Express Electrical Distributors Ltd v Beavis

The Court of Appeal considered when a validation order should be made under section 127 of the Insolvency Act 1986 for payments made by a company after presentation of a winding up petition. The court reaffirmed that the strong pari passu policy requires special circumstances before a pre-liquidation creditor is allowed to be paid in full at the expense of other unsecured creditors. A retrospective validation will only be appropriate where the disposition has been, or can be shown to have been, for the benefit of the general body of unsecured creditors (for example as part of a transaction that preserves or increases the company’s assets or enables a sale as a going concern).

Applying those principles, the appellant did not discharge the evidential burden: the £30,000 payment related to goods already supplied, there was no convincing explanation why the payment was made early, the payment did not demonstrably secure particularly profitable contracts or a sale as a going concern, and there were indicators it was not in the ordinary course of business and might amount to preferencing. The judge below had therefore been entitled to refuse a validation order and the appeal was dismissed.

Background and parties: Express Electrical Distributors Ltd (the appellant) supplied electrical goods to Edge Electrical Limited. A third party, Mr Cook, presented a winding up petition against Edge on 22 May 2013. Edge paid the appellant £30,000 on 29 May 2013 in respect of goods previously supplied. The appellant sought a validation order under section 127 of the Insolvency Act 1986 to validate that payment so it would not rank pari passu with other unsecured creditors in liquidation.

Procedural history: At first instance District Judge Obodai refused the validation order. The appellant’s appeal to HHJ Hodge QC was dismissed (HHJ Hodge modified the payment destination pending appeal). Permission to appeal to the Court of Appeal was subsequently granted; the liquidators supported the decisions below but did not appear at this hearing for lack of funds.

Issues framed:

• Whether the appellant had knowledge of the winding up petition when it received the £30,000;
• Whether the payment was made in the ordinary course of business and in good faith;
• Whether special circumstances existed showing the payment was for the benefit of the general body of unsecured creditors so as to justify disapplying the pari passu principle and making a validation order under section 127.

Court’s reasoning and analysis: The court reviewed the leading authorities, in particular Buckley LJ’s judgment in In re Gray’s Inn Construction Co. Ltd and Oliver J’s decision in In re J. Leslie Engineers Co. Ltd, and concluded that the governing principle is that, save in exceptional circumstances, validation orders should only be made where the disposition will be or has been for the benefit of the unsecured creditors as a whole. The court rejected any bright‑line rule that good faith in the ordinary course automatically warrants validation. Applying these principles to the facts, the court found on the balance of probabilities that the appellant did not know of the petition prior to 17 June 2013 but that the appellant failed to show that the £30,000 payment conferred a benefit on the general body of unsecured creditors. The payment was largely for goods already delivered, was made earlier than the appellant’s historical practice and contractual terms, and there was no evidence that the payment enabled profitable trading or a sale as a going concern. The absence of an adequate explanation increased the risk that the payment was an attempt at preferencing. The District Judge’s refusal was therefore a legitimate exercise of discretion and, even if the court were to re‑exercise the discretion, it would have reached the same result.

Relief sought: Validation order under section 127 of the Insolvency Act 1986 in respect of a £30,000 payment.

The appeal was dismissed. The Court of Appeal held that, applying the principle that the pari passu policy is strong, a retrospective validation order under section 127 will only be made in exceptional circumstances where the disposition is for the benefit of the general body of unsecured creditors. The appellant failed to show such circumstances or provide sufficient evidence that the £30,000 payment benefited unsecured creditors as a whole; the District Judge’s refusal to grant validation was a legitimate exercise of discretion.

First instance: District Judge Obodai (Chancery Division, Manchester District Registry, M14C240) refused the validation order. Appeal to HHJ Hodge QC (sitting in the High Court) was dismissed, with a modification directing payment to the liquidators' solicitors pending appeal. Permission to appeal to the Court of Appeal was granted (case A2/2014/3439), culminating in the present judgment [2016] EWCA Civ 765.