July 1996

31.4.9 General rule (companies only)

The general rule is that any transaction entered into by the company after the commencement of a winding up is void unless the transaction is authorised or validated by the court. The is irrespective of the knowledge of the parties. There are no exceptions to the provisions of section 127 so knowledge is irrelevant except insofar as the court may take it into account in deciding whether to validate a transaction. In practice, when considering if payments or transactions are voidable, the official receiver will require details of the date the petition was advertised in "The London Gazette" which may be regarded as being notice of the petition to all creditors. When considering recoveries of dispositions under section 127 it is not necessary to show that the company was insolvent. The provisions of section 127 apply in the winding up of a foreign company (Re Sugar Properties (Derisley Wood) Ltd [1987] 3 BCC 88).

 

31.4.10 Commencement of winding up order

The liquidation proceedings following a winding up order made by the court are deemed to commence at the time of the presentation of the petition. Since the word "time" is used it can be assumed that one does not go back to the beginning of the day of presentation but that the event (the presentation of the petition) is the precise time of the day when it occurred. If prior to the presentation of the petition the company had been in voluntary liquidation, the commencement is the time when the resolution for winding up was passed.

Notes:[s129(2)][s129(1)][s86]

 

31.4.11 General Rule (bankruptcy only)

Dispositions of property or payments made after the date of the presentation of the petition and up to the vesting of the estate in the trustee are void unless approved by the court (before or after the disposition). The date of the vesting of the estate in the trustee is either the date when the trustee is appointed or the date when the official receiver files notice of his intention not to call a meeting of creditors in court. However, there is an exception when conflicting claims depend on the question of which of the two events was first in order of time and this would apply when considering whether a transaction occurred prior to the petition being presented. In practice there may be difficulties if the precise time at which the petition was presented is not recorded.

 

31.4.12 Deceased insolvents estates

The bankrupt’s estate comprises that property which is vested in the bankrupt at the date of the making of the bankruptcy order. A personal representative is restrained from disposing of any property of the insolvent in the period from the date of the presentation of the petition for an insolvency administration order until the estate vests in a trustee. Any dispositions made by the personal representative in the relevant period are void unless made with the consent of the court or subsequently ratified by it (see paragraph 54.25).

Notes:[Article 5, Schedule 2 1986 DPO] [Schedule 1, part II, para 12 DPO 1986 and s284]

 

31.4.13 What are void payments? (companies and bankruptcy)

Payments made after the commencement of the winding up or the presentation of the petition in bankruptcy are void unless sanctioned or validated by the court, subject to certain exceptions in the case of bankruptcy.

The invalidation of dispositions of an insolvent’s assets after the date of presentation of a winding-up petition or a petition for bankruptcy is designed to prevent the directors of a company or the bankrupt, when insolvency proceedings are imminent, from disposing of the assets to the prejudice of the creditors and to preserve those assets for the benefit of the general body of creditors. Accordingly, section 127/284 does not apply when the disposition can have no impact on the creditors, e.g. in case of dispositions by receivers appointed under a charge over the company’s property.

Section 127/284 in no way prevents the company/bankrupt from continuing to incur liabilities nor does it invalidate those liabilities. Presentation of the winding-up/bankruptcy petition has no impact on the powers of the directors of the company, the authority of the company/bankrupt’s agents, or the powers of disposition of the company/bankrupt. In particular, the presentation does not invalidate the mandate of the company/bankrupt’s bank to honour cheques drawn by them.

The result is that, where a bank makes a payment out of an account, under the terms of the bank mandate, between the presentation of the petition and the making of the winding-up/bankruptcy order, there is no disposition of the property in favour of the bank. This applies whether the account is in credit or overdrawn (Re Hollicourt (Contracts) Limited (In Liquidation) v Bank of Ireland [2000] BCC 1,210).

The liquidator/trustee’s only remedy is to pursue the ultimate recipients of the funds, the payments to the recipient being void, unless validated by the court, under the provisions of section 127/284. In practice, this would apply only where the funds were paid from a bank account with a credit balance as otherwise the bank is simply using its own funds to pay a debt of the company/bankrupt.

Payments into an overdrawn account of funds representing assets of the company/bankrupt would be considered to be dispositions of property to be challenged under this section . The transfer of shares in a company and alterations in the status of its members made after the commencement of the winding up are void. In a voluntary liquidation the sanction of the liquidator is needed to validate the transaction whilst in a compulsory liquidation the transfer can only be validated by order of the court.

Notes:[s127 and 284] [s88 and s127]

 

31.4.14 Court’s discretion to validate transactions

The grounds on which the court will exercise its discretion to validate void transactions were considered by the Court of Appeal in Denney v John Hudson & Co Limited [1992] BCC 503.

