Fowlds (A Bankrupt), Re

Where the requirements for a preference under Insolvency Act 1986, section 340 are established, restoration is the norm, reflecting the statutory policy of equal distribution. The court nevertheless has a wide judicial discretion to make no order where the case is out of the norm and restoration would be unjust.

Relevant factors may include a genuinely commercial and arm’s-length transaction, the recipient’s good faith, the absence of available proceeds or substituted assets, a good-faith change of position, and wholly disproportionate consequences of repayment. A change of position is not a freestanding defence to the statutory claim, but may inform the discretionary remedy. The discretion is exceptional and fact-sensitive.

The joint trustees in bankruptcy of Peter Herbert Fowlds applied under section 340 of the Insolvency Act 1986 to recover a payment of £47,675.51 made by Mr Fowlds to his stepdaughter, Gina Wilson, on 4 September 2014.

The parties agreed that Ms Wilson was an associate, a creditor, and had received a better position than she would have obtained in the bankruptcy. The issues were whether Mr Fowlds was insolvent, whether the statutory presumption of a desire to prefer had been rebutted, and whether the court should decline relief because the case was out of the norm. Ms Wilson also relied on evidence that she had used the payment in good faith and no longer had access to it.

1. Preference established. The payment was made while Mr Fowlds was cash-flow and balance-sheet insolvent. The statutory presumption that he was influenced by a desire to produce a preference was not rebutted. His sale of assets and payment of other creditors, while leaving the judgment creditor unpaid, supported the inference of a desire to prefer. The fact that Ms Wilson was paid only part of her debt did not prevent the inference.
2. Discretion under section 340. Section 340(2) conferred a wide, judicial discretion to make such order as the court thought fit, including no order or an order less than full restitution. The starting point remained restoration, because the statutory scheme sought equal distribution among creditors. Refusal of relief required an unusual, out-of-the-norm case.
3. Relevant factors. The payment arose from a genuine commercial relationship and was not made because Ms Wilson was a stepdaughter. She acted in good faith and had no notice that the payment might be voidable. The payment and its proceeds were no longer available to her. Those circumstances formed an important foundation for the exercise of the discretion.
4. A change of position was not a freestanding defence because sections 340–342 contained no such defence. However, evidence analogous to change of position could be considered when deciding whether restoration would be inequitable. The court could also consider the disproportionate consequences of repayment, including the likely sale of Ms Wilson’s family home and the impact on her children and business, while avoiding an unstructured balancing exercise between all affected interests.
5. The combination of the commercial nature of the transaction, good faith, absence of available proceeds, and either the good-faith change of position or the wholly disproportionate consequences of repayment made this a rare case outside the norm. Restoration would be unjust. The application to recover the payment was dismissed, and an adjournment for further investigation of the change-of-position evidence was refused.
6. The court stated that, if necessary, the same conclusion would follow under the principle in Re Condon Ex p James, since it would be improper for the court to exercise its legal rights so as to require restitution in these circumstances.