The Chancery Division in Re Changtel Solutions UK Ltd [2022] EWHC 694 (Ch) found in favour of liquidators seeking to recover payments deemed void pursuant to s.127 Insolvency Act 1986. Considering limitation, arguments of special and exceptional circumstances, and the defence of change of position, ICC Judge Barber found no reason to justify an exception to the principle of pari passu distribution to unsecured creditors.
Following their appointment, the liquidators of Changtel Solutions UK Ltd (“Changtel”) sought to recover various sums against sixteen respondents, on the basis they were void under s.127 Insolvency Act 1986. One of the respondents was G4S Secure Solutions (UK) Ltd (“G4S”), having received five payments totalling £47,053.28 made by cheque in respect of advance payments for the provision of security guards at Changtel’s premises for a period of approximately seven months up to December 2013.
Changtel had been involved in MTIC fraud and was in receipt of assessments from HMRC exceeding £15m. HMRC presented its second winding up petition against Changtel on 7 June 2013 (an earlier petition having been struck out as a result of a breach of agreement not to advertise), which was again struck out in March 2014. HMRC appealed this decision and on 28 January 2015, having dispensed with the requirement to advertise the second petition, a winding up order was made against Changtel.
Following the presentation of the petition, Changtel transferred its assets to a connected company, including freehold property, before ceasing trading in January 2014. The sums pursued by the liquidators were in respect of payments relating to a period where Changtel was trading at a significant loss, prior to transferring the property for no consideration.
Settlements were reached with the majority of respondents. G4S however defended the application, asserting:
For the following reasons, ICC Judge Barber granted the application and ordered G4S to repay the sums claimed in full together with interest:
Limitation: The wording of s.127 states “In a winding up by the court. The purpose of s.127 is to preserve the pari passu principle in a liquidation, however without a winding up order, there is no cause of action. Accordingly limitation runs from the date of the winding up order and not the date of payment. In the instant case, whilst the liquidators had delayed in making the application - the winding up order had been made on 28 January 2015 and the application issued on 22 January 2021 – the claims were not statute barred.
Cheque: Whilst G4S had been provided with the cheque prior to the presentation of the petition, the funds cleared Changtel’s bank account four days post-presentation. The disposition was held to be debiting of funds, rather than the date the cheque was signed or delivered. As such the payment was post-presentation and, in the absence of a validation order, was void pursuant to s.127. It was observed that a creditor with an uncashed cheque is no better off than a creditor with a money judgment which has yet to be executed; both are unsecured and would rank pari passu on the company’s insolvency.
Validation: G4S had not applied for a validation order, despite having been invited on several occasions to make such an application and having had ample opportunity to make the application prior to the final hearing. G4S’s conduct bordered on discourteous, and was described as not the way to conduct litigation. That being said, substantive arguments on validation were considered.
It was noted the onus is on the recipient to satisfy the court, on a balance of probabilities, that the disposition has been in the overall interests of the general body of unsecured creditors, referring to the Court of Appeal's decision in Express Electrical [2016] 1 WLR 4783.
G4S asserted the existence of special and exceptional circumstances to support a validation order, namely:
Despite the assertions made by G4S, being minded to ensure the interests of unsecured creditors were not prejudiced, G4S had not established any special or exceptional grounds to justify the making of an exception to pari passu distribution to allow ICC Judge Barber to validate the payments.
Change of position: the court considered at length the decision in Rose v AIB Group (UK) plc [2003] 1 WLR 2791 and the conflicting decision of MKG Convenience Ltd [2019] BCC 1070. Having found no special or exceptional circumstances were established to justify the validation of the payments, it followed ICC Judge Barber was persuaded any change in G4S’s position meant it was not unjust to require G4S to repay the sums claimed.
This case is a good reminder of the difficulty in defending post-petition depositions made by a corporate debtor. Ignorance of the existence of a petition will not assist a recipient, and save in exceptional circumstances, a validation order should only be made in respect of dispositions which benefit the general body of unsecured creditors (as per Express Electrical). Given that the court ordered that a change of position defence is only available in circumstances where a validation order would be made, there are clearly limited circumstances in which a respondent could successfully defend a post-petition disposition.
It is clear that the courts consider the application of the test in Express Electrical – which arguably sets a high bar - will be limited; such expectational circumstances may be where the debtor company had wilfully concealed the fact that a petition had been presented. Whilst unfortunate for individual creditors, this was the policy decision behind the drafting of s.127; to preserve the pari passu principle in a liquidation.
For more information, please contact Olivia Reader in our Restructuring & Insolvency team.
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