Section 127 Insolvency Act 1986 (“Section 127”) is a small but sometimes deadly piece of legislation to those who are unaware of its existence.  Its effect can be significant and the available defences to such a claim are being narrowed.

In a winding up of a company by the Court, any disposition of its property made after the commencement of the winding up is, unless the court otherwise orders, void.

The Section is often considered a harsh consequence to the recipients of monies who were potentially unaware of the presentation of a winding up petition.

What Section 127 does is allows a liquidator to claw back monies that were paid to recipients from the period of first presentation of the winding up petition up until the making of the winding up order. The purpose of the legislation is to prevent the directors of a company from disposing of the company’s assets when they become aware that the company is moving towards liquidation. Its aim is to protect all the company’s assets for the general body of creditors.

It is not just the payment of monies that is caught by Section 127 but also it bites when there has been a change in the share subscription or if any of the company’s assets have been used as security for any borrowing by the company.

There are limited defences to a claim being brought by a liquidator under this legislation but following the case of Dingley and Others v. Nisa Retail Limited (re MKG Convenience Limited (in liquidation)), the availability of a change of position defence is limited to exceptional circumstances and requires a respondent to navigate high hurdles. In this case, Nisa Retail Limited confirmed that they were unknowingly in receipt of the invalid payments and had continued to supply stock to MKG Convenience Ltd and they claimed that they should be refunded the value of that stock.  The Judge agreed that this defence was available, but it would only succeed in exceptional circumstances and was not prepared to accept that the circumstances set out by Nisa Retail Limited were exceptional. No doubt the parameters of “exceptional circumstance” will become clearer as the case law develops.

If you find yourself in a position where you have received monies or property from a company that you later realise was the subject of a winding up petition, you will have the opportunity to make an application to Court for that transaction to be validated. If successful, the Court will validate the disposition of the company property and the liquidator will no longer have a claim against you.

The criteria for successfully obtaining a validation order has equally high hurdles. A recipient will need to demonstrate that the funds received were for the benefit of the general body of creditors.  By way of example, perhaps the recipient was supplying goods or services that enabled the company to continue trading, generating profit for the general body of creditors.

If you have any concerns as to the financial stability of a customer to whom you supply goods or services, then you should first check whether a winding up petition has been issued or advertised against that customer. You can do this by searching The Gazette. The complexity of this area of law means that it can be a huge advantage to have legal assistance to enable you to understand whether there is a possible defence and if a validation order is an option, to ensure that your application will satisfy the criteria and have the best chance of being approved by the Court.

The Insolvency and Debt Recovery Team at Ellisons are here to assist and provide advice if you have received a claim from a liquidator.  We can provide practical advice on the options available and assist in defending the claim.