Changtel Solutions UK Ltd, Re

Factual and Procedural Background

On 22 January 2021, Company A and its liquidators (together, the Applicants) issued an application against sixteen respondents seeking to recover sums allegedly paid by Company A to these respondents between the presentation of a winding up petition on 7 June 2013 and the making of a winding up order on 28 January 2015. This judgment concerns five payments totalling £47,053.28 made by Company A to the eighth respondent, Company B, during this period. The Applicants contend that these payments are void under section 127 of the Insolvency Act 1986 and seek repayment with interest.

Company B opposes the application, arguing that the claim is time-barred under the Limitation Act 1980, that the first payment was made before the petition presentation, that the court should validate the payments, and that it has a defence based on change of position. The Applicants respond that the claim is within the limitation period, that the first payment was debited post-petition presentation and is therefore void, that no validation application has been made and validation would not benefit creditors, and that the change of position defence is unavailable or unproven.

The background includes a first winding up petition presented by HMRC on 18 April 2013, which was struck out on 6 June 2013. A subsequent petition was presented on 7 June 2013, struck out in March 2014, but later reinstated on appeal with a winding up order made on 28 January 2015. During the period between the petition presentation and the winding up order, the payments in question were debited from Company A's bank account.

Legal Issues Presented

1. Whether the Applicants' claim to recover the payments is time-barred under section 9 of the Limitation Act 1980.
2. Whether the first payment, made by cheque before petition presentation but debited after, is caught by section 127 of the Insolvency Act 1986.
3. Whether the payments should be validated by the court under section 127.
4. Whether the defence of change of position is available and established in the context of section 127 claims.

Arguments of the Parties

Applicants' Arguments

• The claim is not time-barred as the cause of action accrued on the making of the winding up order, less than six years before the application.
• The first payment is void under section 127 because the company's bank account was debited after the petition presentation, despite the cheque being signed earlier.
• No application for validation has been made by the Respondent; validation would not benefit creditors and no special grounds exist to override the pari passu principle.
• The change of position defence is not available in a section 127 context, or alternatively, the Respondent has failed to discharge the burden of proof for it.

Respondent's Arguments

• The claim is time-barred because the cause of action accrued at the date of the payments, which were made more than six years before the application.
• The first payment was made before the petition presentation as the disposition occurred on delivery of the cheque.
• The court should validate the payments on grounds including special circumstances such as the payments preserving the value of Company A’s assets and exceptional circumstances due to the petition not being advertised.
• The Respondent has changed its position detrimentally by continuing to provide services and accounting for VAT, constituting a defence to repayment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Letang v Cooper [1965] 1 QB 232	Definition of cause of action as factual situation entitling remedy.	Supported Applicants' argument that cause of action accrues when all facts necessary to succeed exist.
Coburn v College [1897] 1 QB 702	Cause of action consists of all facts necessary to prove right to judgment.	Used to define accrual of cause of action for limitation purposes.
Re A I Levy (Holdings) Ltd [1964] Ch 19	Court’s power to prospectively validate transactions under s.127.	Distinguished by the court as not addressing when cause of action accrues.
Officeserve Technologies Ltd (in compulsory liquidation) v Annabel's (Berkeley Square) Ltd [2019] Ch 103	Validation requires application; no validation without application.	Supported Applicants' objection to lack of formal validation application.
Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783	Principles governing validation of post-petition dispositions; pari passu principle; special/exceptional circumstances required for validation.	Formed the leading authority on validation; court applied its principles to refuse validation.
Hollicourt (Contracts) Ltd v Bank of Ireland [2000] 1 WLR 895	Debiting of company’s bank account is a disposition of company property under s.127.	Supported Applicants' position on when disposition occurs for first payment.
Rose v AIB Group (UK) plc [2003] EWHC 1737	Suggested availability of change of position defence to s.127 claims.	Considered obiter and subject to later judicial disagreement; court preferred later conflicting authority.
Re MKG Convenience Ltd [2019] BCC 1070	Change of position defence constrained similarly to validation discretion in s.127 claims.	Followed by the court as later authority overruling Rose on change of position defence availability.
Skandinaviska Enskilda Banken AB v Conway [2019] UKPC 36	Change of position defence inconsistent with statutory pari passu policy in insolvency clawback claims.	Supported the court’s reluctance to allow change of position defence in insolvency avoidance claims.
Bucknall v Wilson [2021] EWHC 2149	Change of position defence not a strong factor in insolvency clawback claims; validation discretion is primary.	Reinforced court’s approach to restrict change of position defence and emphasize pari passu principle.
Mersey Steel and Iron Co v Naylor Benzon & Co (1884) 9 App Cas 434	Definition of disposition as alienation of company property.	Applied to identify what constitutes disposition under s.127.
Westminster Bank Ltd v Hilton (1926) 136 LT 315	Bank acts as agent debiting company account on instructions.	Supported reasoning that bank’s debiting is agency action, not itself a disposition.
Re Grays Inn Construction Co Ltd [1980] 1 WLR 711	Payments preserving company assets may benefit unsecured creditors.	Discussed in context of special circumstances for validation but found insufficient here.
Re Leslie Engineers Co Ltd [1976] 1 WLR 293	Advertisement of petition gives constructive notice; purpose of advertisement explained.	Supported court’s conclusion that lack of advertisement is not exceptional circumstance.
Re D'Eye [2016] BPIR 883	Validation orders cannot allow preference over other creditors.	Applied to reject absence of desire to prefer as exceptional circumstance for validation.

