High Court rules on 'value' in post bankruptcy petition payments

Out-Law Legal Update | 11 Feb 2021 | 6:32 pm | 3 min. read

The High Court has dismissed an application made by a trustee in bankruptcy which argued that payments made by the bankrupt to companies after the presentation of a bankruptcy petition were void.

The court found that the funds had been received by the companies in good faith, for value and without notice of the bankruptcy petition, and therefore fell within a statutory exception.

This is an important and useful decision, finally giving a reported authority based on which insolvency practitioners can analyse the meaning of "value" when looking to see if payments made after a bankruptcy petition can be overturned for the benefit of creditors.

On 23 March 2013, HM Revenue and Customs (HMRC) presented a bankruptcy petition against Jagdev Singh Wasu. Following the presentation of the petition, Jagdev made payments to Aurora Leasing Ltd (Aurora) and Howard de Walden Estates Ltd (de Walden), and this resulted in the trustee in bankruptcy (the trustee) applying to void the payments under section 284 of the 1986 Insolvency Act (IA 1986).

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The decision finally gives a reported authority based on which insolvency practitioners can analyse the meaning of "value" when looking to see if payments made after a bankruptcy petition can be overturned for the benefit of creditors.

Aurora operated a business that purchased equipment and leased it to customers. The day before the bankruptcy petition was presented, Aurora made an offer to Wasu Medical Centre, a partnership made up of Jagdev's parents which operated as a doctor's surgery and was looking to expand into dental work. The offer sought to finance the purchase of dental equipment. This arrangement was supported by guarantees from Jagdev and his parents. The offer was accepted and, on 26 July 2013, Jagdev made payment of £27,972 for the initial rental of the equipment.

The dental equipment was to be installed at a property let by de Walden to Wasu Property Ltd; a company set up for the proposed dental practice of which Jagdev and his parents were directors and shareholders. In July 2013 and August 2013, Jagdev made three payments totalling £81,006 to de Walden, accounting for the rent arrears of Wasu Property Ltd. The bankruptcy order was made in October 2013.

Section 284 of IA 1986 provides the general rule that any disposal of property or payment made by a bankrupt after the presentation of a bankruptcy petition, and before vesting of the bankrupt's estate in a trustee, is void unless made with the consent of the court.

The court considered section 284(4)(a) IA 1986 which provides an exception to the general rule, and covers any property or payment which a person received before the commencement of the bankruptcy in good faith, for value, and without notice that the bankruptcy petition has been presented.

The trustee argued that Aurora and de Walden fell short of this exception because there was a requirement that "value" must be provided directly to the bankrupt or the bankrupt's estate, rather than being provided to a third party. The court rejected this interpretation and found that the exception contained no explicit qualification on the word "value".

Judge Prentis considered that section 284 balanced the need to "protect the bankruptcy estate, and thereby the creditors of the bankrupt as a whole", and the need to "avoid the consequences if parties could no longer safely deal with a person, honestly and for value, on the chance that a bankruptcy petition had, or was to be, presented".

Accordingly, the statutory exception was "designed to avoid unfairness and promoted certainty in a bankrupt's dealings for value with innocent third parties". The balance was met because the exception also provided "certainty in a trustee's later investigations into the dealings of the bankrupt", and the exception was "strictly limited to its three elements". In this case, Aurora provided the value of dental equipment and de Walden provided value of property letting; both consequences intended by Jagdev when making the payments. Importantly, at the time the payments were received, neither Aurora nor de Walden had knowledge of the bankruptcy petition.

The trustee's application was dismissed.

The case is the first in which the High Court has considered the meaning of "value" in the context of a post bankruptcy petition payment, and is therefore significant. Historically, we have had to rely on the parallels between corporate and personal post petition payments, but there are substantial differences between the two.

When making an application under section 284 IA 1986, trustees in bankruptcy would be advised to pay specific attention to the circumstances in which the bankrupt made payments to third parties. Particular correspondence between the bankrupt and the recipients should be reviewed, as well as any information received by the recipients in the course of the trustee's investigations into the bankrupt's affairs, so as to ascertain whether the statutory exception under section 284(4)(a) may be applicable.