Section 127 Insolvency Act and applying for a validation order

A supplier to convenience stores received payments of £162,000 by direct debits from the Company’s bank account after the date of presentation of the winding-up petition

The Company’s liquidators later applied for an order that the payments be repaid as void under Section 127 Insolvency Act.  “In a winding up by the court, any disposition of the company’s property…, made after the commencement of the winding up is, unless the court otherwise orders, void.

The supplier cross applied for an order validating the payments as having been made in the ordinary course of business and for the benefit of the general body of creditors.

The court said it is not sufficient for an applicant for a validation order to show that:

  • the disposition was in the ordinary course of business; and/or
  • the supplier was unaware of the petition; and/or
  • the supplier acted in good faith.

An applicant must demonstrate that the transaction will be or has been beneficial for creditors generally. 

In this case the applicant sought to blame the liquidators for the lack of evidence of the Company’s finances and invited the court to assume there must have been benefit to creditors as the payments enable continued supply of goods that were presumably sold by the Company’s convenience stores at a profit.

However, the court made clear it is for the applicant to show that the circumstances make a validation order appropriate.  In the present case there was no evidence of benefit to creditors or that any trading by the Company was profitable, so the validation order was refused and the supplier ordered to repay the direct debits.

In the matter of MKG Convenience Ltd [2019] EWHC 1383 (Ch)

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