Express Electrical Distributors Ltd v Beavis & Ors

This appeal concerns the circumstances in which a validation order will be made under section 127 of the Insolvency Act 1986 where a person supplies goods to a company at a time when, unbeknown to that person, a winding up petition has already been issued in relation to the company. The object of a validation order in such a case is to validate the payment made by the company for goods supplied so that, notwithstanding the liquidation of the company, the person supplying the goods is paid for them in full by the company and is not left to claim for the amount of the price pari passu with the other creditors of the company.

Section 127 of the 1986 Act provides:

“In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.”

Where a winding up order is made on a winding up petition, section 129(2) of the 1986 Act provides that the winding up is taken to have commenced on the date of presentation of the petition. Absent a validation order, the payment in the period after presentation of the petition by the company which received the goods will be treated as void under section 127 and the money would have to be returned to the company to be shared among its creditors according to the usual pari passu principle.

In the present case, at first instance District Judge Obodai declined to make a validation order sought by the appellant on an application against the liquidators of Edge Electrical Limited (“Edge”) for a payment of £30,000 received by it from Edge on 29 May 2013 in relation to electrical goods which the appellant had previously supplied to Edge. The appellant’s appeal to HHJ Hodge QC (sitting as a judge of the High Court) was dismissed by him on the basis that DJ Obodai had directed herself correctly and had reached a legitimate decision in the exercise of her discretion under section 127 which could not be said to be wrong. HHJ Hodge QC modified the order made by DJ Obodai in one respect: instead of requiring payment of £30,000 to the liquidators of Edge, he ordered that that sum be paid to the solicitors acting for the liquidators to be held by them pending the outcome of these proceedings.

The appellant now appeals to this court with permission granted by Lewison LJ. The operative underlying decision which calls for examination is that of DJ Obodai. The liquidators have not appeared by counsel on this appeal, as they have no funds left from the assets of Edge; but they wrote to the court to support the decisions made below.

The appellant is a company which trades in the wholesale supply of electrical goods. Edge was in the business of installing electrical equipment in high value properties and in about 2011 became a customer of the appellant. Edge would purchase significant quantities of goods from the appellant every month or so.

According to the appellant’s standard terms on which it traded with Edge, Edge was required to pay each invoice before the last day of the calendar month immediately following the calendar month in which delivery took place. Thus, if the appellant supplied goods in May, Edge would be required to pay for them by 30 June. Evidence adduced by the liquidators of Edge shows that in 2011 and 2012 the typical pattern was for Edge to make payment of invoices on the last date permissible under the standard terms, i.e. utilising the maximum credit to which Edge was entitled.

This pattern became disrupted from November 2012. Edge paid for goods supplied in that month on dates between 6 March 2013 and 5 April 2013 and there was further disruption thereafter. In other words, Edge in practice secured longer periods of credit from the appellant.

According to the witness statement of Simon Jackson, a director of the appellant, by April 2013 the appellant perceived that there was a problem with payment by Edge. On 17 May 2013 Simon Jackson put Edge on credit hold, as he did not wish to increase the appellant’s exposure to it. Despite this, on 20 May the appellant did make another modest delivery of goods as it did not wish to cause problems for Edge for the sake of a small order worth a few hundred pounds. But according to Simon Jackson the appellant did not want to deliver large quantities of goods without a substantial payment being made first.

On 22 May 2013, Mr Graham Cook, another creditor of Edge, issued a winding up petition in relation to Edge. Mr Cook had engaged solicitors in March 2013 to chase payment of a sum owed to him by Edge, without success. The winding up petition was only advertised on 17 June 2013, i.e. after the payment of the £30,000 by Edge to the appellant to which these proceedings relate. In due course, the court made a winding up order in relation to Edge on 15 July 2013.

At paragraph 6 of his witness statement, Simon Jackson says this:

“Eventually after a number of attempts by my brother Barry Jackson (another director) to speak with Gareth Jones [the principal director of Edge] he contacted [the appellant] and confirmed on the 29 May 2013 that a payment would be coming through for £30,000.”

It appears from the evidence filed by the liquidators and from the appellant’s application notice that the £30,000 payment was made on 29 May 2013. Although as at this date the appellant had supplied goods to Edge with a value in excess of £30,000, it is common ground that at the end of May 2013 invoices totalling only £25,160.43 were contractually due for payment by Edge. Other invoices were not due for payment until the end of June 2013.

