End of winding-up restrictions prompts surge in potential void dispositions

The change has also caused a rise in the number of applications both to validate payments in advance and to validate post-petition dispositions.

Void dispositions

The temporary measures put in place by the government to protect businesses against the threat of winding-up petitions during the pandemic have come to an end, and the winding-up lists have quickly gone back to the high levels seen before the pandemic – with HM Revenue and Customs remaining one of the largest petitioners.

Given the long period of time during which petitions were prohibited, a gap in experience in the market has developed in dealing with and responding to petitions by lenders, debtors and creditors.

When a company is presented with a winding-up petition, any payments or dispositions of company property made after the presentation of the petition will be void unless the court orders otherwise and may be recovered by the liquidator after a winding-up order is made. This is set out in section 127 of the 1986 Insolvency Act

The effect of s127 is automatic, and it is common practice for banks as well as other types of lenders, such as asset-based lenders, to freeze or rule off customer accounts as soon as it becomes aware of a winding-up petition. 

Validation orders

Post-petition dispositions can be ratified in advance by applying to the court for a validation order. If a validation order is granted, the payments subject to that order will not be void in a subsequent winding-up, and the bank can ‘unfreeze’ the bank account to allow these payments to be made. 

Obtaining a validation order will often need to be done urgently to allow the company to continue to trade. To obtain a validation order, the company will need to show the court that the payments requested to be made are either necessary for the benefit of the general body of creditors or that there are exceptional circumstances.

Successful applications will depend on the circumstances, but will typically succeed where payments are shown to promote a benefit to the company and are not prejudicial to creditors.   The company will need to comply with the Practice Direction on Insolvency Proceedings which sets out strict requirements on the information to be provided to the court to satisfy it that the validation order ought to be made. Early engagement with solicitors and accountants is key, as is the provision of up-to-date and accurate financial and management information.

Withdrawal of a winding-up petition

If the petition debt is undisputed and the debtor can pay the debt in full, payment should be arranged as soon as possible. Consideration will need to be given as to the mechanics of that payment if the bank has frozen the account and whether a third party can provide payment or if undertakings for payment can be provided. 

If the petition debt is paid in full before the petition has been advertised and no creditors have come forward in support, then the petition can be withdrawn by an application to the court. The key point here is for the petition to be withdrawn before advertisement – which can take place as early as seven business days after service of the petition.

Once the petition is advertised, it cannot be withdrawn or dismissed until the date of the hearing of the petition, which is generally six weeks from the date it was issued. It is critical that the debtor works with the petitioner to get an express undertaking from the creditor that it will not advertise the petition in circumstances where the petition debt is to be repaid in full.  

James Court Limited (in liquidation) v Hindsight Contractors Limited

The High Court recently considered the application of a change of position defence in a restitution claim bought by liquidators following a failed application to validate post-petition payments. The liquidators of James Court Limited (JCL) brought an application for a declaration that payments totalling £37,000 by JCL to Hindsight Contractors Limited (HCL) were void under s127 of the Insolvency Act.

A winding-up petition was presented against JCL on 30 January 2019 and served on 11 February 2019. On 12 and 13 February 2019, JCL made two payments totalling £37,000 to HCL. On 19 July 2021, HCL made a retrospective application for a validation order to ratify the two payments, which was dismissed by the High Court. 

On 27 June 2022, the liquidators sought restitution. Having failed to obtain a validation order, HCL relied on a change of position defence, where the defendant’s position is so changed that he will suffer an injustice if called to repay the sums, to argue that it should not be ordered to make restitution.                    

The law set out in previous cases provides that the circumstances in which a change of position defence can succeed are constrained in the same way, and for the same reasons, as the exercise of the court’s discretion to validate. It was agreed between the parties that the payments had been made and that they were void, so the starting point was that JCL was entitled to restitution and the question for the court was whether HCL was prevented from raising these matters again – a mechanism known as ‘estoppel’.

The court found that, to succeed in the change of position defence, HCL had to establish that these were exceptional circumstances which would mean the payments were capable of validation. On the basis that these considerations had already been dealt with at the validation proceedings, the court found that there was an ‘issue estoppel’ which barred HCL from relying on the change of position defence. There were no special circumstances in existence which would justify the lifting of this bar.

The court also concluded that having found that issue estoppel did apply, there would also be an abuse of process as it would be manifestly unfair to JCL to be vexed twice for the same validation issue that had already been determined and it would bring the administration of justice into disrepute to attack the previous decision of the High Court using the change of position defence. 

Whilst the sums involved were small, this case is a useful reminder that when a party has an application for validation or ratification, it should run all arguments at the same time. The underlying issues are generally the same and the court will not afford two bites of the cherry.

Co-written by Stephen Cope of Pinsent Masons.