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Overview Of Post Petition Payments In Liquidation

Post petition payments in Liquidation was the subject matter in Changtel Solutions UK Ltd, Re [2022] EWHC 694 (Ch).

The position arising from Section 127 of the Insolvency Act 1986 is that dispositions of company property after issuance of a Winding Up Petition are void unless the Court orders otherwise.

The Liquidator in this case challenged payments to sixteen Defendants and succeeded.

The Issues Considered In Post Petition Payments

The Court considered the following issues:

  • claim of liquidators/company seeking repayment of sums paid between presentation of a winding up petition and winding up order which were void under Section 127 Insolvency Act 1986
  • whether for limitation purposes/ Section 9 Limitation Act 1980, the cause of action accrued immediately on the making of the payments or not until the winding up order
  • whether the payee had demonstrated special or exceptional circumstances warranting validation; whether absence of advertisement comprised an exceptional circumstance
  • whether the restitutionary defence of ‘change of position’ is available in a Section 127 context

Statute Of Limitation For Post Petition Payments

The Defendants suggested that the challenged payments were statute barred because they occurred more than six years. This was rejected by the Court because the intention of Section 127 is to preserve the pari passu principle in Liquidation which is not engaged until the making of the Winding Up Order with the company going into Compulsory Liquidation:

As explained by HHJ Paul Matthews in Officeserve Technologies Ltd (in compulsory liquidation) v Annabel’s (Berkeley Square) Ltd [2019] Ch 103 at [21]:

‘in the context of section 127 … the legal consequence of the transaction at the time it was carried out depends on what happens subsequently. If the winding up order is eventually made, the disposition is and always was void from the beginning, although the court has the power to validate it in an appropriate case. If, however, the winding up order is not made, the disposition is and always was valid’ [emphasis in original]

Validation Of Challenged Payments

The key issues on validation of payments were considered from the leading case of Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783:

In that case Sales LJ (Patten LJ and Sir Terence Etherton C concurring) held that:

(1) It is a basic concept of the law governing liquidation of insolvent estates of individuals and companies that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent unsecured creditors as at that date. This is the pari passu principle (at [20]).

(2) It may sometimes be beneficial to the company and its creditors that the company should be enabled to complete a particular contract or project, or to carry on its business generally in its ordinary course with a view to the sale of the business as a going concern (at [20] and [21]).

(3) In considering whether to make a validation order, the court must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced (at [20]).

(4) Since the policy of the law is to procure so far as practicable rateable payments of the unsecured creditors’ claims, it is clear that the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the unsecured creditors as a body (at [20]).

(5) Thus, the policy of the law in favour of distribution of the assets of an insolvent company in the course of the liquidation process on a pari passu basis between its unsecured creditors is a strong one; and it needs to be shown that special circumstances exist which make a particular transaction one in the interests of the creditors as a whole before a validation order will be made to override the usual application of the pari passu principle (at [20]).

(6) There may be circumstances in which a validation order is not sought in advance of a transaction, but only retrospectively. The same principles apply (at [24]), although the range of evidence available is likely to be different. In a case where a retrospective order is sought it may have become clear whether a particular transaction or the carrying on of the company’s general business in fact turned out to be for the benefit of the general body of creditors or not. Observations of Buckley LJ in Gray’s Inn Construction [1980] 1 WLR 711 at pp 720B and 723F-724C suggest that, in a retrospective case, the court should look at the matter with the benefit of hindsight.

(7) It is incorrect to say that a disposition carried out in good faith in the ordinary course of business at a time when the parties are unaware that a petition has been presented will normally be validated by the court (at [36], [40]-[41] and [56]). Validation on such a basis could well prejudice the interests of the body of unsecured creditors. The making of such a validation order instead depends upon a more searching enquiry whether it is in the circumstances in their overall interest that the transaction in question should be validated (at [36]).

(8) Therefore, save in exceptional circumstances, a validation order should only be made in relation to dispositions occurring after presentation of a winding up petition if there is some special circumstance which shows that the disposition in question will be (in a prospective application case) or has been (in a retrospective application case) for the benefit of the general body of unsecured creditors, such that it is appropriate to disapply the usual pari pasu principle (at [56]).

(9) Accordingly, where the evidence shows that the company traded at a loss, validation orders should not be made in respect of the operation of its bank account used for its ordinary trading to the extent of such loss (at [37]). That is an approach which accords with the pari passu principle.

Trading At A Loss

Here the Court said it was not satisfied that the section 127 post-petition payments benefitted unsecured creditors as a whole. The payments being undertaken whilst trading at a loss and it did not see special circumstances.

No Significant Loss

It was interesting that an argument was put forward by the Defendants that the impugned payments did not produce a significant loss to creditors as a whole. This was not a view endorsed by the Court:

… This however ignores the fact that the Applicants are pursuing numerous post-presentation payees; the fact that any one of a number of such payees might argue that recovery of the sums paid to it, viewed alone, would not materially affect the dividend, is neither here nor there. This is not an ‘exceptional circumstance’ for current purposes. It would have been easy for Parliament to limit the effects of section 127 to transactions above a certain size but that has not been done. There is no monetary threshold in section 127 of the 1986 Act. Moreover, as noted by Mr Robins in submissions, ‘materiality’ or ‘significance’ cuts both ways. On present facts, the Respondent is an extremely large company sporting annual profits in the region of £5.5 million; viewed in vacuo, repayment of the sums sought would have no material impact on the Respondent’s net assets either.

Change Of Position And Exceptional Circumstances

The Court also rejected the change of position defence after considering the authorities in some detail and seemingly finding conflict amongst them:

On the evidence before me, considering all factors relied upon by the Respondent both individually and cumulatively, I am not satisfied that any special or exceptional circumstances have been shown that would justify the making of an exception to the principle of pari passu distribution in relation to the Payments or any part thereof. I therefore decline to make a validation order in relation to the same. On the evidence before me and for the reasons explored in this judgment, the Respondent has not persuaded me that by reason of any change in its position it is unjust to require it to repay any of the sums sought by the Applicant.

What Next?

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