Trustee In Bankruptcy Loses Void Disposition Claim: Section 284(4) Of The Insolvency Act 1986, follows from the case of Edwards v Aurora Leasing Limited [2021] EWHC 53 (Ch) (“Edwards v Aurora”).
This case is all about Section 284(4) of the Insolvency Act 1986:
The preceding provisions of this section do not give a remedy against any person –
(a) in respect of any property or payment which he received before the commencement of the bankruptcy in good faith, for value and without notice that the … bankruptcy petition had been presented, or
(b) in respect of any interest in property which derives from an interest in respect of which there is, by virtue of this sub-section, no remedy.
Payments were made by a bankrupt to various third parties whilst they were unaware of the bankruptcy petition.
What Is A Void Disposition In Bankruptcy?
Section 284 of the Insolvency Act 1986 provides that any disposition of the property or a payment made by a bankrupt from the date of the bankruptcy petition to the date of the bankruptcy order is void, except if the same arises with the Court’s consent or its subsequent ratification.
Why Does Legislation Against A Void Disposition Exist?
Legislation on void dispositions exists in bankruptcy to protect the bankruptcy estate and ensure that creditors are treated equally.
When Is A Void Disposition Not A Void Disposition?
A void disposition is not a void disposition if a payment is provided by a bankrupt to a third party for value when they are unaware of the bankruptcy petition and the transaction was entered into in good faith.
What Happened In Edwards v Aurora? Trustee In Bankruptcy Loses Void Disposition Claim
In the case of Edwards v Aurora the recipients of funds received monies from the bankrupt, Jagdev Singh Wasu after the date of the bankruptcy petition.
What Did Insolvency And Companies Court Judge Prentis Say: Trustee In Bankruptcy Loses Void Disposition Claim?
…it can be put shortly: “value” means what it says; and section 284(4) is a long-standing and principled shield for innocent third parties.
There is no doubt that the same two strands of preservation of the insolvent estate’s property and the ensuring of its proper, pari passu, distribution permeate both section 127 and section 284.
I do not read the reference in paragraph [6] to “full value” as being a necessary condition to the availability of a section 284(4)(a) defence, which was not there in issue, but as a high-water mark example.
As a defence, it bears obvious resemblance to that of equity’s darling, the bona fide purchaser of the legal estate for value without notice. It is, though, wider, as not distinguishing between disposition of a legal and disposition of an equitable estate.
There is no explicit qualification of the word “value”: all that is required is “property or payment which he received… for value”. So, provided the receipt was not gratuitous, which it will not be where consideration was given, value will have been provided. Whether one should go on to align all aspects of value with its ordinary bona fide purchaser use, so excluding merely nominal value, is not necessary to my decision.
Nor is there any explicit requirement that the value be received by the estate rather than a third party. I do not find that surprising where what are being protected are the rights of innocent third parties, which rights have been generated through their dealings with the bankrupt. As Lord Sumption said in Akers v Samba Financial Group at [89]:
“The rules of equity which protect transferees acquiring in good faith and without notice are among the fundamental conditions on which equitable interests can exist without injustice”.Earlier, Lord Neuberger had said this at [76]:
“…it would not merely be harsh, but positively unfair for a bona fide purchaser of a legal estate from a third party to find that, because of s 127, the transaction in question was liable to be held void owing to the existence of an equitable interest held by a company of which he had no notice”.
In saying that, I acknowledge the strength of the Trustee’s argument that section 284 is designed to protect the estate for the benefit of a bankrupt’s creditors as a whole. As explained, that is not a supreme principle, although legislation which made it so would be perfectly justifiable.It follows that I reject the Trustee’s reading of “value” based on the dicta from Officeserve v Anthony-Mike and Re MC Bacon Ltd quoted above. Each is in a different context, Officeserve testing whether the transaction there in issue could amount to a disposition, MC Bacon laying out the exercise for the undervalue provisions.
So section 284(4) may be seen to promote certainty in a bankrupt’s dealings for value, and which are therefore likely enough within the course of one or other side’s business, with innocent third parties; and it gives certainty in a trustee’s later investigations into the dealings. So the defence functions as one which is convenient, and fair.
It is also a defence which is strictly limited to its three elements.
Result: Trustee In Bankruptcy Loses Void Disposition Claim: Section 284(4) Of The Insolvency Act 1986
The Application against Aurora and de Walden was dismissed.
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