’s application to vary an earlier vesting order made following successful proceedings under sections 339 and 423 IA 1986. The decision provides helpful clarification on the temporal effect of vesting orders, the proper scope of section 375 IA 1986, and the interaction between avoidance remedies and the pari passu principle.

Background

Mr Razeem was the legal owner of two properties. In 2011, he purportedly executed a trust deed intending to declare a trust of those properties in favour of his wife. In 2016, shortly before judgment debts were obtained against him by a creditor, the properties were transferred to her for nominal consideration.

The creditor later obtained charging orders and a freezing injunction in respect of what she contended remained Mr Razeem’s interest in the properties. The creditor also subsequently petitioned for Mr Razeem’s bankruptcy without disclosing any secured position and proved in the bankruptcy as an unsecured creditor.

Following the bankruptcy order, the creditor brought a private application under section 423 IA 1986 seeking sale of the properties for her own benefit. Separately, the trustees in bankruptcy commenced proceedings under sections 339 and sought carriage of the creditor’s section 423 IA 1986 application, contending that the trust deed was a sham and that the 2016 transfers were transactions at an undervalue.

At trial in July 2024, the court upheld the trustees in bankruptcy’s case, set aside the transactions and ordered that the properties vest in the trustees in bankruptcy pursuant to section 342(1)(b).

The section 375 IA 1986 application

The creditor later applied under section 375 IA 1986 to vary the vesting order, arguing that:

• The vesting order should be treated as taking effect retrospectively to 2016, ab initio, with the consequence that her earlier charging orders against Mr Razeem should be validated; or
• The July 2024 order should be amended so as to recognise her as a secured creditor, on the basis that section 339(2) IA 1986 requires restoration of the position that would have existed but for the transfers.

The creditor’s application required the court to consider both the temporal effect of vesting orders made under section 342 IA 1986 and the extent to which avoidance provisions can be used to improve the position of a single creditor once bankruptcy has intervened.

The court’s decision

The court rejected the creditor’s application in its entirety.

Effect of vesting orders
The court confirmed that a vesting order made following avoidance proceedings operates prospectively, not retrospectively. The trustees in bankruptcy’s title to the properties arose only on the date of the vesting order. There was no legal basis on which the court could retrospectively validate security obtained before the order was made.

Further, the court held that the purported security obtained by the creditor was ineffective at the time it was created, as the charging orders were against Mr Razeem’s interest in the properties, which he had transferred to his wife. As such, even if a vesting could occur retrospectively, which it could not, the creditor would not have had the benefit of security as it was never effective.

No elevation of unsecured claims
The court held that sections 339(2)/342(1)(b) IA 1986 donot permit the restoration of a creditor to secured status where doing so would disrupt the statutory scheme of distribution in bankruptcy. Once a bankruptcy order has been made, property re‑captured by avoidance proceedings forms part of the bankrupt’s estate for distribution in accordance with the pari passu principle.

Allowing the creditor’s charges to take effect would have improved her position at the expense of other unsecured creditors, contrary to fundamental insolvency principles. Consequently, the creditor had no defence to the discharge of the charging orders and could not rely on her purported security.

Section 423 IA 1986 claims post‑bankruptcy
The court also rejected reliance on section 423 IA 1986. Where such claims are pursued after bankruptcy, any relief is ordinarily for the benefit of the general body of creditors rather than a single claimant.

An application made under section 423 IA 1986 is brought on behalf of “every victim of the transaction” and whilst this includes creditors of the insolvent estate, it has wider scope.

The creditor attempted to rely on the Kubiangha v Ekpenyong [2002] EWHC 1567 (Ch), which was distinguished by the court as a solvent section 423 IA 1986 case concerned with beneficial ownership and the treatment of a third‑party mortgage, not the recognition or revival of creditor security post‑insolvency. The court held that it provides no authority for reinstating charging orders in an insolvent avoidance context, where section 423 IA 1986 relief is treated as brought for the benefit of all creditors and cannot operate so as to breach the pari passu principle.

Limits of section 375 IA1986
Although the court did not need to determine the application on section 375 IA 1986 grounds alone, it observed that the application was, in effect, an attempt to reopen a fully reasoned trial decision. Section 375 IA 1986 cannot be used in place of the usual appellate jurisdiction not to be used as another chance to overturn or appeal prior decisions where the appellate courts would be the correct route and time limits to appeal have expired.

Practical takeaways for insolvency practitioners

This decision offers several points of practical significance:

• Vesting orders are forward looking: property vests in trustees in bankruptcy from the date of the order, not before.
• Avoidance remedies do not re‑order priorities: sections 339 and 423 IA 1986 cannot be deployed to enhance the position of a single unsecured creditor following bankruptcy.
• Pari passu remains central: recoveries achieved through avoidance proceedings are assets of the estate and must be distributed in accordance with statutory priorities.
• Section 375 IA 1986 has limits: the provision is not a mechanism to revisit findings or outcomes with which a party is dissatisfied, nor to correct alleged unfairness arising from the proper application of insolvency law.
• Charging orders over uncertain interests remain vulnerable: where a bankrupt’s interest is later shown to be illusory or voidable, downstream security may fall away.

Tom Paton and Hannah Lambert of Irwin Mitchell represented the trustees in bankruptcy.

“The judgment underlines that vesting orders obtained through avoidance proceedings are forward looking, and that section 375 IA 1986 is not a backdoor route to re write the distribution outcomes of bankruptcy. Recoveries belong to the estate and must be shared pari passu; unsecured creditors cannot use section 339 or 423 IA 1986 to manufacture secured status after the event.” Tom Paton, Irwin Mitchell