Void Dispositions and Validation Orders in Compulsory Liquidation

Section 127 of the Insolvency Act 1986 (“The Act”) applies to transactions entered into by a company between the date of issue of a winding up petition and the date of the winding up order. The Act provides that any disposition of the company’s property made during this period is void, unless a validation order is made in respect of that transaction. The purpose of this section is to ensure creditors are treated equally.

In line with the ruling in Re: Gray’s Inn Construction Co Ltd [1980] it has, until recently, been presumed that the Courts would normally validate such dispositions where the disposition was “carried out in good faith in the ordinary course of business at a time when the parties were unaware that a petition had been presented”.

However, in a recent ruling in Express Electrical Ltd v Beavis and Ors [2016], this was overturned.

In this case the Company had fallen behind with payments to an electrical wholesaler and the account had been put on hold. On the 29 May 2013 the company paid the wholesaler a sum of money and the credit bar was lifted and goods were supplied. However, on the 23 May 2013 a different supplier had issued a winding up petition against the Company and, in July 2013 the Company was wound up. At the date the Company had made payment to the electrical wholesaler the petition had not been advertised.

Whilst considering whether to retrospectively validate a payment to a creditor, the Court found that whether the payment was made in good faith and in the ordinary course of business was irrelevant, save in exceptional circumstances where the disposition was made in special circumstances which have been, or will be, for the benefit of the general body of unsecured creditors. These special circumstances would be required to override the Parri Passu principle (being the principle that all unsecured creditors share rateably any available assets in the insolvent estate).

That leads to the question what circumstances could be deemed to be ‘special’. Special circumstances may be, for example, where the payment has led to the completion of a profitable contract which will ultimately lead to a better return to the general body of creditors.

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