Debtor payments leading up to the making of a bankruptcy order—Thomas and another v D’Eye and others

Debtor payments leading up to the making of a bankruptcy order—Thomas and another v D’Eye and others

What are the consequences of a money transaction being void under section 284 of the Insolvency Act 1986 (IA 1986), and what relief can the court grant? Joseph Curl, barrister at 9 Stone Buildings, considers the significance of the recent decision in Thomas and another v D’Eye and others.

Original news

Thomas and another v D’Eye and others [2016] Lexis Citation 50, [2016] All ER (D) 66 (May)

The Bankruptcy High Court allowed an application for relief by trustees in the bankruptcy of Dean D’Eye, who had made his living from residential and commercial property and was indebted to around the sum of £2.8m. The court held that money in certain accounts belonged to Dean D’Eye, that a flat which had been purchased out of money from one of the accounts was a bankruptcy asset, and that the transfer of shares in a company controlled by Dean D’Eye had been a sham.

What were the facts?

This case concerned how to treat payments made by a debtor during the period leading up to and after his bankruptcy. Having started off as an antecedent transaction application, it developed in an unexpected way into a claim to void payments.

A statutory demand was served on Dean D’Eye on 11 July 2011. After a drawn out and ultimately unsuccessful application to set aside the demand, a bankruptcy petition was presented on 28 May 2012. A bankruptcy order was made against Dean D’Eye on 31 July 2012. Trustees in bankruptcy were appointed on 23 September 2012. After their appointment, the trustees discovered that on 24 January 2012 (at a time when the application to set aside the statutory demand was on-foot) the bankrupt had transferred £321,919 from a bank account in his own name to a bank account in the name of his father, Derek D’Eye. It was subsequently transferred to, and dissipated from, another bank account in Derek D’Eye’s name.

On the face of it, it looked like the bankrupt had entered into a transaction at an undervalue with Derek D’Eye. The bankrupt, however, explained in his preliminary information questionnaire and two subsequent private examinations before the court that Derek D’Eye was a substantial creditor of the bankrupt and that the transaction had been part-repayment. If true, this would have meant that Derek D’Eye had received a preference.

Proceedings were commenced on the footing that the payment was either a transaction at an undervalue or a preference. Shortly before trial, the trustees discovered that a significant chunk of the £321,919 had been spent on a valuable long leasehold flat on a date that fell in between presentation of the petition and the bankruptcy order. At the commencement of trial before Mr Chief Registrar Baister on 10 November 2015, Derek D’Eye indicated by his counsel that he wished to disavow his evidence. It had been, he said, written for him by the bankrupt and he had no knowledge of any of it.

The trial was adjourned with indemnity costs. Derek D’Eye’s new evidence was to the effect that he had never been a creditor of the bankrupt and—crucially—knew nothing about any of the relevant bank accounts in his name. These accounts, he said, had been opened for and operated by the bankrupt.

In light of this evidence, the trustees completely revised their case. Various third parties who had benefited from the accounts in Derek D’Eye’s name were joined to the proceedings. The trustees now put their case on the footing that:

  • the accounts in Derek D’Eye’s name were beneficially owned by the bankrupt and were thus bankruptcy assets
  • various identifiable parties who had received payments from these accounts had received them from the bankrupt, not Derek D’Eye, and
  • the flat purchased post-petition had, accordingly, been purchased directly by the bankrupt

It was contended by the trustees that payments made post-petition were void pursuant to IA 1986, s 284, while payments made after the estate became vested in the trustees pursuant to IA 1986, s 306 were straightforward misappropriations of bankruptcy assets. The flat, as well as the bank accounts themselves, were assets that the bankrupt had failed to deliver up in contravention of IA 1986, s 291.

What were the issues?

At trial, the factual issues were disposed of in the trustees’ favour. Mr Chief Registrar Baister found that the bankrupt had been dishonest and manipulative and had used Derek D’Eye and others as his stooge. Assertions made by the bankrupt that the money had belonged beneficially not to the bankrupt (and thus not to the estate) but to various third parties were rejected.

