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Validation of dispositions of property made after the winding up petition

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24/04/2015

Pursuant to section 127(1) Insolvency Act 1986, if a winding up petition is made to court, any disposition of the company’s property, transfer of shares or alteration in the status of the company’s members is void, if not validated by the court.

In Wilson v SMC Properties Ltd [1], the purchaser of a commercial property from a company that had subsequently gone into liquidation was seeking a validation order. The company had decided to sell the property in November 2013 and a winding up petition was presented in February 2014. The property was sold in March and the winding up order made in April.

The liquidator argued that the transaction had been made at an undervalue and should be declared void.

In granting the application for the validation order, the High Court held that the policy behind section 127 was to prevent and remedy breaches of the principle that the insolvent’s estate should be distributed rateably among creditors of the same class. It prevented a disposition of the company’s assets to the prejudice of its creditors and prevented improper alienation by making every post-petition transaction void. In general, the court would not grant a validation order which ran contrary to this policy, save where the company’s assets were swollen as a result or the case demonstrated salvage.

A disposition made in good faith in the ordinary course of business at a time when the parties were unaware that a winding up petition had been presented, normally will be validated unless there are grounds for supposing that the payment was intended to prefer the recipient above other unsecured creditors. However, a transaction which significantly depleted the company’s assets to the detriment of the general body of creditors would be unlikely to be made in good faith.

On the facts of the case, the court found that the purchaser had not known of the presentation of the winding up petition when agreeing to make the purchase. The transaction had been made in good faith and at arm’s length within the context of a pressing secured creditor who would have taken possession and sold the property as a mortgagee in possession if not paid.

The court considered whether the sale had been made at an undervalue. It considered that the appropriate basis for valuation was the investment basis rather than an owner-occupation basis. Capitalising the rent and deducting the costs of purchase and refurbishment, the appropriate value at the date of transaction was £900,000. The purchaser had paid £850,000. Account being taken of the margin of error, the general body of creditors had therefore not suffered significantly, if at all, as a result of the transaction. Accordingly, it was appropriate to order validation of the transaction.

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[1] [2015] EWHC 870 (Ch)