Section 127 of the Insolvency Act 1986 provides that in a winding up by the court any disposition of the company’s property made after the commencement of the winding up is void, unless the court otherwise orders. The section was enacted to prevent directors of a company that is about to go into liquidation from dissipating the company’s assets and to preserve them to be distributed among its creditors. Cases decided to date suggest that the section will bite if full value was provided for an asset after a petition is presented in circumstances where the directors pay one of many creditors in full, or if a property is sold at a substantial undervalue to distribute equally between creditors in the same class.
In Wilson (as liquidator of 375 Live Ltd) v SMC Properties Ltd [2015] EWHC 870 (Ch); [2015] PLSCS 119, the court was asked to validate a sale by a company that had sold a property to a buyer who agreed to pay £850,000 for it and was prepared to complete quickly. Previous offers for the property, in the sums of £1.3m and £1.1m respectively, had came to nothing and the seller was under pressure from a creditor holding a fixed charge over the property. The loan expired in April 2014 and the creditor was threatening to sell the property as mortgagee in possession to repay the debt.
The company exchanged contracts to sell the property to the buyer on 6 March 2014, completed the sale on 4 April 2014, and went into liquidation soon afterwards. However, because the disposition was made after the presentation of a winding up petition on 26 February 2014, the transfer was void.
In the case of companies, there is no official machinery, as there is in the case of the bankruptcy of an individual, for notification to all persons for all purposes of liquidation proceedings that are pending against companies, and the buyer stated that it had not been aware that there was a winding up petition hanging over the seller before exchange of contracts or completion of the acquisition.
The judge noted that the winding up petition was not advertised until 3 April 2014. He accepted that the buyer did not know about the petition before completion of the transaction and that the transaction was made in good faith. The company believed that the price was the best that was obtainable in the circumstances and the buyer believed that the purchase price reflected the full, or near full, value of the property. The transaction was made at arm’s length. It did not favour a pre-liquidation creditor and there had been no – or no significant – loss to creditors.
The buyer had paid no more than 5-6% less than the open market value of the property and this took no account of the fact that the property had had to be sold quickly. If the fixed charge holder had sold the property, the evidence suggested that it would not have realised more than £850,000. In fact, it may have had to sell for less. Therefore, having weighed the interests of the creditors in general against the transaction under scrutiny, the judge decided to exercise his discretion and to validate the transaction.
The case reminds us that searching at Companies House and telephoning the Companies Court (which is based in London, but maintains a central index of winding-up petitions against companies in England and Wales) to check a company’s status before completing a transaction might not be a bad idea.
Allyson Colby is a property law consultant
