Void dispositions in bankruptcy – Any value will do

The Chancery Division in Wasu, Re (also known as Edwards v Aurora Leasing Ltd) - [2021] EWHC 96 (Ch) held the defence afforded by s.284(4) Insolvency Act 1986 to claims seeking to recover, as void dispositions, sums paid by a bankrupt to a third party who received them in good faith, for value and without notice of the bankruptcy petition, was not to be construed narrowly as an exception to the principle of recovery. A payment would be made “for value” as long as its receipt was not gratuitous.

Background

The bankrupt, a dentist, was adjudged bankrupt in 18 October 2013, on a petition presented by HMRC in 23 March 2013. The trustee in bankruptcy applied under s.284(1) and s.284(2) to recover sums paid by the bankrupt to Aurora Leasing Ltd (“Aurora”) and Howard de Walden Estates Limited (“HdW”) in the period between presentation of the petition and the bankruptcy order.

HdW were the landlords of a property which had been leased to Wasu Property Limited (“WPL”), of which the bankrupt and his parents were directors and shareholders.  In the period July to August 2013 the bankrupt paid three instalments of rent to HdW in settlement of the sums owed by WPL.

Aurora’s business was the purchase and onward leasing of equipment.  Aurora and Wasu Medical Centre (“WMC”) (a partnership between the bankrupt’s parents) entered into a lease, which the bankrupt personally guaranteed. In July 2013, the bankrupt paid, by way of cheque, the initial rental sum, which cleared into Aurora’s account shortly thereafter.

It was accepted that each of the payments made by the bankrupt was a disposition within the meaning of s.284, and that Aurora acted in good faith and without notice of the petition.

The issue to be determined was whether the payments had been received by Aurora “for value” within the meaning of s.284(4)(a). If they had, Aurora would have the benefit of a full defence to the trustee’s claim.

The trustee argued there were significant parallels between the principles underlying s.284 and those underlying the equivalent provision for companies, s.127. As such, s.284(4) had to be read narrowly, and that either direct value received by the bankrupt, or value from the bankrupt’s point of view was required. The trustee asserted that no value had therefore been provided by Aurora or HdW to the bankrupt’s estate and, as such, the defence in s284(4)(a) could not be relied upon.

Court decision

In rejecting the trustee’s argument, the court observed that, whilst there were significant parallels between the principles underlying s.284 and s.127, their terms were substantially different.

While s.284 was designed to protect the estate for the benefit of the bankrupt’s creditors as a whole, that was not a supreme principle. The best approach was to take s.284 on its own terms.

Section 284(2) provides “where any payment is void by virtue of that subsection, the person paid shall hold the sum paid for the bankrupt as part of his estate”. Accordingly qualifying dispositions would be held by the recipient for the bankrupt as part of his estate. As such, s.284(2) creates a situation of significant potential unfairness, where persons dealing with the bankrupt without knowledge of the petition might become unwitting trustees, an unfairness which s.284(4)(a) sought to avoid.

The defence provided by section 284(4)(a) states:

“The preceding provisions of this section do not give a remedy against any person –

(a)     in respect of any property or payment which he received before the commencement of the bankruptcy in good faith, for value and without notice that the … bankruptcy petition had been presented, or

(b)     in respect of any interest in property which derives from an interest in respect of which there is, by virtue of this sub-section, no remedy.”

It is a defence that formed part of the legislative principles and, as such, could be construed in accordance with its terms; it was not an exception which had to be given a restricted ambit. Although it resembled the defence afforded to equity’s darling, the bona fide purchaser of the legal estate for value without notice, the defence was wider due to the absence of explicit qualification of the word “value”.

Accordingly value would be provided as long as the receipt was not gratuitous. Furthermore, reflective that the aim was to protect the rights of innocent third parties, that value did not need to be received by the bankrupt’s estate.

The court confirmed the s.284(4) defence was convenient and fair, in that it promoted certainty both in a bankrupt’s dealings for value with innocent third parties and in the trustee’s subsequent investigations into those dealings. It was also strictly limited to its three elements: the payment had to be received in good faith, for value and without notice of the bankrupt’s status.

In the instant case, the payments were borne from commercial considerations, and were not gratuitous: Aurora and HdW had provided “value” because they had continued to permit WMC to make use of the equipment and WPL to occupy the premises respectively. Further, ICC Judge Prentis considered the bankrupt’s estate did in fact receive benefit for the payments through the conferring or imposition of enforceable rights against the partnership and the company which leased the building.

The trustee’s application was dismissed.

Our comment

This finding is entirely consistent with the aims of s.284(4)(a) which is to protect innocent third parties from unfairness which is potentially generated by s.284(1), who inadvertently deal with an individual subject to bankruptcy proceedings.  As long as such individuals are acting in good faith, without notice of any bankruptcy petition and have provided some value, even if not to the individual personally, they will be able to rely on the full protection afforded by s.284(4)(a).

For trustees in bankruptcy though, clarity on the law is always welcome, but this decision may not be, given the wide interpretation of ‘value’. 

For more information, please contact Nikki Brastock in our Restructuring & Insolvency team.