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Case law update

IPA Insolvency Practitioner newsletter, July 2023

Contents

An insolvency case law update prepared by Alison Kirby, Associate Director at Manolete Partners PLC.


Void Dispositions, Validation Orders and Change of Position Defence

James Court Ltd (in liquidation) v Hindsight Contractors Ltd [2023] EWHC 1101 (Ch)

In this Judgment delivered on 9th May 2023 by District Judge Bond sitting in the Business and Property Courts in Leeds, the relationship between validation orders and the change of position defence where a transaction is challenged as a void disposition pursuant to S.127 Insolvency Act 1986 was considered. This case is good news for Officeholders where a robust approach was taken following an earlier Judgment that refused an application for a validation order. When the recipient of the void disposition attempted a second bite of the cherry and used the same arguments to defend an application for restitution of the void disposition, that defence failed.

Background

The proceedings concerned an application by James Court Ltd (“JCL”) acting by its liquidator Mr Kevin Mawer, seeking a declaration that two payments totalling £37,000 made by JCL to Hindsight Contractors Ltd (“HCL”) were void pursuant to S.127 of the Insolvency Act 1986 (“S.127 IA86”) and for an order for payment accordingly. S.127 IA86 provides that “In a winding up by the court, any disposition of a the company’s property…..made after the commencement of the winding up is, unless the court orders otherwise, void”. By S.129(2) the commencement of the winding up is deemed to be the time of presentation of the petition.

At all material times Mr Paul Fava (“Mr Fava”) was the sole director of JCL and HCL. JCL was a property investment company, HCL is an accountancy practice, and HCL sub-contracts payroll services to Proactive Payroll Services (“PPL”). On 11th February 2019 a winding up petition was served on JCL. On 12th and 13th February JCL paid £23,000 and £14,000 respectively to HCL. Mr Fava’s evidence was that on 1st February 2019 JCL had entered into a loan agreement with HCL and that these were loan monies. Subsequently, later in 2019, HCL paid amounts totalling £30,000 to PPL which discharged JCL’s indebtedness to PPL of £26,500 and discharged HCL’s indebtedness to JCL.

The Applications

On 19th July 2021, so over 2 years later, HCL issued an application for a validation order in respect of the £37,000 paid to it by JCL. On 27th August 2021 HHJ Kelly sitting as a Judge of the High Court dismissed the application after a fully contested hearing.

On 27 June 2022, JCL issued its application seeking restitution. HCL relied on the equitable defence of change of position. It was common ground that the payments were made and that they were prima facie void, and as such JCL had established a right to restitution subject to HCL’s change of position defence.

The issues for the court were threefold:

  1. Was HCL estopped by the decision of HHJ Kelly from contending that the payments are capable of validation?
  2. Was it an abuse of process for HCL to contend that the payments are capable of validation?
  3. If HCL was entitled to so contend, had HCL established its defence of change of position on the facts?

The Decision

It was common ground that the merits of the change of position defence had not been determined on the prior application for a validation order, however JCL argued that issue estoppel (which prevents a party from raising an issue that has already been decided in previous litigation between the same parties) should bar HCL from essentially re-litigating an essential element of the change of position defence, which was whether the court would or should validate the payments. The Judge accepted that both the cause of action on the application to validate and the defence of change of position in the current application depended on establishing that there were exceptional circumstances justifying the exercise of the court’s discretion. This was because there was no benefit to general body of creditors by the payments to HCL. HHJ Kelly had made a relevant finding of fact, that on the balance of probability, it had not been established that there was a loan agreement between JCL and HCL. Thus, the Judge rejected on the facts, that there were exceptional circumstances, and found that issue estoppel was a bar to HCL’s defence.

The abuse of process argument was narrowed down to the understanding that the abuse was to re-litigate the same issue twice. The Judge decided that it was “manifestly unfair” for JCL to have to twice face the validation issue in two sets of proceedings. In addition, she referred to a wider policy consideration that it would bring the administration of justice into disrepute if unsuccessful applicants for validation orders could re-litigate the same issue, relying on new evidence. Having already decided that issue estoppel was a bar to the defence, she gave a preliminary view that this would be a case of abuse of process if issue estoppel did not apply.

Summary

None of the requirements of the change of position defence were made out, the circumstances of the case were not exceptional and the balance of justice weighed in favour of restitution.

Content courtesy of IPA corporate partner Manolete Partners PLC.

Please note that guest content does not necessarily represent the views of the IPA.

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