It is unclear from the evidence adduced by the appellant why Edge made a payment on 29 May which, as to £25,160.43 thereof, was slightly in advance of when it was due for payment and as to the remaining £4,839.57 was more than a month in advance of when it was due for payment. Although there is no suggestion that there was any impediment to prevent Barry Jackson providing a witness statement to explain in detail what passed between him and Mr Jones in their conversation on 29 May and the reason why Edge agreed to make a payment in excess of what was then due to the appellant, the only evidence is that in paragraph 6 of Simon Jackson’s witness statement, quoted above.

After payment of the £30,000, the appellant lifted the credit hold in relation to Edge and recommenced supplies of goods to Edge. From 30 May to 19 June 2013 the appellant supplied further goods worth about £13,000 to Edge.

There is a conflict of evidence between the witness statement of Mr Cook, adduced on behalf of the liquidators, and those of Simon Jackson and Mr Neil Iceton adduced on behalf of the appellant. Mr Cook maintains that he informed the appellant, acting by Simon Jackson and Mr Iceton, in about April 2013 that he intended issuing a winding up petition against Edge and that he told Mr Iceton when he had issued the petition, before the payment of £30,000 was made on 29 May 2013. Simon Jackson and Mr Iceton denied that they were told that a winding up petition had been issued by Mr Cook. Mr Iceton said that although Mr Cook did make references on numerous occasions to the possibility that he might present a winding up petition he (Mr Iceton) did not take these threats seriously; if he had thought that Mr Cook was in earnest, he would have stopped the appellant from making further supplies to Edge.

The District Judge was not invited to hear oral evidence to resolve this conflict of evidence. She had to proceed simply on the basis of the witness statements and documentary evidence before her. This court has to do the same.

On this state of the evidence, I do not think we can say that the appellant knew about Mr Cook’s winding up petition at any time before about 17 June 2013. On the balance of probabilities it did not know, since it is unlikely that it would have made the further deliveries to Edge after 29 May if it had known about this. Therefore it cannot be said that the appellant was acting in bad faith, that is, with knowledge of an extant winding up petition, when it received the £30,000 payment.

In December 2013 the liquidators of Edge wrote to the appellant to demand repayment of the £30,000. In February 2014 the appellant issued an application notice seeking a validation order under section 127 of the 1986 Act.

The principles governing the exercise of the court’s discretion in deciding whether to make a validation order were examined in the judgment of Buckley LJ in In re Gray’s Inn Construction Co. Ltd [1980] 1 WLR 711, CA. The case concerned section 227 of the Companies Act 1948, which was the predecessor of section 127 of the 1986 Act and is in identical terms. A trading company maintained its current account with a bank; the account was usually overdrawn. A creditor of the company presented a winding up petition on 3 August 1972 (when the account was in overdraft, i.e. when the bank had lent money to the company), which was only advertised on 17 August and only came to the attention of the bank on about 15 August. The bank sought no validation order at this stage. The company then went on trading, continuing to use its account for debits and credits in the ordinary course of its business until a winding up order was made on 9 October. It transpired that this further period of trading was at a loss, so that the extent of the insolvency of the company worsened in that time. After the winding up order was made, the bank sought a retrospective validation order.

Buckley LJ explained the principles to be applied in deciding whether a validation order should be made at pp. 717D-719E. As he emphasised, “It is a basic concept of our law governing liquidation of insolvent estates [of individuals and companies] … that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent’s unsecured creditors as at that date” (717D, this is the pari passu principle); “It may sometimes be beneficial to the company and its creditors that the company should be enabled to complete a particular contract or project, or to continue to carry on its business generally in its ordinary course with a view to the sale of the business as a going concern”, in which case a validation order may be sought (717G); “In considering whether to make a validating order the court must always … do its best to ensure that the interests of the unsecured creditors will not be prejudiced” (717G); and “Since the policy of the law is to procure so far as practicable rateable payments of the unsecured creditors’ claims, it is … clear that the court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the unsecured creditors as a body” (718A-B; and see also p. 720E). Thus, the policy of the law in favour of distribution of the assets of an insolvent company in the course of the liquidation process on a pari passu basis between its unsecured creditors is a strong one, and it needs to be shown that special circumstances exist which makes a particular transaction one in the interests of the creditors as a whole before a validation order will be made to override the usual application of the pari passu principle.

