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.
Our thinking
Melania Constable
Melania Constable and Jessica Williams write for Pharmacy Business on what the collapse of Testerworld means for community pharmacies
What does the collapse of Testerworld mean for community pharmacies?
Jessica Williams
Administrators beware where more than 20 redundancies are planned
The case of Palmer has confirmed that an insolvency practitioner in the role of an administrator can be prosecuted.
Melania Constable
Melania Constable and Georgina O'Sullivan write for P3 Pharmacy on the easing of Covid winding up restrictions
Regulations mean that a creditor can once again rely on an unpaid statutory demand to apply to the court for a winding-up petition.
Dimitri A. Sonier
Dimitri Sonier and Denis Meyer write for Les Echos Solutions on the restructuring and reform of French insolvency law
Dimitri and Denis consider developments to French insolvency law following changes earlier in 2021.
Denis Meyer
Capital Finance and La Lettre des Juristes d'Affaires report on the recruitment of Denis Meyer as Counsel in the firm's Paris office
Denis joins the firm's Corporate Restructuring and Insolvency team in the Paris office.
James Hyne
Charles Russell Speechlys named in Global Restructuring Review’s GRR 100 2021
Restructuring and Insolvency team ranked in Global Restructuring Review
Georgina Bernard
Privy Council confirms ability of courts to grant freezing injunctions in aid of foreign proceedings – but beware the minority report
Georgina looks at the landmark Privy Council judgment on freezing and interim injunctions
Georgina Bernard
PSV 1982 Limited v Langdon: A Warning for Directors in Breach of Section 216 Insolvency Act 1986
Georgina takes a look at PSV 1982 Limited v Langdon
Daniel Moore
Global Restructuring Review and Law 360 report on the firm's success on behalf of the joint liquidators of LB GP No 1 Limited
After three years of litigation, the Court of Appeal has unanimously accepted GP1’s grounds of appeal.
Hanh Nguyen
Insolvencies and rising prices: the energy retail market in flux
Hanh and Sara take a look at the energy market
Charles Russell Speechlys successfully advises the Joint Liquidators of LB GP No.1 Ltd in Lehman Brothers litigation before the Court of Appeal
LBGP is a company within the Lehman Brothers Group, whose purpose was to raise regulatory capital for parts of the Group.
Georgina Bernard
Court of Appeal reviews key principles to consider when making a non-party costs order
Jamie Tilling
Jamie Tilling writes for ThoughtLeaders4 FIRE Magazine on the ramifications of Al Jaber v Mitchell for insolvency practitioners and their investigations
The Court of Appeal has held that the doctrine of immunity from suit applies to statements made by an examinee.
James Hyne
Global Restructuring Review feature the firm’s involvement advising the joint liquidators of LB GP No 1 Limited in the Lehman Brothers’ sub-debt appeal
The Lehman Brothers’ sub-debt appeal continues with guarantor question.
Denis Meyer
The importance of anticipating the restructuring of State Guaranteed Loans
Denis looks at the importance of anticipating the restructuring of State Guaranteed Loans
Hannah Edwards
Phase out of temporary restrictions on use of winding up petitions
Hannah takes a look at the recent UK Government announcement on statutory demands and the presentation of winding up petitions
Gabrielle Shovlin
Be careful what you reference: when witness evidence waives privilege
Gabrielle looks at the recent decision in Scipharm Sarl v Moorfields Eye Hospital NHS Foundation Trust and its impact on privilege
Rory Partridge
Weighing in on the importance of attention to detail in service cases
Rory looks at recent judgments that have emphasised the need to follow correct procedure when serving documents in court cases
Emma Humphreys
Property Patter: the whys and wherefores of receivership
What is a fixed charge receiver?
Emma Humphreys
Property Patter: the news so far on landlord challenges to retail CVAs
We review some of the recent high-profile landlord challenges to tenant CVAs,