Making the case for validation orders

Making the case for validation orders

Does the Court of Appeal’s recent decision in Express Electrical Distributors v Beavis clarify the issue of validation orders under the Insolvency Act 1986 (IA 1986)? James Davies, a barrister at 3PB who specialises in commercial and insolvency matters, considers the implications of the judgment.

Original news

Express Electrical Distributors Ltd v Beavis and others [2016] EWCA Civ 765, [2016] All ER (D) 118 (Jul)

The Court of Appeal, Civil Division, held that a validation order in respect of a payment made to a creditor after a winding-up petition had been made should only be made in relation to dispositions occurring after presentation of winding-up petition if there was some special circumstances that showed that the disposition in question would be, in a prospective application case, or had been, in a retrospective application case, for the benefit of the general body of unsecured creditors, such that it was appropriate to disapply the usual pari passu principle.

What was the background to the appeal?

The appellant (Express) was a wholesaler of electrical goods. Its customers included Edge Electrical Limited (Edge) from 2011. The relevant time line was as follows:

  • April 2013—Edge was not paying according to the Express’s standard terms
  • 17 May 2013—Express put Edge’s account on hold
  • 22 May 2013—another creditor of Edge presented a winding-up petition
  • 29 May 2013—Edge paid £30,000 to Express, representing all the invoices which had fallen due and something towards invoices falling due in June (the hold on Edge’s account allowing further goods to be supplied)
  • 17 June 2013—Express became aware of the winding-up petition
  • 15 July 2013—commencement of the winding-up, ie winding-up order made

The liquidators demanded repayment of the £30,000, relying on IA 1986, s 127. This provides any disposition of company property after presentation of the petition is void unless the court orders otherwise. Express made an application for a validation order under IA 1986, s 127 to displace that default position. The

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