Sometimes the court may be justified in making a validation order where the making of a payment or the supply of assets by the company is a way of, say, fulfilling its obligations under a particularly profitable contract where the eventual profits will exceed the consumption of the company’s assets and will enure to the overall advantage of the general body of creditors. There is no suggestion of that in this case. Sometimes the court may be justified in making a validation order simply to allow the company to carry on its business in the usual way; but, as Buckley LJ pointed out, it will be more speculative whether this is really desirable in the interests of the general body of creditors and this “will be likely to depend on whether a sale of the business as a going concern will probably be more beneficial than a break-up realisation of the company’s assets” (717H).

There was no such objective in the Gray’s Inn Construction case (see p. 724A), so if the bank had sought a prospective validation order in early August 1972 in relation to future transactions in the ordinary conduct of the company’s business, it would have been necessary to look to see what safeguards were in place to ensure that such trading was allowed only so long as it would be profitable: see pp. 719H-720A, 720F-H and 723F-724C. In fact, no such safeguards were put in place and it transpired that the company made a further trading loss of £5,000 after that time. The validation order made in relation to the current account in this period was adjusted in this court to ensure that the bank was not protected in respect of the transactions in that period to the extent of the £5,000 trading loss which occurred, since that was a loss to the detriment of the general body of creditors in relation to which there should be no exemption for the bank from the operation of the pari passu principle.

There is no suggestion in the case before us that Edge continued to trade after the winding up petition was issued on 22 May 2013 with the objective of being sold as a going concern, at a price overall beneficial to the general body of creditors notwithstanding the possibility of trading losses in the meantime. This is similar to the position in the Gray’s Inn Construction case.

As Buckley LJ pointed out, there may be circumstances in which a validation order is not sought in advance of a transaction, but only retrospectively. That will be so where, in a case like the present one, the parties are “unaware at the time when the transaction is entered into that a petition has been presented” (p. 718E). However, in my judgment the same governing principles apply in such a case. The court has to look to see whether the transaction in issue, for which validation is sought retrospectively, was one which could properly be regarded as being for the benefit of the general body of creditors, despite the departure from the application of the pari passu principle which will be the consequence of making the validation order which is sought. (There may be other exceptional circumstances which might possibly justify the making of a validation order in a retrospective application case, for example if a director of the company who knows about the winding up petition suppresses that information and deceives someone into dealing with the company: the merits in such a case would need to be argued out between the person dealing with the company and its liquidator and I express no view on what the result should be).

In a case where a retrospective validation order is sought, as distinct from a prospective order, the range of evidence available is likely to be different. In a case where a retrospective order is sought it may have become clear whether a particular transaction or the carrying on of the company’s general business in fact turned out to be for the benefit of the general body of creditors or not, whereas in a case where a prospective order is sought the court will have to make an assessment on the basis of such evidence is available of what is likely to transpire in the future.

In an appropriate retrospective order case, an interesting question could arise as to whether the court should try to assess whether a validating order would have been made if the court had been asked the question at the time of the transaction to be validated or should look at the matter with the benefit of hindsight. Observations of Buckley LJ in the Gray’s Inn Construction case at pp. 720B and 723F-724C suggest that it should be the latter. However, I do not think that it matters in this case which of these two approaches is adopted.

The goods to which the £30,000 payment related had all been supplied by the appellant on credit prior to the making of that payment and were already available for use in Edge’s business whether that payment was made or not. Therefore, absent some special circumstance, it was not in the interests of the general body of creditors that the appellant should receive that £30,000 in payment for those already delivered goods, in breach of the pari passu principle.

The position is analogous to that addressed by Oliver J (as he then was) in In re J. Leslie Engineers Co. Ltd [1976] 1 WLR 292 in relation to a payment of £250 by the company subject to a winding up petition to a person who had made supplies to that company prior to the presentation of the petition, who was paid the £250 in respect of those supplies after presentation of the petition at a time when he was unaware of the petition. Oliver J held that no validation order should be made in respect of that payment, since that would defeat the object of the statutory provision (now section 127 of the 1986 Act) because it would undermine the application of the pari passu principle, which the provision is intended to promote, without good reason: see pp. 297 and 300-304. As Oliver J explained at p. 304,

“I think that in exercising discretion the court must keep in view the evident purpose of the section which, as Chitty J said in In re Civil Service and General Store Ltd, 58 L.T. 220, 221, is to ensure that the creditors are paid pari passu. Obviously there are circumstances where this cannot in fairness be the sole criterion in cases where, for instance, the creditor concerned has since the presentation of the petition helped to keep the company afloat, or has otherwise swollen the company's assets, salvage cases and that sort of thing.”

