Claims settlement disposed of company property

Insolvency Bitesize 2017

Section 127 of the Insolvency Act 1986 renders automatically void any “disposition” of company property which is made after the presentation of a winding-up petition. The idea is to preserve the insolvency estate for the benefit of creditors. Common examples of dispositions might include a transfer of assets or payments made to key suppliers or even employees. A recent case shows, however, that the provisions can apply more widely.

The High Court considered that the provisions could capture a company’s compromise of claims it may have against a third party. On the facts, the court found that there had been no compromise of certain claims against a former director. But, had there been, it would have fallen foul of s127 because a disposition can include the release of a debt or a promise not to sue on it. That fell within the mischief to be caught by the section. Whether a debt is settled, transferred or released, the company has reduced its assets available to pay its debts.

In line with other recent decisions, including of the Supreme Court, the High Court did not consider it necessary to constrain the scope of s127 by an overly formalistic approach to the term “disposition”. The decision indicates that for s127 to apply:

  • there must be some identifiable property;
  • there must be an act having legal consequences – this would exclude the mere passing of time; and
  • as a result of that act, the property must cease to be in the ownership of the company, such that it is no longer available to the liquidator; but
  • there need not be another person whom it can be said has become owner of the property;
  • it is enough if the value of the property accrues to another person – this would exclude where the company has consumed or wasted an asset.

It is possible to apply for validation of a disposition – on a retrospective or prospective basis. The High Court also usefully confirmed that it may use hindsight to determine whether the relevant disposition benefitted the company’s creditors generally.