Touchstone Retail Ltd v Grabal Alok (UK) Ltd & Ors

Under Insolvency Act 1986, s 127, every post-petition disposition of company property is void unless validated, whether or not it benefits the company. A payment from a mixed company account to discharge an unsecured contractual debt is a disposition, even where the supplier retained title to the goods sold.

Retrospective validation requires special or exceptional circumstances showing that the transaction benefited the general body of unsecured creditors. The court must protect the pari passu principle and assess the transaction, rather than the underlying sale, in its commercial and insolvency context. A change-of-position defence requires proof of a qualifying change, causation and resulting inequity; consciously continuing an existing commercial arrangement is insufficient.

Touchstone supplied jewellery and other goods to Grabal Alok (UK) Ltd under a concession agreement. The company sold the goods through its stores, retained a contractual share of the proceeds and paid the balance to Touchstone under invoices.

After HM Revenue and Customs presented a winding-up petition, the company made several payments to Touchstone. It was later compulsorily wound up. The liquidators sought repayment on the basis that the payments were void under s 127 of the Insolvency Act 1986. Touchstone sought retrospective validation and, alternatively, relied on change of position.

The issues were whether the payments were dispositions of company property, whether special circumstances justified validation, and whether repayment would be inequitable.

1. Disposition. The court held that the goods remained Touchstone’s property until sale, so the sales themselves were not dispositions of company property. Once the sale proceeds were paid into the company’s account, however, they became company property. Payment from that mixed fund to Touchstone was therefore a disposition within s 127 of the Insolvency Act 1986 and was void unless validated.
2. Validation. The applicant bore the burden of showing special or exceptional circumstances. The controlling consideration was whether validation would benefit the general body of unsecured creditors sufficiently to justify departure from the pari passu principle. The court applied the approach in Denney v John Hudson & Company Ltd and Express Electrical Distributors Ltd v Beavis, including the need to protect unsecured creditors and balance the speculative benefits of continued trading.
3. The agreement created no trust, agency or fiduciary relationship. The proceeds were not ring-fenced and Touchstone was an unsecured creditor. The payments preferred Touchstone over other creditors, including the Crown. Any benefit from Touchstone’s continued supply was outweighed by the company’s substantial post-petition losses. No special circumstances justified retrospective validation.
4. Change of position. The court considered the four principles stated in Philip Collins Ltd v Davis: the defendant bears the evidential burden; the change must be more than ordinary expenditure; it must be causally linked to the payment; and recovery must be unjust to the extent claimed. Touchstone had consciously maintained the arrangement and used the prospect of withdrawing stock to secure payment. That was a commercial decision, not a qualifying change of position, and the causal and inequity requirements were not established.
5. The application failed. The post-petition payments were not validated.