Since the creditor could not show in that case that he had done anything falling within the scope of the latter sentence, Oliver J considered that it was clear that validation should be refused in relation to the £250 payment. In my view, if one simply considers the £30,000 on its own, the same is true in the present case.

The question in our case, therefore, is whether it is in the interests of the general body of creditors that there should be validation of the payment of £30,000 on the basis that such payment was necessary in order to secure the continued supply of goods to Edge after 29 May 2013. (It is worth pointing out that no validation order was sought by the appellant in relation to its ordinary trading transactions with Edge after 29 May 2013).

In that regard, there is an absence of evidence from the appellant regarding the purpose of the payment of £30,000 or regarding exactly what benefit Edge hoped to get from paying it. It is striking that the appellant only supplied goods worth £13,000 after the payment was made and by supply in the ordinary way, rather than on any specially advantageous terms. There is no evidence to suggest that the supplies by the appellant after 29 May 2013 were made in order to secure completion by Edge of particularly profitable contracts so as to achieve a better overall result for the general body of creditors than would otherwise have been the case, and that is so whether one looks at the position as it appeared as at 29 May 2013 or with the benefit of hindsight. Nor is there any evidence that the prices at which those goods were supplied by the appellant were especially favourable to Edge, so no inference of benefit to the general body of creditors could be drawn using that as a foundation. The evidence only indicates that Edge wanted the goods supplied by the appellant after 29 May in order to continue to carry on its business generally in its ordinary course for as long as possible in the hope that its position might improve, and without there being any objective of the sale of the business as a going concern in view. Following the guidance given by Buckley LJ and by Oliver J to which I have referred, this is not a sufficient basis on which it can be inferred that the payment of the £30,000 to re-open the possibility of future supplies to Edge was in the interest of the general body of creditors. Again, that is so whether one looks at the position as it appeared as at 29 May or with the benefit of hindsight.

Therefore, if one were simply applying the basic principle identified by Buckley LJ at p. 717G that in considering whether to make a validating order “the court must always … do its best to ensure that the interests of the unsecured creditors will not be prejudiced”, I consider that it would not be appropriate to make a validation order in this case.

However, Mr Knox sought to rely on another passage in the judgment of Buckley LJ, at p. 718F-G:

“A disposition carried out in good faith in the ordinary course of business at a time when the parties are unaware that a petition has been presented may, it seems, normally be validated by the court (see In re Wiltshire Iron Co. (1868) L.R. 3 Ch.App. 443; In re Neath Harbour Smelting and Rolling Works (1887) 56 L.T. 727, 729; In re Liverpool Civil Service Association (1874) L.R. 9 Ch.App. 511, 512) unless there is any ground for thinking that the transaction may involve an attempt to prefer the disponee, in which case the transaction would probably not be validated.”

It should be noted, though, that in the same paragraph Buckley LJ again emphasised the strength of the presumption that the pari passu principle should be applied, absent very good reason to depart from it, at 718H-719A as follows:

“In a number of cases reference has been made to the relevance of the policy of ensuring rateable distribution of the assets: In re Civil Service and General Store Ltd (1888) 58 LT 220; In re Liverpool Civil Service Association, L.R. 9 Ch. App. 511 and In re J. Leslie Engineers Co. Ltd[1976] 1 WLR 292. In the last mentioned case Oliver J said, at p. 304:

‘I think that in exercising discretion the court must keep in view the evident purpose of the section which, as Chitty J said in in re Civil Service and General Store Ltd, 58 L.T. 220, 221, is to ensure that the creditors are paid pari passu.’”

Buckley LJ continued thus at p. 719A-E:

