Can change of position defence defeat liquidators claims under Section 127?

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Can change of position defence defeat liquidators claims under Section 127?

Published 25 July 2019

Section 127 of the Insolvency Act renders void any disposition of property by a company made in the period between presentation of the winding up petition and the making of a winding up order on that petition unless the court orders otherwise. Guidance on applications for validation orders is given in the Insolvency Practice Direction (“PD”). The PD provides that the court will need to be satisfied either that the company is solvent and able to pay its debts as they fall due or that the transaction(s) will be beneficial to or will not prejudice the interest of all the unsecured creditors as a class.

Where a disposition of property (other than money) is in breach of Section 127 and void, the company remains the owner of the property and it is entitled to recover it by asserting its rights as owner. In the case of money, the remedy is a restitutionary one and, as a result, may lead to the recipient raising a defence of change of position.

Section 127 is a powerful tool for liquidators and the recent case of Dingley and others v Nisa Retail Ltd (Re MKG Convenience Ltd (in liquidation)) will be welcomed by liquidators as it confirms that a change of position defence (i.e. that the recipient of the payments had no knowledge of the winding up proceedings and acted in good faith) is only likely to succeed in exceptional circumstances.

In that case, the company, MKG Convenience Ltd (“MKG”), had been a member of the Nisa organisation which supported and promoted small independent traders operating grocery and convenience stores. Nisa purchased goods and sold them to its members. Nisa also enabled member stores to trade under its brand. Nisa would take payment by direct debit for the goods supplied and took over £160,000 from MKG between the petition and the winding up. MKG’s liquidators claimed that these payments were void. Nisa cross applied seeking an order validating the payments and, alternatively, resisted an order for repayment citing a change of position defence relying in good faith on the validity of the payments.

It is apparent from the judgment that the Nisa representative had been obstructive in response to enquiries made by the liquidator and sought to avoid giving a full account of what he knew even in oral evidence. His evidence was stated to be inaccurate in many respects and lacking in candour.

The judgment confirms that the relevant principles as to whether to make a validation order are those set out in Express Electrical Contractors Ltd v Beavis [2016] EWCA Civ 765 and that there is a strong legislative policy of ensuring that the assets of a company at the commencement of the winding up should be made available to creditors and that it is not enough for an application for a validation order to show good faith, lack of knowledge of the petition and the disposition being in the ordinary course of business. It is also necessary to demonstrate a benefit to creditors or other exceptional circumstances.

Nisa did not satisfy the court that the payments it received had been to the benefit of MKG’s creditors. Nisa’s position was not assisted by the fact that MKG appeared to have transferred its business to a new entity and the fact that Nisa was said to have a casual attitude to the detail of who it was dealing with and where its payments came from. The court ultimately found no special circumstances which justified a validation order.

As to the change of position defence, it was noted that neither counsel involved in the case had found a case in which the defence had been allowed against a liquidator’s claim. The judge considered the reasons for the defence and found that it was to strike a balance between the equities in favour of each party. He held that although the defence is available, the circumstances in which it can succeed are constrained in the same way and for the same reasons as the exercise of the court’s discretion to validate.

In a statement that will no doubt find favour with liquidators, the judge stated that it was “not easy to think of circumstances in which the court would decline to make a validation order, but nevertheless find it inequitable to order repayment of a benefit received”. Unsurprisingly, Nisa’s cross-claim failed and it was ordered to repay the sums sought by the liquidators.

The judgment, correctly in our view, reaffirms the strong policy of ensuring that a company’s assets in existence at the commencement of a winding up (which can be the date of the presentation of a petition) ought to be made available to its creditors. If there are no special circumstances which justify a validation order then it is difficult to envisage circumstances in which it will be equitable to enable a recipient to benefit from a change of position defence.

Authors

Kevin Hawthorn

Kevin Hawthorn

Bristol

+44 (0)117 918 2221