James Court Ltd ((in Liquidation)) v Hindsight Contractors Ltd
| Jurisdiction | England & Wales |
| Judge | Bond |
| Judgment Date | 09 May 2023 |
| Neutral Citation | [2023] EWHC 1101 (Ch) |
| Docket Number | Case No. CR-2019-LDS-000129 |
| Court | Chancery Division |
[2023] EWHC 1101 (Ch)
DISTRICT JUDGE Bond
Case No. CR-2019-LDS-000129
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
IN LEEDS INSOLVENCY AND COMPANIES LIST (ChD)
Leeds Combined Court Centre
The Courthouse, 1 Oxford Row, Leeds LS1 3BG
Miss Jessica Powers instructed by Weightmans LLP for the Applicant
Mr Nicholas Towers instructed by Axiom DWFM for the Respondent
Hearing date: 6 December 2022
Approved Judgment
I direct that pursuant to CPR rule 39.9(1) no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
DISTRICT JUDGE Bond
Introduction
By this application James Court Limited (‘JCL’), acting by its liquidator, Mr Kevin Roy Mawer, seeks a declaration that two payments totalling £37,000 made by JCL to Hindsight Contractors Limited (‘HCL’) are void pursuant to section 127 of the Insolvency Act 1986 and an order for payment accordingly.
Section 127(1) provides:
“In a winding up by the court, any disposition of the company's property […] made after the commencement of the winding up is, unless the court otherwise orders, void.”
By section 129(2) the commencement of the winding up is deemed to be the time of the presentation of the winding-up petition.
Background
At all material times Mr Paul Fava was the sole director and shareholder of JCL and HCL. JCL was a property investment company. HCL is an accountancy practice.
HCL subcontracts payroll services for its clients to Proactive Payroll Services (‘PPL’). The sole director and shareholder of PPL is Ms Nicola Lawson, a long-standing business associate of Mr Fava's.
On 21 December 2018 Think Accounting Limited (in liquidation) (‘TAL’) acting by its liquidator, who is also Mr Mawer, served a statutory demand on JCL. On 8 January 2019 Mr Mawer wrote to Mr Fava, as the sole director of JCL, to reconfirm that a statutory demand had been served on JCL and to draw attention to its expiry on 14 January 2019. Mr Fava was aware of the statutory demand at this time.
On 30 January 2019 TAL presented a creditor's petition for the winding-up of JCL. On 11 February 2019 the petition was served on JCL.
On 12 and 13 February 2019 JCL paid £23,000 and £14,000 respectively to HCL. Mr Fava was aware that JCL had been served with a winding-up petition at the time he caused JCL to make the payments but states that he did not understand the significance of the petition or how it would affect the payments.
Mr Fava's account of the circumstances surrounding the payments is essentially this:
(a) over the years there have been several inter-company loans between JCL, PPL and HCL;
(b) as at 1 February 2019 JCL owed PPL £30,766 and JCL owed HCL £8,000;
(c) HCL had been the victim of a banking scam resulting in £120,000 being stolen from its bank account (most of which has now been recovered save for £38,000);
(d) at the start of 2019 HCL was suffering cash flow difficulties as a result;
(e) Mr Fava proposed that JCL should lend £30,000 to HCL to assist it through its difficulties;
(f) Mr Fava agreed with Ms Lawson that:
“a. PPL could agree to a reduction in any debt owed by JCL;
b. JCL could agree to a reduction in any debt owed by HCL;
c. This could put into effect by HCL accepting repayment of the debt due to PPL by reducing the net amounts paid to HCL by PPL.”
(see the first witness statement of Paul Fava dated 16 July 2021, paragraph 15);
(g) this arrangement was documented in counter-signed a letter dated 28 January 2019;
(h) on 1 February 2019 HCL and JCL entered into a loan agreement;
(i) the first of the payments made to HCL on 12 February 2019 of £23,000 comprised (i) repayment of the £8,000 owed by JCL to HCL and (ii) a draw down under the loan agreement of £15,000;
(j) the second payment to HCL of £14,000 on 13 February 2019 was a further draw down under the loan agreement;
(k) as at that date HCL owed £29,000 to JCL and JCL owed £30,766 to PPL.
(HCL now accepts, by reference to evidence given by Ms Lawson in these proceedings, that the debt due from JCL to PPL at that time was in fact £26,500.)
On 25 February 2019 the winding-up petition was gazetted.
On 9 April 2019 a winding-up order was made against JCL on that petition. It is common ground that upon the making of the winding-up order the payments made by JCL to HCL were made void by section 127.
On 9 May 2019 Mr Mawer was appointed liquidator of JCL.
On 13 September 2019 JCL, acting by its liquidator Mr Mawer, presented a bankruptcy petition against Mr Fava. On 17 March 2020 Mr Fava was declared bankrupt on that petition. On 29 April 2020 Mr Mawer was appointed as his trustee in bankruptcy.
