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Express Electrical Distributors Ltd v Beavis (Court of Appeal) July 2016

Section 127 Insolvency Act 1986 (Act) provides that any disposition of a 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. Section 129(2) of the Act provides that the winding up of a company is deemed to commence at the time of the presentation of the petition for winding up.

A recipient of the company’s property from a disposition during this period is therefore liable to refund to the company (acting by its liquidator) the property so received unless the court validates the payment.

Prior to the Express Electrical case, the leading case on obtaining validation orders was Re Gray’s Inn Construction Co Ltd. This case restated the overriding principle underpinning s127 of the Act that all creditors should be paid pari passu. However, the judge in this case commented that it would be usual for validation orders to be granted where the offending disposition had been made in good faith and at a time when the recipient of the disposition was unaware that a winding up petition had been presented against the company.

Banks are often seen by liquidators as an easier target to recover assets of the company which have been disposed of between the presentation of the petition and the making of the winding up order. There have been a number of cases (with differing decisions) which consider payments into and out of bank accounts (in credit and in debit) and whether these constitute dispositions of the company’s property (s127 of the Act has no application where there is no disposition of the company’s property). It is, however, largely settled that at the very least, payments into an overdrawn account would constitute a disposition of the company’s property in favour of the bank. The case of Re Gray’s Inn Construction Co Ltd has provided some comfort to banks whose customers operate overdrawn accounts provided the payments are made in good faith and at a time when the bank is unaware of the presentation of a winding up petition against the customer (or prior to advertisement of the winding up petition, whichever is the earlier to occur).

However, the recent case of Express Electrical Distributors Ltd v Beavis & Ors casts significant doubt over the ability of banks to continue to take such comfort.

In Express Electrical the company made a payment of £30,000 to a trade creditor after the presentation of a winding up petition against it as payment for goods previously supplied. Whilst the trade creditor in question had been told by the petitioning creditor that it intended to issue a winding up petition, the court accepted that the trade creditor had no knowledge that the petition had actually been presented when it accepted the payment.

The trade creditor had applied to court for an order validating the £30,000 payment against the liquidator of Express Electrical. The trade creditor lost the case at first instance but was given permission to appeal to the Court of Appeal. The Court of Appeal dismissed the appeal and refused to grant the validation order sought. It held that the pari passu principle was paramount and that, only in exceptional circumstances where the transaction was in the best interests of the creditors as a whole should dispositions be validated as to override such principle. The fact that the trade creditor was unaware of the petition was, in the court’s opinion, irrelevant. The Court commented that it could be an exceptional circumstance if the company had wilfully concealed the fact that a petition had been presented (but that was not applicable in this case).

Whilst the Express Electrical case did not involve a disposition of company’s property in favour of a bank, the Court expressed its disagreement with the decision in Re Gray’s Inn Construction Co Ltd, a case which did involve a disposition in favour of a bank and the Court made no distinction in the application of the law. Simply put, absent exceptional circumstances where a disposition is in the interests of the general body of creditors, a validation order should not be granted.

The effect of the case is that it is likely to become much more difficult for a bank to obtain the court’s validation for payments made into an overdrawn account during the period between the presentation of the winding up petition against the customer and the advertisement of such petition. As soon as a bank becomes aware of the existence of a winding up petition (however that knowledge arises) it should take the cautious approach of freezing the customer’s accounts to prevent funds being paid out. Whilst payments into an overdrawn account are now much more vulnerable to challenge, it is still arguably better for banks to accept such payments in whilst recognising that they may be subject to successful challenge by a liquidator should a winding up order be made against the customer.

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