Vol 1 (2004) - Issue 2

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Post-Petition Banking Transactions: the Reach of Section 127 of the Insolvency Act 1986

Introduction

Whether or not payments into and out of a bank account constitute dispositions by a company for the purposes of section 127 of the Insolvency Act 1986 has long been a vexed question. Although the issue has been subjected to considerable judicial scrutiny the case law surrounding the provision has lacked coherence. However, the Court of Appeal has recently had the opportunity to revisit the effect of post-petition banking transactions and came down strongly in favour of the banks in relieving them from restitutionary liability.
The effect of section 129 of the Insolvency Act 1986 is to declare that winding up orders operate retrospectively. This has critical importance in relation to dispositions of company property because section 127 of the 1986 Act provides that in a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void. No court order is required because the sanction is applied automatically. Section 127 does not trigger to invalidate a disposition of property where it has no impact on the creditors, as would be the case where, for example, there has been a disposition by a receiver appointed under a charge of the company’s property. But rather, its overall effect is designed to preserve corporate assets for the benefit of the general body of creditors by empowering the liquidator to ‘claw back’ company property which has been transferred by directors after a petition has been presented and liquidation is imminent.
A third party dealing with a company against which a winding-up petition has been brought should apply to the court for a validation order, otherwise he runs the risk that the court will refuse to validate the transaction and he will be ordered to transfer back the property that has passed to him, unless he acquired it as a bona fide purchaser for value without notice. The court’s authorization can be sought in advance by either party to the transaction or proposed transaction. For example, in Re A I Levy (Holdings) Ltd, the court consented to the company’s proposed disposal of a lease prior to the petition hearing, and a clause in the lease which provided for its forfeiture in the event of the company being wound up did not therefore take effect.
The court’s jurisdiction to grant its consent to a disposition of property is, of course, discretionary. Some guidance as to how this discretion will be exercised was provided by Buckley LJ in Re Gray’s Inn Construction Co Ltd. He observed that it was a fundamental concept of insolvency law that the free assets of the company at the commencement of the liquidation should be distributed rateably among the unsecured creditors. Buckley LJ noted, however, that there may be times when it would be beneficial, both to the company and to its unsecured creditors, that the company be permitted to dispose of some of its property after the petition has been presented but before the winding-up order has been made. This would be the case where, for example, the company has the opportunity by acting speedily to sell an asset at an exceptionally good price. However, he stressed that in considering whether to make a validating order the court should ensure that the interests of the unsecured creditors are not prejudiced. He stated that where an application is made in respect of a specific transaction this may be susceptible of positive proof.