Shortly prior to the bankruptcy order being made, on 14 March 2020 Mr Fava resigned as a director of HCL. The current directors of HCL are Mr Fava's father, Anthony Fava, who has been a director since incorporation, and Ian Shepherd, who was appointed on 15 June 2020.
In the meantime, on 30 September 2019, 31 December 2019 and 30 March 2020, Ms Lawson, who had access to HCL's bank account, caused HCL to pay £30,000 in three instalments of £10,000 to PPL, which was set off against JCL's indebtedness of £26,500 to PPL and discharged HCL's indebtedness to JCL.
On 19 July 2021 HCL made an application for a validation order in respect of the payments made by JCL to HCL on 12 and 13 February 2019 totalling £37,000. That application came before HHJ Kelly sitting as a judge of the High Court. On 27 August 2021 HHJ Kelly dismissed the application.
On 27 June 2022 JCL issued its application seeking restitution. HCL relies on the equitable defence of change of position in response. Since it is common ground that the payments were made and that they are void, JCL has established a right to restitution subject to HCL's change of position defence.
The issues
In the context of a claim for restitution of payments made void by section 127, the circumstances in which a change of position defence can succeed are constrained in the same way as the exercise of the court's discretion to validate the payments. I will come to the authorities which establish that shortly.
HCL accepts that of the £37,000 received from JCL, £10,500 is repayable. This comprises the £8,000 paid by JCL to HCL in discharge of the existing indebtedness and £2,500, being that part of the remaining £29,000 which exceeds the £26,500 indebtedness from JCL to PPL that was discharged under the tripartite arrangement relied upon. I have already ordered that sum to be repaid. The remaining dispute is over the balance of £26,500.
In those circumstances the following issues arise:
(a) Is HCL estopped by the decision of HHJ Kelly from contending that the payments are capable of validation?
(b) Is it an abuse of process for HCL to contend that the payments are capable of validation?
(c) If HCL is entitled to contend that the payments are capable of validation has it established its defence of change of position on the facts?
The law on void dispositions under section 127
The nature of the claim made by JCL against HCL is restitutionary: Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch. 555 at [22]; Ahmed v Ingram [2018] EWCA Civ 519, [2018] B.P.I.R. 535 at [33]. In a case involving the payment of money the particular form of claim is in unjust enrichment, being the modern equivalent (for these purposes) of the old form of action for money had and received: Officeserve Technologies Ltd v Annabel's (Berkeley Square) Ltd [2018] EWHC 2168 (Ch), [2019] Ch. 103 at [32].
The defence of change of position is in principle available to the respondent to such a claim. Although it has not been without controversy, that is the established position: Rose v AIB Group (UK) plc [2003] EWHC 1737 (Ch), [2003] 1 W.L.R. 2791 at [41]–[42]; Clark v Meerson [2018] EWHC 142 (Ch), [2018] B.P.I.R. 661 at [47]; Re D'Eye [2016] B.P.I.R. 883 at [55]; Officeserve (supra) at [41]; Re MKG Convenience Ltd [2019] EWHC 1383 (Ch), [2019] B.P.I.R. 1063 at [62]–[69]; Re Changtel Solutions UK Limited [2022] EWHC 694 (Ch), [2022] B.P.I.R. 926 at [106]–[154].
In MKG Convenience at [69] HHJ Cooke considered the rationale for the defence and its particular applicability in the insolvency context:
“67. In my view, the resolution is to be found by stepping back and considering the reason why change of position is recognised as a defence to restitutionary claims at all, which is that in the circumstances in which the defence is held to be made out, the court necessarily finds that it would be inequitable to allow the claim to restitution to proceed (see per Lord Goff in Lipkin Gorman v Karpnale [1991] 2 AC 548 at 577–80, including the following: “… why do we feel that it would be unjust to allow restitution in cases such as these? The answer must be that, where an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution”).
“68. In other words, the strength of the equitable claim of the person seeking restitution is not such as to make it unconscionable for the defendant to retain the benefit he has received. A balance is being struck between the equities in favour of the claimant and those in favour of the defendant. In striking that balance, the court is bound to have regard to the nature of the equitable claim being asserted, and in the context of a claim being made to give effect to the legislative policy to preserve and where necessary return assets for the benefit of creditors in insolvency that requires the court to recognise the strength...
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Reported Case On A Successful Application By A Liquidator For Restitution Under Section 127 Of The Insolvency Act 1986 ' Change Of Position Defence Rejected
...get another bite at the cherry. You can find the full judgment here. - James Court Ltd (In Liquidation) v Hindsight Contractors Ltd [2023] EWHC 1101 (Ch) (09 May The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought abou......