Court's Reasoning and Analysis

The court first addressed the limitation issue, concluding that the cause of action under section 127 of the Insolvency Act 1986 accrues only on the making of the winding up order, not at the time of the payments. This conclusion was based on the statutory language requiring a "winding up by the court" and the principle that post-petition payments are only void upon the winding up order. The court rejected the Respondent's reliance on earlier authority as concerning validation rather than accrual of cause of action.

Regarding the first payment, the court analysed whether the disposition occurred on delivery of the cheque (pre-petition) or on the debiting of the company’s bank account (post-petition). Citing Hollicourt and related authorities, the court held that the relevant disposition is the debiting of the account, which occurred post-petition, rendering the payment void under section 127 unless validated.

The court then examined the Respondent’s contention that the payments should be validated. It held that no formal application for validation had been made, but proceeded to consider the substance of the validation arguments. Applying the principles from Express Electrical Distributors Ltd v Beavis, the court emphasised the strong policy of pari passu distribution among unsecured creditors and the requirement of special or exceptional circumstances to justify validation.

On the facts, the court found that the payments, although for security services protecting assets, were made while Company A was trading at a loss and were part of a process that ultimately benefited a related company rather than unsecured creditors. The court rejected the Respondent’s argument that the payments preserved assets for creditors’ benefit, noting that the settlement achieved was significantly less than the book value of assets and that continued trading was detrimental to creditors. The absence of advertisement of the petition was held not to constitute exceptional circumstances warranting validation.

Other factors advanced by the Respondent, such as lack of significant loss to creditors, absence of intention to prefer, impracticability of pari passu distribution, and delay in making the application, were also rejected as insufficient to justify validation.

Finally, the court addressed the availability of the change of position defence in section 127 claims. It reviewed conflicting authorities, notably Rose v AIB Group and Re MKG Convenience Ltd, and concluded that the latter, which constrains the defence similarly to the validation discretion and aligns with the statutory policy, was the preferable authority. The court further considered the reasoning in Skandinaviska Enskilda Banken AB v Conway and Bucknall v Wilson, which caution against allowing change of position defences in insolvency clawback claims due to the pari passu principle.

Applying these principles, the court found that the Respondent had not demonstrated a change of position defence sufficient to render repayment unjust. The evidence showed that employment and administrative costs were likely incurred in the ordinary course of business, and the Respondent failed to substantiate claims that it was deprived of other opportunities. The Respondent’s failure to reclaim VAT within the statutory period further undermined its position. Overall, the court found no special or exceptional circumstances to displace the statutory scheme.

Holding and Implications

The court ORDERS Company B to repay the total amount of £47,053.28 to Company A together with interest under section 35A of the Senior Courts Act 1981 at a rate to be fixed. The court declines to validate the payments and rejects the Respondent’s defence of change of position.

The direct effect of this decision is that the payments made by Company A to Company B after the presentation of the winding up petition but before the winding up order are void and recoverable. No special or exceptional circumstances were found to justify validation, and the change of position defence was held to be unavailable or unproven in this context. The judgment reinforces the strict application of the pari passu principle in insolvency and clarifies the accrual of causes of action under section 127. No new precedent beyond applying existing authorities was established.