The principles summarising this are:

1. The discretion is entirely at large, subject to the usual general principles applying to discretion, and that the discretion must be exercised in the context of the liquidation provisions of the statute.
2. The pari passu principle is paramount.
3. However, there are occasions when it may be beneficial not only for the company but for unsecured creditors that the company should be able to dispose of some of its property between the presentation of a petition and the making of a winding up order.
4. In considering whether to validate a transaction the court must always do its best to ensure that the interests of unsecured creditors will not be prejudiced.
5. As the desirability of the company being able to carry on its business was often speculative in each case the court must carry out a balancing exercise.
6. The court should not authorise payments in full to some creditors with other creditors only receiving a dividend unless the carrying on of the company’s business was for the benefit of creditors and thus could only be achieved by payment of these specified creditors.
7. A disposition carried out in good faith in the ordinary course of business at a time when the parties were unaware that a petition had been presented would usually be validated unless there were grounds for thinking that the transaction may involve an attempt to prefer the disponee in which case the transaction would not.
8. Despite the strength of the principle of securing pari passu distribution, the principle has no application to post liquidation creditors; for example the sale of an asset at full market value after the presentation of the petition. That is because such a transaction does not involve a dissipation of the company’s assets for it does not reduce their value.

 

31.4.15 Source of information

In bankruptcy the bank account may have been operative right up to the making of the bankruptcy order because there is no advertisement of the petition. Cash dispositions can be identified from the accounting records or bank statements of the bankrupt although dispositions of property other than cash may not be identified easily from the accounting or banking records. In companies the bank account will usually have been frozen when the banker becomes aware of the petition for winding up. Information can also be obtained during the course of the preliminary examination. Finally, information from suppliers and/or creditors, such as copies of statements of account, may reveal transactions after the presentation of the petition.

 

31.4.16 Payments to petitioning creditor

If an original petitioner is paid in full but another creditor is substituted as petitioner and a winding up order is subsequently made, the payment to the original petitioner is recoverable as a disposition (Re Western Walsh International Building Systems Ltd [1985] 1 BCC 99, 296). If the payment was not made by the company, it is not recoverable and the person who made the payment is an unsecured creditor. If the payment was made by a debtor and a bankruptcy order was made the payment is recoverable.

 

31.4.17 Protection available to creditors

The provisions of section 284 do not affect anything done in good faith, for value, prior to the commencement of the bankruptcy and without notice of the presentation of the petition. Any payment to suppliers where the goods, materials or services were delivered in the same period would not be affected (provided proper value was provided). Protection is also given for debts incurred after the commencement of bankruptcy without notice of the presentation of the petition. If a person has knowledge that a petition has been presented and a transaction has occurred, it is possible for them to obtain protection from subsequent recovery action by applying to the court for sanction of the transaction. In bankruptcy, transactions can be validated up to the date of the vesting of the bankrupt’s property in the trustee (see paragraph 31.4.11). Consequently, the court can validate transactions occurring after the date of the bankruptcy order to permit a bankrupt to continue a business up to the date of the hearing of an application for an annulment of the bankruptcy order on the grounds that it ought not to have been made.

Notes:[s284(4)][s284(5)]

 

31.4.18 Enforcement of charges

If a charge has been validly and effectively created, the provisions of section 127 do not prevent its enforcement. It is possible for a mortgagee or a receiver to exercise the power of sale after the commencement of the winding up without contravening the section because the asset is not the unencumbered property of the company but is subject to security. If a company has entered into an unconditional contract for the sale of an interest in land, but has not yet completed the contract, it is unlikely that steps taken after the presentation of a petition the contract could be avoided. However, it would be prudent for the parties involved to seek an order of the court so that the completion may be validated (Re French’s Wine Bar Ltd [1987] 3 BCC 173).

 

31.4.19 Second or subsequent bankruptcy

When a trustee receives notice of a subsequent bankruptcy petition against the bankrupt, he should hold and protect any after-acquired property as proceeds of sale of after-acquired property as proceeds of sale under an income payments order until the subsequent petition is disposed of or an order made. If a later bankruptcy follows any distribution of property, as defined by section 334(3), made by the trustee after notice of the petition is void unless made with the consent of, or ratified by, the court (see paragraphs 21.5 and 21.8).

Notes:[s307(3); s334(3)(a)] [s310; s334(3)(b)][s334(2)]

 

31.4.20 How are recoveries made?

A claim need not involve the court but if the person who benefited will not agree that the money or benefit ought to be repaid, the liquidator or trustee will consider applying to the court for an order requiring payment.

 

31.4.21 Recoveries by an administrative receiver

Where an administrative receiver is appointed following the presentation of a winding up petition but prior to the making of a winding up order and there have been void dispositions of the company’s property within the meaning of section 127, the receiver may be entitled to recover such property. The official receiver should confirm the terms of the charging document, pursuant to which the administrative receiver was appointed, does charge such property, in which case the liquidator will not be entitled to recover or retain the property.

 

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