“But although that policy might disincline the court to ratify any transaction which involved preferring a pre-liquidation creditor, it has no relevance to a transaction which is entirely post-liquidation, as for instance a sale of an asset at its full market value after presentation of a petition. Such a transaction involves no dissipation of the company’s assets, for it does not reduce the value of those assets. It cannot harm the creditors and there would seem to be no reason why the court should not in the exercise of its discretion validate it. A fortiori, the court would be inclined to validate a transaction which would increase, or has increased, the value of the company’s assets, or which would preserve, or has preserved, the value of the company’s assets from harm which would result from the company’s business being paralysed: In re Wiltshire Iron Co. (1868) L.R. 3 Ch.App. 443; In re Park Ward & Co. Ltd [1926] Ch 828, where the business of the company was eventually sold as a going concern, presumably to the advantage of the creditors; In re Clifton Place Garage Ltd [1970] Ch 477. In In re A.I. Levy (Holdings) Ltd [1964] Ch 19 the court validated a sale of a lease which was liable to forfeiture in the event of the tenant company being wound up, and also validated, as part of the transaction, payment out of the proceeds of sale of arrears of rent which had accrued before the presentation of the petition for the compulsory liquidation of the company. If that case was rightly decided, as I trust it was, the court can in appropriate circumstances validate payment in full of an unsecured pre-liquidation debt which constitutes a necessary part of a transaction which as a whole is beneficial to the general body of unsecured creditors. But we have been referred to no case in which the court has validated payment in full of an unsecured pre-liquidation debt where there was no such special circumstance, and in my opinion it would not normally be right to do so, because such a payment would prefer the creditor whose debt is paid over the other creditors of equal degree.”

I confess that I have difficulty in following some of Buckley LJ’s reasoning in these passages. First, I do not see why Buckley LJ appears to accept the bald proposition that a disposition carried out in good faith in the ordinary course of business at a time when the parties are unaware that a petition has been presented should normally be validated by the court (p. 718F-G). Validation on that basis could well prejudice the interests of the body of unsecured creditors, unless the making of such a validation order depends upon a more searching inquiry whether it is in the circumstances in their overall interest that the transaction in question should be validated. The transaction might be part of a course of trading by the company at a loss, which would not be in the interests of the general body of creditors. It is not easy to square this proposition with the reasoning of Oliver J in the J. Leslie Engineers case, which Buckley LJ cited with approval.

In the Gray’s Inn Construction case itself, Buckley LJ indicated that where the evidence showed that the company might trade at a loss (in a prospective validation case) or that it had in fact traded at a loss (in a retrospective validation case), validation orders should not be made in respect of the operation of its bank account used for its ordinary trading to the extent of such loss: pp. 719F-720B and 724C. That is an approach which accords with the pari passu policy and the basic principle to which he referred.

Further, if the application in that case had been made on a prospective basis in relation to validation of the payments to clear the overdraft which existed as at the date of the presentation of the petition (3 August 1972), Buckley LJ made it clear that validation would not have been granted: p. 719F-H. Again, that accords with the policy and basic principle to which he referred.

Yet he was also prepared to say that it was proper for the judge at first instance to validate credits to the current account after presentation of the petition on 3 August and before the bank learned about it and it was advertised, which had the effect of reducing the company’s overdraft as at 3 August, thereby departing from the pari passu principle: p. 721A-C. But why should that be so? It is a result at odds with the decision of Oliver J in the J. Leslie Engineers case and with the basic principles identified by Buckley LJ elsewhere in his judgment. Perhaps it was on the footing that these were dispositions in good faith in the ordinary course of business without knowledge of the petition, but why this should be sufficient to warrant validation is not explained by Buckley LJ. He does not say that any principle of fairness to the creditor (the bank) overrides the pari passu principle which underlies section 127 in cases where the creditor seeking validation cannot show that their actions have benefited the general body of creditors; and it is difficult to see why, absent such special considerations or some other exceptional circumstances such as I have mentioned at paragraph [24] above, fairness requires anything other than that that person be treated as a creditor subject to the pari passu principle along with all the other creditors. Alternatively, the validation may have been on the basis that Buckley LJ thought the bank could show that repayment of that part of the overdraft had been necessary to realise, overall, a benefit for the general body of creditors of the company, although quite what that benefit was is not explained.

In view of the muted language used by Buckley LJ at p. 718G (“may, it seems …”) and the qualifications he enters, I do not think that Buckley LJ intended to lay down any binding rule at p. 718F-G. Such a rule would not be consistent with the emphasis he gave elsewhere in his judgment to the importance of the pari passu principle in the exercise of discretion under section 127 of the 1986 Act and with his statement of the basic principle governing such exercise.

