In Dornoch Ltd & Ors v Westminster International & Ors [2009] EWHC 1782 (Admiralty) Mr Justice Tomlinson held that the sale by Westminster International (Westminster) of the wreck of a vessel, the Fairway for the sum of 1000 Euros to a related company was a transaction at an undervalue under s423 of the Insolvency Act 1986 (which, in basic terms, provides that certain disposals made to connected persons for a value less than a fair value may be set aside by the court).Westminster’s insurers (including Dornoch Ltd (Dornoch)) paid out sums in respect of a claim for a total constructive loss of the Fairway. The vessel was recovered and towed to a shipyard in Thailand. A dispute then arose as to the fair value of the wreck, and the way in which its residual value was to be accounted for to the insurers. As a result, most of the insurers elected to take possession of the wreck, however, Dornoch did not. Subsequently Westminster sold the wreck to a related Nigerian company for 1000 Euros, which was substantially less than its true value. At this point Dornoch also asserted its rights to take over the vessel. The issues to be decided were whether Dornoch acquired any proprietary rights over the vessel, and if not, whether the sale by Westminster could be set aside as a transaction at an undervalue.

Mr Justice Tomlinson held, that as a matter of the law of Thailand (which, as the place where the vessel was situated, was the relevant governing law in the circumstances), neither Dornoch nor any of the other insurers had acquired proprietary rights to the vessel.

However, it was clear that the purpose of the sale of the vessel by Westminster to its Nigerian related company was to prevent the underwriters taking possession of the wreck and therefore gaining control over the sale of the vessel. The price paid for the vessel was clearly at an undervalue. Mr Justice Tomlinson therefore held that the facts of the case “fell squarely within the provisions of s423” and ordered that the transaction be set aside and that the vessel be transferred to the underwriters’ nominee to be sold on the open market. He noted in so doing that the jurisdiction under s423 was subject to no territorial limitation, it need only be accepted that there was sufficient connection to England and Wales. In this case, the insurance policy was governed by English law, subject to the exclusive jurisdiction of the English courts and was placed in the London market. This was judged to be a sufficient connection to England in the circumstances.

This case makes clear that s423 can be invoked where there is no insolvency and that it will not be possible for insureds to avoid accounting to their underwriters for residual value of insured assets by disposing of them to related companies.