Reported case on a successful application by a Liquidator for restitution under Section 127 of the Insolvency Act 1986 – change of position defence rejected
Liquidator successful following failed retrospective validation order proceedings by respondent – change of position defence rejected
Weightmans has successfully acted for a liquidator of a company seeking a declaration that payments out of a company’s bank account are void pursuant to section 127 of the Insolvency Act (“IA”) 1986 in circumstances where the respondent had previously applied for a retrospective validation order which was dismissed. The respondent opposed the liquidator’s application for a declaration relying on a change of position defence. A hearing was held on 6 December 2022 and DJ Bond handed down judgment on 9 May 2023.
- James Court Limited (“the company”) entered compulsory liquidation following a winding up petition presented by the liquidator of Think Accounting Limited on 30 January 2019.
- On 11 February 2019, the winding up petition was served on the company.
- The company made payments totalling £37,000 to Hindsight Contractors Limited (“the respondent”) by bank transfer on 12 February 2019 and 13 February 2019.
- The winding up petition was advertised on 25 February 2019.
- A winding up order was made against the company on 9 April 2019. As such, the company paid the respondent between the date of the petition and the winding up order.
- The liquidator of the company was appointed on 9 May 2019.
- The respondent’s application for a validation order in respect of these payments was dismissed by HHJ Kelly on 27 August 2021.
- The liquidator of the company issued an application against the respondent on 7 June 2022 for recovery of these payments plus interest on the basis that these payments were void pursuant to section 127 IA 1986.
Despite the respondent’s failed application for a validation order, the respondent nevertheless opposed the liquidator’s application on the basis that (1) as at 1 February 2022, the company was allegedly indebted to a company called Proactive Payroll Services Limited (“PPSL”) in the sum of £26,500; (2) on 28 January 2019, PPSL, the company and the respondent agreed that, if the company could not repay its alleged indebtedness to PPSL, “Hindsight Accountants” and/or “Hindsight Contractors” would satisfy the company’s alleged debt to PPSL; (3) the respondent paid £30,000 to PPSL in three instalments purportedly in satisfaction of the Company’s alleged debt to PPSL; and (4) the respondent has therefore changed its position, such that it would be inequitable to require the respondent to repay the sum of £37,000 to the company.
Relying on Re Changel Solutions UL Ltd (in liquidation)  EWHC 694, the liquidator submitted that a change of position defence is not generally available to a respondent under section 127 IA 1986, in an instance where the court would not also grant a validation order.
Key takeaways from the judgment
- The judge agreed with the liquidator’s submissions that no special circumstances had been established where a change of defence can succeed in the face of a failed validation order application and that the respondent is estopped from contending that the payments are capable of being validated.
- Whether or not the respondent was aware of the effects of section 127 IA 1986 was irrelevant in these circumstances.
- The judge did not agree with the respondent that HHJ Kelly (in the validation proceedings) made no relevant finding on the correctness of the facts contended by the respondent. The issue was decided on. It should have been obvious to the respondent that the validation application hearing was the best time to produce its best evidence. In HHJ Kelly’s judgment, there was a finding that, on the evidence, the respondent’s contention that there was a loan agreement and that payments made to the company were referable to it, was not established. The respondent therefore fell at the first hurdle.
- The judge considered the authorities on cause of action estoppel, issue estoppel and abuse of process. She held that there was prima facie an issue estoppel arising out of the determination of HHJ Kelly in the validation proceedings on this issue (at point 1 above). The question was whether there were special circumstances why the bar should apply.
- The judge agreed with the liquidator’s submissions that no special circumstances had been established:
- The absence of HHJ Kelly (in the validation proceedings) determining whether she would have validated payments had the respondent come to proof is not a special circumstance permitting the respondent to re-open the factual determination that HHJ Kelly did make.
- The existence of new and additional evidence does not constitute a special circumstance and nowhere is it suggested this evidence could not, with reasonable diligence, have been adduced in the validation order proceedings.
- The company not pursuing a claim in restitution at the same times as the validation proceedings is not a factor which gives rise to special circumstances.
- The respondent comprehensively argued its defence on change of position for the application for a validation order as set out in the respondent’s skeleton argument filed in support.
- The judge went on to consider the change of position defence on its own merits. She found that none of the requirements for a change of position defence were made out and stated that the company cannot have been acting in good faith in circumstances where the sole director knew of the liquidation at the time the payments were made by the respondent to PPSL. She stated that if she were wrong about this and there had been a change of position in good faith, then she would have to weigh up the injustice to the respondent against denying the company restitution. She found that the balance of injustice weighed in favour of restitution.
This case will be of interest to liquidators seeking payment following an unsuccessful validation application by the recipient of funds to which section 127 IA 1986 applies and in opposing a defence of change of position. From the point of view of a recipient of funds to which section 127 IA 1986 applies, when making an application for a validation order, it is imperative to fully argue any change of position and any other defences at that stage. The validation application hearing is the best time to produce its best evidence – do not wait for a claim for restitution from the liquidator of the company - because you may not get another bite at the cherry.
You can find the full judgment here. - James Court Ltd (In Liquidation) v Hindsight Contractors Ltd  EWHC 1101 (Ch) (09 May 2023)
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