Court clarifies the meaning of “value” within the context of s284 Insolvency Act 1986

A recent decision of the Court has confirmed that the recipient of funds from an individual who is subject to a bankruptcy petition can be construed as having provided value where that value is given to a third party (and not to the bankrupt personally).

Roger Elford and Jessica Williams in the Corporate Restructuring and Insolvency team at Charles Russell Speechlys LLP acted for a successful Respondent, Howard de Walden Estates Limited, in these proceedings.

The Background

The case concerned the bankruptcy of a struck-off dentist, Jagdev Wasu.  Mr Wasu was the subject of a bankruptcy petition issued by HMRC in March 2013.  The Trustee in Bankruptcy (and Applicant in this case) was appointed in December 2013.

In the intervening period, certain payments were made by Mr Wasu out of his personal account.  This application made by the Trustee concerned payments made by Mr Wasu to Aurora Leasing Ltd (“Aurora”) and Howard de Walden Estates Limited (“HdW”) in the period between presentation of the petition and the bankruptcy order.

The Application

An application was made by the Trustee (shortly before the limitation period for the claim was due to expire) for a declaration that certain payments were void pursuant to s284 of the Insolvency Act 1986 (“IA86”) and should therefore be repaid.  

Section 284(1) provides that:

“Where a person is made bankrupt, any disposition of property made by that person in the period to which this section applies is void, except to the extent that it was made with the consent of the court, or is or was subsequently ratified by the court.”

The Respondents argued that they were entitled to rely on the defence contained within s284(4)(a) IA86.  Section 284(4)(a) provides that:

“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.”

The claim against HdW

HdW were the landlords of a property near Harley Street which had been leased to Wasu Property Limited (“WPL”), of which the Bankrupt and his parents were directors and shareholders.  In the period July to August 2013 the Bankrupt made payment of three instalments of rent to HdW in settlement of the sums owed by WPL.

The claim against Aurora

Aurora’s business was the purchase of equipment from third parties and the onward leasing of the equipment to its customers.  The lease of the equipment was between Aurora and Wasu Medical Centre (“WMC”) (a partnership between the Bankrupt’s parents) and was personally guaranteed by the Bankrupt and his parents. 

In July 2013, the Bankrupt wrote a cheque from his personal account for payment of the initial rental sum, which cleared into Aurora’s account shortly thereafter.

The availability of the s284(4)(a) Defence

Under s284(4)(a), a Respondent to a claim made under s284 has a valid defence to that claim if the sums received by it are received in good faith, for value and without notice of the bankruptcy petition.  There was no dispute in this case that the payments had been received in good faith and without notice of the petition, but a question arose as to the meaning of “value”. 

The Trustee’s case was that “value” had to mean value received by the Bankrupt personally (drawing conclusions from cases relating to s127 of IA86).  He argued that no value had therefore been provided by Aurora or HdW to the Bankrupt’s estate and, as such, the defence in s284(4)(a) could not be relied upon.

ICC Judge Prentis rejected this argument, instead preferring the argument of the Respondents, that s284(4)(a) should be taken on its own terms (and not by reference to s127) and there was no explicit qualification of the word “value” in s284(4)(a) so as to require the Bankrupt to receive value for the payments personally.  Therefore, Aurora and HdW had given “value” because they had continued to permit WMC to make use of the equipment and WPL to occupy the premises, respectively.

In his judgment, Judge Prentis noted that:

“In our case, both [Respondents] provided value which the Bankrupt intended by making each payment”.

Judge Prentis noted that s284(4)(a) was a protective section, designed to avoid unfairness.  Therefore, as long as consideration had been provided by the Respondents (i.e. it was not a gratuitous payment) the parameters of the “value” requirement in s284(4)(a) would have been met.

Separately, Judge Prentis also went a step further in this case, finding an assumption of a benefit to the Bankrupt (even in the absence of bank statements confirming this to be the case) by making the payments from his personal account, through arrangements that he would have had with WMC and WPL.   Judge Prentis held that the Bankrupt would have derived some value in any event “through the conferring or imposition of enforceable rights in the same amounts against the [WMC] and WPL.”

Comment

This finding is entirely consistent with the aims of s284(4)(a) which is to protect innocent third parties from unfairness which is potentially generated by s284(1).  It will therefore come as a relief to innocent third parties who inadvertently deal with an individual subject to bankruptcy proceedings and who accept funds from him.  As long as such individuals are acting in good faith, without notice of any bankruptcy petition and have provided some value (even if not to the individual personally), they will be able to rely on the protection in s284(4)(a).

For trustees in bankruptcy, this decision may be less welcomed (though clarity on the law is always positive).  The onus will be on the trustees to confirm whether the recipient of the funds gave any value at all (not just whether value was given to the Bankrupt’s estate) before considering whether a claim to recover sums under s284(1) is possible.

Contact

For any further information in relation to the findings in the above case (or the application of s284 more generally), please do not hesitate to contact Roger Elford or Jessica Williams.