Filling the void—the court’s approach to validation orders (Wilson v SMC Properties Ltd)

Hugh Sims QC and Christopher Brockman, barristers at Guildhall Chambers, say the decision in Wilson v SMC Properties Ltd emphasises that while good faith alone is not enough, it is a powerful factor in favour of the exercise of the court’s discretion to validate an otherwise void disposition.

Original news

Wilson & anor v SMC Properties Ltd and anor [2016] EWHC 444 (Ch), [2016] All ER (D) 246 (Jan)

The Companies Court dismissed the appellant liquidator’s appeal against the registrar’s validation, pursuant to section 127 of the Insolvency Act 1986 (IA 1986), of a contract made between the second appellant company and the first respondent company as purchaser of land. The registrar’s conclusions on the actual value of the property, applying a deduction from the open market value on the assumption that a quick sale was required, had meant that there had been no loss to creditors.

Briefly, what was the background to the appeal?

The case concerned an application for a validation order under IA 1986, s 127 and an appeal from the recent decision of Registrar Briggs (see Wilson and another v SMC Properties Ltd and others [2015] EWHC 870 (Ch), [2015] All ER (D) 115 (Apr)).

IA 1986, s 127 provides that any disposition of a company’s property after the making of a winding-up order is void unless validated by the court. IA 1986, s 129 provides that a winding-up by the court is deemed to commence at the time of the presentation of the petition.

The facts are very straightforward. The company, 375 Live, purchased 58 Hatton Garden, London (the Property) in August 2011 for £1.2m. In 2013 it took a bridging loan from a private lender and granted a mortgage over the Property. Subsequently it struggled to repay the loan, and the mortgagee informed the company that it would enforce its security if the company did not sell the property to repay the loan by its (extended) due date of April 2014. The company had placed the Property on the market in the Autumn of 2013, and received two offers for the Property, the latest being for £1.3m. The latter fell through by 23 January 2014. SMC Properties Limited (SMC) entered into negotiations in February 2015 and purchased the Property for £850,000 on 6 March 2014.

Meanwhile, and before the date of purchase, on 26 February 2014 HMRC presented a winding-up petition. A winding-up order was made on 14 April 2014. SMC had entered into possession of the Property and commenced renovation and repair work on it before being notified by the liquidator of their appointment and that the sale to SMC was being challenged as a void transaction.

The purchaser, SMC, applied to court under IA 1986, s 127 for a retrospective validation order. The liquidator cross-claimed, seeking a declaration that the transaction was void and seeking possession. The liquidator argued that the Property had been sold at an undervalue, put in issue whether the transaction was entered into in good faith and questioned whether SMC had known about the winding-up petition.

What were the legal issues the registrar had to decide?

The major issues before the court at first instance, and the registrar’s conclusions on them, were therefore:

  • Was the director of the purchaser aware of the petition? The registrar found that he was not and that the transaction was negotiated at arm’s length—SMC was therefore a purchaser for value in good faith
  • Was the sale at an undervalue? The registrar concluded it was not on the basis that the market value was in the region of £900,000, and when allowing for the fact that marketing was constrained by the payment deadline for the secured lender and a margin of error, the registrar concluded there was no significant undervalue
  • If it was at an undervalue could it still be validated? The registrar concluded there was no undervalue. The question as to whether it could still be validated if there was an undervalue is discussed further below

The appeal was heard by HHJ Purle QC (sitting as a deputy judge of the High Court). He upheld Registrar Briggs’ decision that the market value of the Property was £900,000, ignoring any special circumstances or assumptions. He also upheld the registrar’s decision to apply a ‘special assumption’, being the threat by secured creditor to take possession and the resultant constrained marketing period. This forced sale scenario reduced the value by a further 10–15%. Accordingly the value of the Property with this special assumption was between £765,000 to £810,000. As SMC had bought the Property for £850,000 it followed that the Property had not been sold at an undervalue. In those circumstances on appeal it was confirmed that the registrar had been correct to make an order retrospectively validating the sale.

To what extent are the judgments helpful in clarifying the law in this area?

Taken together, the judgments provide a helpful clarification of the principles and policy considerations behind IA 1986, s 127 and the way the discretion of the court should be exercised. At first instance and on appeal the eight factors set out in Denney v John Hudson & Co Ltd [1992] BCLC 901 at paras [904]–[905] were cited with approval. The most important in this case were firstly, the need to ensure a pari passu distribution among creditors and secondly to prevent the dissipation of assets, or to put it another way to prevent sales at an undervalue. The decision emphasises that while good faith alone is not enough it is a powerful factor in favour of the exercise of the discretion to validate an otherwise void disposition.

What practical lessons can those advising take away from this case?

It should be borne in mind that this was an application made to validate a one-off transaction which had been completed. The decision does not detract from the usual principle that 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.

In most instances the application to validate is a prospective one, and there is a practice direction applicable to those transactions. The practice direction does not apply to retrospective applications. Accordingly, the case provides a helpful illustration of the modern Companies Court approach to one-off transactions where the application is a retrospective one.

On appeal HHJ Purle QC raised an additional point, that the petition had been advertised in the London Gazette which is accessible electronically. Further, the Companies Court maintains a register of pending petitions so it could have been said that SMC should have known of the petition. This was not argued at first instance, and therefore did not form part of the appeal, but it does raise the question of whether before exchanging contracts to purchase a property from a company appropriate checks should be made to see whether a petition has been presented particularly where it is known that it is in financial difficulty.

Any other points of interest?

As there was no undervalue, the registrar did not need to decide whether he would have made a validation order had the sale been at an undervalue. Nevertheless, the registrar went on to make some observations on this issue. At para [78] he stated:

‘I would have reached the same conclusion if the margin discount is not applied and the Special Assumption disapplied as the balance between the innocent third party (SMC) and the general body of creditors lies in favour of the innocent third party in the circumstances of this case and on the values found (SMC paid 5–6% less than the open market value without any allowances).’

These obiter remarks suggest that, especially where the element of any undervalue is small, the court may be willing to validate a transaction at undervalue, if the transaction has been made in good faith, for value without notice. This is consistent with the provisions applicable in personal bankruptcy, where the legislature has expressly provided under IA 1986, s 284(1)), and that under IA 1986, s 284(4)) there shall be no remedy against any person:

‘(a) in respect of any property or payment which he received before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented’

But the observations of HHJ Purle QC suggest that where the element of undervalue is large the applicant may face more difficulty, even if the transaction was entered into in good faith. In this respect the regime applicable under corporate insolvency may be applied in a manner less forgiving on the third party purchaser. This different policy approach may in part be informed by the advertisement requirements in relation to companies, which is not in personal insolvency.

Hugh Sims QC is recognised by legal directories as a leading barrister across seven practice areas—commercial, professional negligence, insolvency, banking & finance, partnership, chancery and company. He is instructed nationwide in complex and substantial disputes where his advocacy and forensic skills are highly valued. In Wilson v SMC Properties, Hugh was sole counsel for the respondents.

Christopher Brockman practises in all areas of personal and commercial insolvency and has been consistently recommended in legal directories.

Interviewed by Kate Beaumont.

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

Further Reading

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

Can a liquidator or an administrator challenge or unwind transactions entered into by the company before it was wound up or entered into administration?

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First published on LexisPSL Restructuring and Insolvency

 

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