Moreover, the authorities to which Buckley LJ refers do not provide any clear support for such a rule. In the Wiltshire Iron Company case it seems to have been assumed at first instance that it was in the interests of the creditors to ensure that the company could continue to trade so that it could be sold as a going concern (see (1868) L.R. 3 Ch. App. 443, 447) and the discussion on appeal at pp. 450-452 simply turned on an analysis of whether the contract in question had been fully completed so that property in the iron to be delivered to the company’s customer had passed to the customer before the date of the winding up order. In the Liverpool Civil Service Association case the creditor who himself presented the winding up petition obtained part payment of his debt after that date but pressed on with his petition in relation to the balance of the debt with the result that a winding up order was made, with effect relating back to the date of presentation of the petition, and the court declined to make a validation order in respect of the part payment he received, holding that he should share it pari passu with the other creditors; at (1874) L.R. 9 Ch.App. 511, 512, the court simply distinguished and put to one side authorities including the Wiltshire Iron Company case which indicated that the position could be different in relation to bona fide transactions in carrying on the ordinary business of a company between the petition and the making of the winding up order, which have been completed before the order is made and which do not involve the petitioning creditor. The Neath Harbour case involved a question of the circumstances in which directors of a company would be accountable for funds misapplied by them by making payments rendered void by a section equivalent to section 127 of the 1986 Act, in relation to which Chitty J indicated that the directors would usually be protected by the making of a validation order “where the payments are made honestly and in the ordinary course of business” (see (1887) 56 LT 727,729); this is a context for application of section 127 which is very different from using it to adjust the rights of ordinary creditors in an insolvency. By contrast, as Buckley LJ points out, the other authorities he refers to underlined the importance of the policy underlying section 127 of ensuring rateable distribution of the assets of the company in accordance with the pari passu principle.

In addition, I think it can be said that by qualifying the proposition at p. 718F-G in the way he does, by referring to “any ground for thinking that the transaction may involve an attempt to prefer the disponee” (p.718G), and by stating that the pari passu principle “might disincline the court to ratify any transaction which involved preferring a pre-liquidation creditor” (p. 719A), Buckley LJ sought to emphasise how easily the approach suggested by that proposition could be displaced. I think that he was seeking, in effect, to emphasise how strong the presumption in favour of application of the pari passu principle is and thus how strong the reasons will need to be to justify departing from it in any given case.

As to the passage at p. 719A-B, set out above, it is difficult to see why it should always be assumed that a post-liquidation transaction should always be validated, as involving no dissipation of the company’s assets. No doubt it often will be appropriate to validate such a transaction, if it is carried out at full value (e.g. if there is sale of an asset at full market value), but whether that is so will depend upon examination of the particular facts.

However, the point made at p. 719B-E in relation to validation of a transaction which has increased the value of a company’s assets is clear and in accordance with the basic principle set out by Buckley LJ of ensuring the interests of the general body of creditors are protected. As Buckley LJ indicates there, absent exceptional circumstances, a court should not validate payment of an unsecured pre-liquidation debt where such payment is not a necessary part of some wider transaction which is beneficial to the general body of unsecured creditors. On the evidence, there is no such exceptional circumstance in the present case and so this statement too supports the view that no validation order should be made in relation to the £30,000 payment.

Again, the relationship of this observation with that at p. 718F-G, set out above, and the validation order made in relation to part repayment of the overdraft as at 3 August 1972 at p. 721A-D is unclear. However, in my judgment the proper course is to apply the basic principle identified by Buckley LJ. These other aspects of Buckley LJ’s judgment are too flimsy to amount to any clear direction that we should depart from applying that principle.

In my opinion, by reason of the importance when exercising discretion under section 127 of promoting the pari passu policy which underlies that provision and having regard to the basic principle identified by Buckley LJ that in considering whether to make a validation order “the court must always … do its best to ensure that the interests of the unsecured creditors will not be prejudiced”, it is not appropriate to grant a validation order in relation to the £30,000 payment in this case. This conclusion is in line with Buckley LJ’s analysis of the A. I. Levy (Holdings) Ltd case at p. 719C-E and with the judgment of Oliver J in the J. Leslie Engineers case.

I note that this is also in accordance with the Practice Direction for Insolvency Proceedings ([2014] BCC 502) at para. 11.8, dealing with validation orders. In my opinion, para. 11.8.8 correctly states the position as follows:

“The court will need to be satisfied by credible evidence either that the company is solvent and able to pay its debts as they fall due or that a particular transaction or series of transactions in respect of which the order is sought will be beneficial to or will not prejudice the interests of the unsecured creditors as a class (Denney v John Hudson & Co. Ltd [1992] BCC 503 (CA); Re Fairway Graphics Ltd [1991] BCLC 468)”.

