Express Electrical Distributors Ltd v Beavis
Corporate insolvency – validation orders – supply of goods – pari passu principle – s. 127 Insolvency Act 1986.
The appellant, Express Electrical Distributors Ltd, supplied goods to the company. Between presentation of a winding up petition and its advertisement, on 29 May 2013 the company paid the appellant £30,000 of which £25,160 was due on 31 May 2013 and the balance was not due until the end of June 2013. The company entered insolvent liquidation and the appellant sought a retrospective validation order under section 127 of the Insolvency Act 1986. The company’s liquidators succeeded at first instance in opposing the order.
The appellant relied on Buckley LJ’s dictum in Re Gray’s Inn Construction Ltd [1980] 1 WLR 711 at p718F-G 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 may normally be validated by the court.
The Court of Appeal disagreed. Whether the application for a validation order was made prospectively or retrospectively, the true position is that, save in exceptional circumstances, a validation order should only be made if there was some special circumstance which shows that the disposition will be or has been for the benefit of the general body of unsecured creditors.
The court accepted that the appellant was not aware of the presentation of the petition at the time of payment. However, there was no evidence to suggest that the company’s creditors derived any benefit from the payment, even though the appellant supplied further goods. It seemed that the company simply wished to carry on trading as usual for as long as possible. The appellant had supplied the goods on credit prior to the presentation of the petition. It would infringe the pari passu principle for a validation order to be made.
Even if Buckley LJ’s dictum was correct, a validation order would not have been appropriate. The company had paid the £30,000 earlier than it normally did as regards even the £25,160 and more than a month earlier than normal as regards the balance. In the absence of a clear explanation from the appellant as to the circumstances of that payment, the possibility of preference could not be ruled out.
The governing principle for validation orders is maintenance of the pari passu principle. Applicants will normally need to adduce evidence of benefit to the general body of creditors and liquidators should consider adducing evidence that no or little benefit was received, if that is the case, though as in this case the circumstances may indicate that sufficiently without such evidence being produced.