Void dispositions and Validation Orders
21st July 2016
When a winding up petition has been issued, any disposition of assets made after that date is void. This can mean that payments to suppliers, who are unaware of the petition as it may not have been advertised, can be recovered by a liquidator. Section 127 of the Insolvency Act 1986 allows the Court to validate such payments provided certain safeguards are met, with the result that the person supplying the goods is paid for them in full by the company and is not left with an unsecured claim against the company.
The Court of Appeal has recently made a judgment in Express Electrical Distributors Ltd v Beavis and Others  EWCA Civ 765 in relation to void dispositions under s.127 Insolvency Act 1986 and retrospective validation applications.
In this case an electrical wholesaler regularly supplied the company with goods with a short period of credit. A winding up petition was presented on 23 May 2013. The company had fallen behind on the payment of invoices and the wholesaler put a hold on further credit. The company paid the wholesaler £30,000 on 29 May 2013 in respect of goods already supplied to bring payments up to date for that month, leaving a further payment due by the end of June 2013. The wholesaler subsequently lifted the credit bar and supplied further goods of £13,000. The company was later wound up in July 2013. The wholesaler applied for a validation order on the basis that the payment of £30,000 was made in good faith, in the ordinary course of business and whilst they were unaware of the petition.
Whilst considering whether to retrospectively validate a payment made to a creditor the Court found that:
a) it is irrelevant whether the disposition was made in good faith and in the ordinary course of business; and
b) save in exceptional circumstances, a validation order should only be made where the relevant disposition was for the benefit of the general body of creditors.
Examples provided by the Court include where payments enabled the company to fulfil its obligations under a contract whose eventual profits would benefit creditors as a whole, where the payment otherwise swelled the assets of the company, or where the payment allowed the company to carry on trading when the sale of the business as a going concern was achievable (where this would be more beneficial than breaking up the business).
This judgment has the potential to severely restrict the future use of the ‘good faith’ defence for suppliers and others seeking the Courts blessing in protecting funds received from a company which has subsequently been wound up.