For officeholders seeking to recover sums pursuant to s.127 Insolvency Act 1986, the recent Court of Appeal judgment in Express Electrical Distributors Ltd v Beavis and Others  EWCA Civ 765 provides an interesting development (equally in relation to retrospective validation applications).
In this case an electrical wholesaler regularly supplied the company with goods with a short period of credit. A winding up petition was presented on 23 May 2013. The company had fallen behind on the payment of invoices and the wholesaler put a hold on further credit. The company paid the wholesaler £30,000 on 29 May 2013 respect of goods already supplied to bring payments up to date for that month, leaving a further payment due by the end of June 2013. The wholesaler subsequently lifted the credit hold and supplied further goods of £13,000. The company was later wound up in July 2013. The wholesaler applied for a validation order on the basis that the payment of £30,000 was made in good faith, in the ordinary course of business and whilst they were unaware of the petition.
Whilst considering whether to retrospectively validate a payment made to a creditor the Court found that:
- it is irrelevant whether the disposition was made in good faith and in the ordinary course of business; and
- save in exceptional circumstances, a validation order should only be made where the relevant disposition was for the benefit of the general body of creditors.
Examples provided by the Court include where payments enabled the company to fulfil its obligations under a contract whose eventual profits would benefit creditors as a whole, where the payment otherwise swelled the assets of the company, or where the payment allowed the company to carry on trading when the sale of the business as a going concern was achievable (where this would be more beneficial than breaking up the business).
This judgment has the potential to severely restrict the future use of ‘good faith’ in defence of s.127 claims moving forward.