Preferential payments successfully challenged

Posted: 5th September 2018

LiquidationIf you suspect that a company with which you trade is facing insolvency, it is vital to seek professional advice straight away. In a case on point, innocent suppliers of goods and services to a company that subsequently went into compulsory liquidation ended up severely out of pocket.

Between the date on which a petition was presented to wind up the company and the date on which it entered liquidation, it was alleged to have made payments totalling over £200,000 to 43 suppliers. After the liquidators launched proceedings under Section 127 of the Insolvency Act 1986 to recover those sums for the benefit of the company’s creditors, the majority of the suppliers settled the claims against them, but no agreement had been reached in 16 cases.

Those suppliers who responded to the proceedings put forward various grounds of defence, including that payments for goods and services had been received from the company in good faith and in ignorance that the petition had been issued. It was argued that the position of the suppliers had changed since the payments were received and that it would be unfair to require their repayment. The relevant transactions were, in any event, said to have been in the best interests of the company’s creditors.

In upholding the liquidators’ case, however, the High Court noted that none of the suppliers had sought retrospective judicial validation of the transactions. Whether the payments were received in good faith was irrelevant to the operation of Section 127 in rendering the dispositions of the company’s funds void. The same applied to the absence of knowledge of the existence of the petition and none of the other defences relied upon by the suppliers had been made good.

The Court noted that, by Section 127, Parliament had chosen to prefer the interests of the company and its creditors to those of innocent third parties with whom the company had dealt. The Court had no power to ignore that policy decision and, in the circumstances, none of the suppliers had any valid defence to the liquidators’ claims.