Mr Knox also sought to gain support from the decision of this court in Re S.A. & D. Wright Ltd; Denney v John Hudson & Co. Ltd [1992] BCC 503. In that case, the company which went into liquidation had carried on business as hauliers, and the respondent supplied it with fuel oil on terms that the company paid for previous deliveries before new supplies were delivered. Certain payments to settle outstanding invoices were made between presentation and advertisement of the winding up petition against the company, and these were impugned by the liquidator relying upon what is now section 127 of the 1986 Act. The respondent had been unaware of the presentation of the petition at the time the payments were made. This court identified the two essential questions as (1) were the parties acting in the ordinary course of business? and (2) were the relevant transactions likely to be for the benefit of the creditors generally? (p. 506C-D). This court held that the judge at first instance correctly directed himself by reference to these questions and could legitimately find that both should be answered in the affirmative.

As to question (2), Fox LJ observed,

“It is possible that the continuance of the business was not a benefit to the company. But there is no evidence of that. … The reality, in my view, is that … the company obtained a benefit form the payment, viz. the capacity to give a further order which would enable it to continue its business” (p. 507B-C).

The judge at first instance had found that the transaction was likely to benefit the company and Fox LJ found that in the absence of evidence that the company thereafter traded at a loss this was a permissible finding for him to make in the circumstances, on the footing that it could reasonably be assumed “that what was for the benefit of the company [by earning revenue by continuing to carry on its business] would be for the benefit of the general body of the creditors” (p. 507G-H).

Russell LJ and Staughton LJ agreed with the reasons given by Fox LJ. Staughton LJ emphasised that a critical point was that it had been “sufficiently proved that the further deliveries which were made, after the two payments that are in dispute, were for the creditors’ benefit” and the judge could properly proceed on the basis that the transaction was “apt to benefit the creditors” even if it was not shown on the evidence that it did in fact do so (p. 508D-G). It should be noted that neither Fox LJ nor Staughton LJ said that it should be presumed that continued trading after presentation of a winding up petition will necessarily be in the interests of the general body of creditors (this would have conflicted with Buckley LJ’s approach in the Gray’s Inn Construction case), only that in the circumstances of the Denney case it had been legitimate for the judge, looking at the case in the round, to come to that conclusion on the facts.

In my view, the judgments in Denney’s case support the interpretation which I consider should be given to Buckley LJ’s judgment in the Gray’s Inn Construction case. In Denney, the courts at first instance and on appeal properly focused on the question whether the transactions to be validated had benefited the general body of unsecured creditors, and did not simply ask whether they had been carried out in good faith in the ordinary course of business. At pp. 505F-506C, Fox LJ accepted that the respondent was acting in good faith and in the ordinary course of business, but for the reasons given by Oliver J in the J. Leslie Engineers case at [1976] 1 WLR 292, 304, set out above, held that this was not enough to justify validation.

Fox LJ sought at pp. 504G-505E to paraphrase the guidance to be derived from the Gray’s Inn Construction case. He did not engage in any critical analysis of it such as I have attempted above. He set out the basic principle at proposition (4):

“In considering whether to make a validating order, the court must always to its best to ensure that the interests of the unsecured creditors will not be prejudiced (p. 717)”.

He also set out propositions (5)-(8) as follows:

“(5)

The desirability of the company being enabled to carry on its business was often speculative. In each case the court must carry out a balancing exercise (p. 717).

(6)

The court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interests of the creditors generally. If, for example, it were in the interests of the creditors generally that the company’s business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition is presented but not yet paid for, the court might exercise its discretion to validate payments for those goods (p. 718).

(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 by the court unless there is ground for thinking that the transaction may involve an attempt to prefer the dispone – in which case the transaction would not be validated (p. 718).

(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 involves no dissipation of the company’s assets for it does not reduce the value of its assets (p. 719).”

As so often with a paraphrase, some nuances in the judgment of Buckley LJ have been lost in these propositions. Moreover, in stating the propositions Fox LJ does not examine the points at which they may be in tension with each other and how such tensions might be resolved: I have referred to some of the difficulties above. In particular, proposition (7) appears to me to be misleading as a general proposition, not least because Fox LJ himself did not apply it as a governing criterion in the Denney case, but also because it does not marry up in a coherent way with the basic principles identified in the Gray’s Inn Construction case and repeated by Fox LJ.