The legal issues were focused on the appropriate order to make in respect of the various payments. Firstly, how should void post-petition payments be treated? Mr Chief Registrar Baister noted that IA 1986, s 284 does not spell out the relief that the court can or must grant as a result of a disposition being void. Secondly, it was unclear whether, and if so how, payments made post-petition but pre-bankruptcy should be treated differently from payments made after the estate had vested in a trustee pursuant to IA 1986, s 306.

Although IA 1986 expressly provides that post-petition payments are ‘void’, indicating that no title at all passes to the payee, in cases where a debtor pays electronic money into a mixed account belonging to the payee, it is difficult to see how it can be said that legal title does not pass. The trustees contended that the appropriate remedy was an account for money had and received, which appeared to be in accordance with the decision of HHJ Norris QC (as he then was) in Pettit (trustee in bankruptcy of Steven Anthony Thrussell) v Novakovic [2007] Lexis Citation 2, [2007] All ER (D) 310 (Jan).

The respondents contended (relying on Re Leslie (J) Engineers Co Ltd [1976] 2 All ER 85 and Hollicourt (Contracts) Ltd (in liq) v Bank of Ireland [2001] Ch 555, [2001] 1 All ER 289 , which concerned the similar provision for corporate insolvency contained in IA 1986, s 127) that the remedy for payments within the meaning of IA 1986, s 284 was restitutionary, which meant that the court should look to see whether the ingredients set out in Goff and Jones on Unjust Enrichment were made out. This required the court to ask questions such as whether the payments were within established categories of unjust enrichment, whether the enrichment was unjust, and whether there was a change of position defence. The trustees contended that this was unnecessary, given the comprehensive regime set out in IA 1986, s 284.

What did the judge decide?

Mr Chief Registrar Baister tentatively agreed with the trustees in bankruptcy that IA 1986, s 284 was probably not Goff and Jones territory. This was because IA 1986, s 284 was ‘a particular statutory regime which gives rise to an obligation to account for money had and received to which there are limited defences’. The treatment of payments made post-petition but pre-vesting, and those made post-vesting, was the same—namely an account for money had and received. Indeed, ‘[t]he position after vesting is even simpler. The accounts and the money in them vested in the applicants as trustees, entitling them to an account…and a money judgment given.’

Mr Chief Registrar Baister added that, if the principles in Goff and Jones were applicable contrary to his primary view, then the trustees would nonetheless succeed. This was because it would be wholly unjust to allow any of the respondents to retain the benefits they had received to the detriment of the bankrupt’s creditors:

To do so would be to prefer those persons over the creditors in the bankruptcy…and would defeat the statutory purpose [of pari passu distribution].

No change of position defence was available because there was simply a continuation of the status quo ante, as opposed to any change in conduct, and in any event the relevant respondent had been on notice of the bankruptcy and could not be heard to say that she received the payments in good faith.

Money judgments were entered in respect of the various payments. Notably, the flat (which had been purchased post-petition but pre-bankruptcy using funds from one of the accounts in the name of Derek D’Eye that was controlled by the bankrupt) was vested outright in the trustees and a possession order made.

How does this clarify the law in this area?

This decision is useful because it spells out in clear terms that:

  • the remedy for payments that are void pursuant to IA 1986, s 284 is an account for money had and received
  • the position is the same in respect of payments that are void pursuant to IA 1986, s 284 and payments made post-vesting pursuant to IA 1986, s 306, and
  • where an asset (such as the flat in this case) is purchased with a payment that is void pursuant to IA 1986, s 284, then that asset may simply be declared to be part of the bankruptcy estate

Joseph Curl specialises in commercial Chancery, with the emphasis on insolvency. He also practises in the areas of banking and financial services, civil fraud, mortgages and real property. He is ranked as a leading junior in both the major legal directories. Joseph appeared for Dean D’Eye’s trustees in bankruptcy in this case.

Interviewed by Stephen Leslie.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

Restrictions on dispositions of property once a winding-up or bankruptcy petition has been presented

Application notice in Form 7.1A seeking a declaration that a transaction is void under section 284 of the Insolvency Act 1986

Witness statement in support of an application seeking a declaration that a transaction is void under section 284 of the Insolvency Act 1986

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.