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This case considered the ability of a party to successfully defend a restitution claim where the Court has already refused to validate a payment to it which falls foul of Section 127 of the Insolvency Act 1986.
Facts:
This case involved an application brought by James Court Ltd (In Liquidation) (“JCL“) which sought restitution in relation to two payments totalling £37,000 made to a connected company, Hindsight Contractors Limited (“HCL“), which were void pursuant to section 127 of the Insolvency Act 1986.
On 12 and 13 February 2019, JCL paid £23,000 and £14,000 respectively to HCL (“the Payments“). The director of HCL was aware that JCL had been served with a winding-up petition when the Payments were received. However, he claimed not understand how significant the petition was and how this would impact the Payments.
On 9 April 2019, a winding up order was made against JCL.
On 19 July 2021, HCL made an application for an order validating the Payments. On 27 August 2021 the application was refused.
On 27 June 2022, JCL made an application seeking restitution in relation to the Payments. In its defence of the application, HCL relied on the equitable defence of change of position.
Issues:
The starting point for the hearing on 9 May 2023 was that JCL was entitled to restitution subject to HCL’s change of position defence. Given the circumstances, in particular the preceding validation application, the Court considered three issues:
- Whether an issue estoppel had arisen;
- Whether HCL’s defence was an abuse of process; and
- The merits of the change of position defence.
For a change of position defence to succeed HCL needed to show that:
a) HCL’s change in position had occurred in good faith.
b) HCL would suffer an injustice if asked to repay.
c) A validation order would be made.
d) The injustice caused to HCL of restitution being ordered outweighed the injustice of denying JCL restitution.
Decision:
1. Issue estoppel
The Judge held that there was an apparent issue estoppel because of Court’s decision on the 2021 validation order application. There were no extraordinary circumstances in this matter which would suggest that the estoppel bar should not apply. Therefore, HCL was estopped from asserting that the Payments were capable of being validated.
This fact, in itself, was sufficient for the Court to order restitution. However, the Judge went on to make obiter comments in relation to issue 2 and 3.
2. Abuse of process
The Judge highlighted that the Court had been asked to consider precisely the same issue in the two sets of proceedings and that this was unfair to JCL. It was considered unjust that HCL had included “fresh evidence” within the second set of proceedings which should have been presented in the first.
The judge went on to state that HCL’s defence of the second set of proceedings itself was an “attack on the decision” of the previous Judge; that allowing HCL’s defence would bring the administration of justice into disrepute; and that it was “mere window dressing” to suggest that separate issues were now being considered.
3. Merits of HCL’s defence
The judge finalised her position by commenting that none of the requirements of the change of position defence had been made out. Even if there had been a genuine change of position, this would need to be weighed against the injustice to JCL’s creditors of allowing the defence to succeed.
Takeaway:
This case serves as a general reminder that the Court requires that all relevant evidence relating to an issue should be fully presented at the earliest opportunity. The Court will not allow parties a “second bite of the cherry” and it is not in the interests of justice being seen to be done for this to be allowed. In the context of Section 127, the decision is also helpful in clarifying that the issues to be considered in relation to an application for a validation order are the same as those to be considered in relation to an application for restitution.
Should you wish to discuss any of the issues raised in this article, please contact Sacha Pickering.
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