In my judgment, the time has come to recognise that the statement by Buckley LJ at p. 718F-H cannot be taken at face value and applied as a rule in itself. The true position is that, save in exceptional circumstances, a validation order should only be made in relation to dispositions occurring after presentation of winding up petition if there is some special circumstance which shows that the disposition in question will be (in a prospective application case) or has been (in a retrospective application case) for the benefit of the general body of unsecured creditors, such that it is appropriate to disapply the usual pari passu principle.

Finally, as a footnote to the discussion above, I would add this. Even if – contrary to my view - the pari passu policy and the basic principle in applying section 127 were to be treated as qualified by what Buckley LJ says at p. 718F-G, in my opinion it would still not be appropriate to make a validation order in this case. The payment of the £30,000 was not made by Edge in the ordinary course of business, because (a) it was made much more quickly than Edge had in practice being paying its bills to the appellant since November 2012; (b) it was even made more quickly than Edge was contractually obliged to pay the £25,160.43 (which was only due on 31 May 2013); and (c) as to the balance of £4,839.57, it was paid more than one month before it was due. Moreover, in these circumstances and in the absence of a full explanation from the appellant of what passed between Barry Jackson and Mr Jones in the conversation leading to Edge’s agreement to pay the £30,000, there are grounds for thinking that the transaction might have involved an attempt to prefer the appellant over other creditors. That impression is not dispelled by the later supply by the appellant of goods worth £13,000, in view of the difference in value between that and the £30,000.

I turn, then, to consider the outcome of this appeal in the light of this discussion. In a short ex tempore judgment DJ Obodai referred to the guidance in the Gray’s Inn Construction case and correctly directed herself that the court must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced and that they should be paid pari passu (paras. [4] and [5]). She considered that the general body of unsecured creditors would be prejudiced if either the £30,000 payment to the appellant or a lesser sum of £25,160.43 (the total amount of the invoices due for payment on 31 May 2013 according to the applicable contract term) were validated; the payment made was not in the ordinary course of business; and “There is insufficient evidence that has been provided to persuade the court that non-production of these goods would have meant the company could not carry on”: para. [4]. She concluded at para. [5], “I am not persuaded that anything has been produced by way of evidence by this applicant sufficient to satisfy the court that discretion should be exercised in its favour.”

Although it can be said that the District Judge’s reasoning mixes up different elements from the judgment of Buckley LJ in the Gray’s Inn Construction case in what is a somewhat unstructured way, in view of the tensions in that judgment I do not think it is altogether surprising that the District Judge did so. On the key points I consider that she was entitled to reach the conclusions she did. She was entitled to find that validation of the £30,000 payment (or, on the appellant’s alternative argument, £25,160.43 of it) would be to the detriment of the general body of unsecured creditors and that it was not established on the evidence that there was any special circumstance of the kind identified in the Gray’s Inn Construction case to indicate that, notwithstanding that validation of the £30,000 would involve a departure from the pari passu principle, the transaction should nonetheless be regarded as having been in the interests of the general body of creditors. In my view, this was a sufficient basis on which the District Judge was entitled to conclude that no validation order should be made.

Also, in so far as it was relevant for the District Judge to apply the statement of Buckley LJ at p. 718F-G (which, for reasons given above, I do not regard as a critical matter), I consider that on the evidence she was entitled to find that the £30,000 payment (or, on the appellant’s alternative argument, £25,160.43 of it) was not a transaction carried out in the ordinary course of Edge’s business and hence did not fall within the scope of that statement. The District Judge was entitled to approach the payment of the £30,000 as a single transaction in relation to which there was more than one indicator that it was not made by Edge in the ordinary course of business.

For these reasons, I agree with HHJ Hodge QC that the District Judge’s decision was a legitimate one, properly open to her to make, and that an appellate court should not interfere with it.

However, if the view were taken that her judgment is too unstructured and ought to be set aside, so that this court should exercise the discretion under section 127 afresh, I would still come to the conclusion that the appeal should be dismissed. That is for the reasons I have explained above. Although the liquidator did not adduce evidence which clearly showed that the general body of Edge’s unsecured creditors derived no overall benefit from the £30,000 payment by Edge being able to receive further supplies from the appellant after 29 May 2013 and continuing to trade in the usual way, the circumstances of the case (by contrast with the Denney case) indicate that this was likely to be the position, particularly in the absence of a clear and persuasive account from the appellant, by Barry Jackson, about his discussion with Mr Jones and an explanation why the transaction was in fact for the benefit of the general body of unsecured creditors.

I agree.

I also agree.