Court declines to order repayment of a preference

Within the two years prior to his bankruptcy, the bankrupt (“F”) had paid £47,000 to his stepdaughter (“W”) for forensic accounting services. The Joint Trustees in bankruptcy had established a preference claim and sought repayment with interest and costs. However, relief may be declined in exceptional circumstances if justice requires (the burden being on the respondent).

W gave evidence that her position had changed since payment such that she no longer had the funds available to her. It had, however, been established that she held equity in her family home in the approximate value of £225,000.

Although it was held that a formal “change of position” defence was not available in this context, the change in position could nevertheless be considered by the court when exercising its discretion.

ICCJ Jones considered the following factors to be of relevance:

  1. W was paid on a commercial basis at arm's length.
  2. She played no part in the transaction other than receiving payment in good faith.
  3. She no longer had the preference payment or realisable assets purchased from it.
  4. She had low income and insufficient means to repay the preference without the sale of her and her teenage children’s family home. Despite the fact that there would be surplus realisations from sale of the home which would cover future years of rental, the impact was viewed by the court as “wholly disproportionate” when compared with the receipt due to the bankruptcy estate.

The court concluded that these factors taken together moved the case well beyond the norm. Justice and fairness required no order for repayment be made.

Even without applying the change of W’s position in exercising its discretion, the court held that W’s financial and personal circumstances activated the rule in ex parte James (requiring all officeholders to act reasonably notwithstanding their strict legal rights) to prevent the relief sought by the trustees.

The court emphasised that the discretion is to be exercised in rare cases. The decision will nevertheless raise some eyebrows among Insolvency Practitioners, who might disagree that the facts of this case are “out of the norm”. 

Re Peter Herbert Fowlds (A Bankrupt) Sub Nom (1) Sean Bucknall (2) Mark Peter George Roach (As Joint Trustees In Bankruptcy Of Peter Herbert Fowlds) V Gina Louise Wilson [2020] EWHC 1200 (CH)

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