James Court Limited (in liquidation) v Hindsight Contractors Limited

Payments made after presentation of a winding-up petition are void under Insolvency Act 1986, subject to validation. Where restitution is sought and the recipient relies on change of position, the defence is constrained by the same principles as validation under section 127.

The recipient must establish a good-faith change of position referable to the void payment, injustice if required to repay, circumstances capable of justifying validation, and a balance of injustice favouring the recipient. A prior refusal of validation may create issue estoppel where the same essential issue was decided. Fresh evidence does not avoid the estoppel unless special circumstances exist. The defence failed and judgment was entered for the liquidator.

JCL, acting through its liquidator, sought restitution of two payments totalling £37,000 made to HCL after presentation of a winding-up petition against JCL. The payments were void under section 127 of the Insolvency Act 1986. HCL accepted that £10,500 was repayable but relied on change of position for the balance, alleging that it had paid sums to PPL under a tripartite arrangement.

HCL had previously applied for a validation order. HHJ Kelly dismissed that application on 27 August 2021 after finding that HCL had not established the alleged loan agreement or the asserted connection between the payments and the sums later paid to PPL. The issues were whether HCL was estopped from contending that the payments were capable of validation, whether reliance on change of position was an abuse of process, and whether the defence succeeded on the evidence.

1. Disposition. The change of position defence failed. Judgment was entered for JCL for the remaining £26,500, in addition to the £10,500 already ordered to be repaid.
2. Applicable defence. In this statutory context HCL had to show: a good-faith change of position referable to the void payment; injustice if repayment were ordered; circumstances in which a validation order would be made; and that the injustice to HCL outweighed the injustice of denying restitution. Save in exceptional circumstances, validation required a special circumstance showing benefit to the general body of unsecured creditors.
3. Issue estoppel. HHJ Kelly’s finding that HCL had not established the loan agreement or the asserted payments to PPL determined an essential issue. It was immaterial that the earlier application and the present claim had different causes of action, or that HHJ Kelly had not reached the hypothetical question whether validation would otherwise have been appropriate. No special circumstances justified reopening the factual issue. The additional evidence could have been adduced earlier and did not fundamentally change the case.
4. Abuse of process. The court expressed the preliminary view that, absent issue estoppel, relitigating the same validation issue between the same parties with evidence that could and should have been deployed earlier would be manifestly unfair and would risk bringing the administration of justice into disrepute.
5. Merits. HCL’s payments to PPL were made with knowledge of JCL’s liquidation and preferred PPL over the general body of creditors. HCL had chosen to pay a third party rather than JCL’s liquidator. That conduct was not a good-faith change of position and did not make repayment unjust or unconscionable. The pari passu principle meant that apparent balance-sheet neutrality did not remove the statutory prejudice to JCL’s creditors.
6. JCL had not cross-examined HCL’s witnesses. The court therefore did not disbelieve them, but considered whether HCL had established its defence even on the assumption that the essential thrust of its evidence was correct. It had not.

First-instance decision. The judgment records that HHJ Kelly dismissed HCL’s earlier validation-order application on 27 August 2021.