Express Electrical Distributors Ltd v Beavis and Ors
| Jurisdiction | England & Wales |
| Judge | Lord Justice Sales,Lord Justice Patten,The Chancellor |
| Judgment Date | 19 July 2016 |
| Neutral Citation | [2016] EWCA Civ 765 |
| Docket Number | Case No: A2/2014/3439 |
| Court | Court of Appeal (Civil Division) |
[2016] EWCA Civ 765
THE CHANCELLOR OF THE HIGH COURT
Lord Justice Patten
and
Lord Justice Sales
Case No: A2/2014/3439
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION,
MANCHESTER DISTRICT REGISTRY
HIS HONOUR JUDGE HODGE QC
M14C240
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Peter Knox QC (instructed by RHF Solicitors) for the Appellant
The Respondent did not appear and was not represented
Hearing date: 28 th June 2016
Approved Judgment
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 pricepari 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 Facts
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.
Discussion
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...
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