The increase in the number of insolvencies has been well reported recently: inflation, labour shortages, post Brexit difficulties with international shipping, increasing raw material costs, uncertainty in capital markets, rising interest rates and more recently the increasing cost of energy are all posing difficulties for business. The statistics published by The Insolvency Service for December 2022, published on 17 January, reveal a sharp rise in numbers all round. Given the increased petition activity, creditors may wish to be reminded of the provisions regarding void dispositions enshrined in the Insolvency Act 1986.
The relevant sections are s.127 for dispositions made by a company, and s.284 for dispositions made by an individual respectively. Both render void any disposition of property made after the presentation of a petition and before a winding-up or bankruptcy order is made, in the absence of court order to the contrary. Both offer defences by way of application to the court for an order ratifying the disposition.
Before addressing the defences, with attention increasingly on the conduct and actions of directors, it is worth noting s.127 affords liquidators with an additional head of claim in pursuing action against the director for breach of fiduciary duties where a director has permitted a void disposition to occur. Directors of a company are subject to a legal duty to act in the best interests of the company and, where a company is insolvent or on the verge of insolvency, that duty is owed to its creditors. Accordingly directors who cause transactions to take place which amount to a disposition of the company’s property and reduce the available assets to the detriment of creditors’ interests, are likely to risk facing claims against them personally for failing to meet their duties and for misappropriation of assets.
Disposition by a company
In order for the company or any interested party, often the intended recipient, to obtain a validation order pursuant to s.127, the court must have been satisfied the debtor company is solvent and able to pay its debts as they fall due, or that the transaction(s) will be beneficial to or will not prejudice the interest of creditors.
There may be circumstances where a company is subject to a pending winding up petition and, while it has been unable to settle its debts as they fall due (and therefore insolvent on a cash flow basis), the company is solvent on a balance sheet basis. For instance, despite cash flow pressures, the company may be in the course of completing on a large project which will result in significant revenue from which the petition debt will be discharged in full. The pending completion of the project is necessary for the long term benefit of the company, and does not pose a serious risk to creditors. In such circumstances, an application for a validation order may well be successful.
It is always advisable to seek a validation order in advance. Whilst validation applications can be made where the disposition has already occurred (and often once the company has been wound up and in defence to a claim brought by a liquidator), these are less common and arguably harder to successfully pursue.
In either case, the threshold an applicant must achieve in order to persuade the court to make a validation order is a high one; Olivia Reader addresses the threshold further in “Void dispositions in liquidation – Recipients beware”. The rationale being to seek to ensure company assets are preserved for the benefit of all creditors, and to uphold the principle that unsecured creditors are treated pari passu in the event of insolvency.
Disposition by an individual
To rely on the defence in s.284(4)(a) afforded to recipients of dispositions from individuals, requires the recipient to have received the disposition in good faith, for value and without notice that the petition had been presented.
Although this would appear to resemble the defence afforded to equity's darling - the bona fide purchaser for value without notice – it is in fact wider. In the absence of qualification of the word "value", value will be considered to have been provided as long as the receipt was not gratuitous. Furthermore, it is not necessary for the individual to have directly benefitted from the value. This is explored further in “Void dispositions in bankruptcy – Any value will do”.
The threshold to rely on the s.284(4)(a) defence is not as high as that required for s.127, where s.127 is a proven powerful tool for liquidators in enabling them to challenge such dispositions and pursuing action for the return of the property, or an order for payment of the equivalent value if it is not practically possible to return the property.
The s.284 defence also promotes certainty, both for innocent third parties, and in the trustee's subsequent investigations into those dealings. The authorities on s.127 do provide some certainty but the practical application of s.127 has been consistently heavily in favour of creditors and upholding the principle of pari passu. Put simply, validation orders, in particular retrospective orders, are sometimes difficult to achieve.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
