Under the insolvency legislation, any dispositions of property or payments made by a company after it has been presented with a winding up petition are void, unless validated by the Court.
In the recent decision of Express Electrical Distributors Limited –v- Beavis and Others  EWCA CIV 765, the Court of Appeal held that the overriding principle that the assets of an insolvent company’s estate are available for payment to its unsecured creditors on an equal and pro-rata basis, is paramount. A validation order should only be made in special circumstances which demonstrate that the payment is of benefit to the general body of creditors.
Examples of special circumstances cited in the case are: a payment which is required to obtain a supplier’s materials required to complete a profitable contract; or which allows a company to carry on its business, with a view of selling the business as a whole.
The Court of Appeal also observed that when hearing a retrospective validation application (that is to say an application made after the company has gone into liquidation, rather than before the payment/disposition is made), the Court should deal with the application with the benefit of hindsight. The Court should take into account the evidence available, as to whether or not the payment actually benefited the general body of creditors.
In this case, the Court of Appeal refused to overturn the decision made by the Judge at first instance, who had refused to retrospectively validate a payment of £30,000 paid to a supplier in respect of a pre-petition debt. The supplier had upon receipt of the payment made further supplies to the company. There was no evidence before the Court which explained exactly why the payment was made. The payment had not been made within the ordinary course of business, because it included a payment of invoices which had not yet fallen due for payment. The Court of Appeal also noted that here had been no evidence before the first instance Judge, that if the “post-payment” goods had not been supplied, it would have meant that the company could not carry on.
This case seems to go against the previously held view that payments made in good faith, without knowledge of the winding up proceedings and in the ordinary course of business, will be validated.
It demonstrates that not only must there be special circumstances, but also that the evidence of the benefit to the general body of creditors must be produced.
It should present a warning to tread carefully, when trading with companies in financial difficulties and highlights the need to monitor such trading relationships closely. Payments, even if made and accepted in good faith and without knowledge of the winding up proceedings, are liable to be required paid over to the liquidation estate, in the absence of special circumstances.