The hurdles in establishing retrospective validation of post-petition dispositions

Changtel Solutions UK Ltd (In Liquidation) and others v G4S Secure Solutions (UK) Ltd [2022] EWHC 694 (Ch)¹

Section 127(1) Insolvency Act 1986 (“IA 1986”) provides that: "In a winding-up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding-up is, unless the court otherwise orders, void."

The purpose of this section is to preserve the assets of the company for the benefit of its creditors and protect against the risk of one unsecured creditor being paid before another to preserve the pari passu principle in a liquidation.

A transaction will not be void under section 127(1) of the IA 1986 if the court makes an order validating the transaction.  Applications for validation can be made to prospectively (before the disposition of the Company’s assets has been made) or retrospectively (after disposition of the Company’s assets has been made).

In the recent case of Changtel Solutions UK Ltd (In Liquidation) and others v G4S Secure Solutions (UK) Ltd [2022], ICC Judge Barber discusses the hurdles that a recipient must overcome to make a successful application for validation. We set out the key takeaway points below.

The Facts

On 22 January 2021, Changtel Solutions UK Limited ('the Company') and its liquidators (together, 'the Applicants') issued an application ('the Application') against 16 respondents, seeking to recover various sums allegedly paid by the Company to such respondents in the period between the presentation of a winding up petition against the Company on 7 June 2013 and the making of a winding up order against it on 28 January 2015. The Court of Appeal ordered that HMRC dispense with the requirement of advertising the petition.

Prior to the presentation of the winding up petition, HMRC investigations into the Company were at an advanced stage in respect of suspected 'missing trader intra-community' (or 'MTIC') fraud against HMRC. At this time, the Company also transferred its business to its group company, Entatech UK for no consideration.

Notwithstanding presentation of the Petition, the Company continued to purchase goods from its existing suppliers and then sell those goods onto Entatech UK, at a negligible mark-up, for on-sale by Entatech UK. By this arrangement, the Company was trading at a significant loss and eventually ceased to trade in January 2014, after transferring its remaining assets to Entatech UK (who entered administration in 2017).  In 2016, Entatech UK reached an agreement with the Company’s liquidators to pay £1.2m in full and final settlement of all and any claims the Company had against Entatech UK.

A number of the respondents to the Application entered into confidential settlements and therefore the Judgment of ICC Judge Barber addresses only the eighth respondent, G4S Solutions (UK) Limited ('the Respondent'). The Respondent provided 24-hour security to the Company’s premises at a time when the Company was trading at a loss and received payments for these services after the presentation of the petition (‘the Payments’).

The Respondent sought to defend the Application asserting: (1) the claim was time-barred; (2) the first payment made by cheque was made before presentation of the petition when the cheque was issued; (3) the court should validate the payments as they were made in ‘exceptional’ or ‘special’ circumstances such that it was appropriate to disapply the usual pari passu principle; or (4) they had changed their position rendering it unjust to require repayment.

ICC Judge Barber Held:

1. Limitation: The claim against the Respondent was not time-barred, time runs from the date of the winding-up order, not (as the Respondent contended) the date of the disposition of the Company’s property, that is, the date of the Payments. ICC Judge referred to the wording of s.127 IA 1986 and section 9 Limitation Act 1980 and stated that without the winding up as ordered by the court the constituent elements of the cause of action are not all present.

2. Cheque: The critical date here is when the cheque was debited from the Company’s bank account not when the cheque was issued. Here, the cheque was debited after the presentation of the winding up petition and is therefore void under section 127(1) of the IA 1986.

3. Validation: No special or exceptional grounds had been established justifying validation. ICC Judge Barber cited the leading case of Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783 which establishes that the onus is on the recipient in question to satisfy the court on a balance of probabilities that the disposition has been in the overall interests of the general body of unsecured creditors. The Respondent argued:

(a) It preserved the value in the Company’s assets by its security services benefitting the Company’s creditors as it facilitated/enabled the Liquidators to reach the £1.2m settlement with the administrators of Entatech UK in respect of the Company’s assets. ICC Judge Barber rejected this argument, stating the evidence before her fell far short of establishing this.

(b) The Payments were made in 'exceptional circumstances', in that the petition was not advertised, with the result that creditors were not given notice of the petition and were denied the right to seek prospective validation for Payments. ICC Judge Barber said the fact that the petition was not advertised was not an exceptional circumstance warranting validation.

(c) Other 'discretionary factors … which support retrospective validation', to which ICC Judge Barber ruled: (i) the total of the Payments was not enough to effect a dividend to creditors – Parliament had not added any monetary threshold on section 127 IA 1986; (ii) the absence of a desire to prefer was not a relevant factor when deciding whether a given payment should be validated; (iii) it was not open to a creditor to seek validation on the basis that other creditors have not yet paid; (iv) the recipient can make their own application for validation at any point and therefore they cannot claim prejudice due to the delay of the Application.

4. “Change of Position” Defence: ICC Judge Barber was not persuaded that any change in the Respondent’s position meant it was unjust to require the Respondent to repay the sums claimed. Following Re MKG Convenience Ltd [2019] EWHC 1383 (Ch), and rejecting the earlier, conflicting decision in Rose v AIB Group (UK) plc [2003] EWHC 1737 (Ch), the court held that the circumstances in which a change of position defence to a section 127 application can succeed are constrained in the same way and for the same reasons as the exercise of the court's discretion to validate dispositions under section 127. If the Respondent’s defence were to succeed here, it would apply in practically every case in which section 127 operates, rendering the section ineffective.

Key Takeaways

• Application for validation: a recipient of Company property must make a fee paid application under section 127 IA 1986 and file this with the court if payments/disposition of company property are not to be considered void – this application is not implicit in any application made under section 127 by the liquidator.
• Dividend: It is not a special or exceptional ground for validation that the disposition of company property is not enough to affect a dividend to creditors. The creditor position has to be considered as at the date of presentation.
• Delay: It is not a special or exceptional ground for validation that the applicant has delayed in making the application.
• Change of Position: where a party has been refused a validation order, it will be unlikely that a change of position defence will succeed.

 Case details

Court: Business and Property Courts of England and Wales, Insolvency and Companies Court (ChD)

Judge: Insolvency and Companies Court Judge Barber

Date of judgment: 1 April 2022

^{1 Changtel Solutions UK Ltd (In Liquidation) and others v G4S Secure Solutions (UK) Ltd [2022] EWHC 694 (Ch)}