Recovery of void payments under section 127

13th November 2019

The case of Re MKG Convenience Ltd (in Liquidation) v Nisa Retail Ltd [2019] EWHC 1383 (Ch) has clarified the law surrounding applications to recover payments invalidated by section 127 of the Insolvency Act 1986.

What were the facts?

MKG Convenience Ltd (MKG) operated convenience stores under the Nisa Retail brand. MKG went into compulsory liquidation on 7 May 2015 following the presentation of a winding-up petition by Nisa on 16 March 2015. Direct debit payments were taken from MKG’s bank accounts shortly after the winding-up petition was presented and continued to be taken by Nisa on a weekly basis for the supply of stock after the petition was advertised and after the winding-up order was made. In total twenty-eight payments were made totalling £162,307.36.

The liquidators of MKG brought proceedings under section 127 of the Insolvency Act 1986 to recover the payments. The liquidators sought an order declaring that the direct debit payments made after the presentation of the winding-up petition were void and should be repaid.

Nisa accepted that the direct debits were prima facie void due to the effect of section 127 but made a cross-application for a validation order. It argued that it should not have to repay the money as it had changed its position in good faith on the basis that the payments had been validly made. The so-called ‘change of position’ defence.

What did the court decide?

The High Court (David Cooke HHJ) did not grant a validation order in respect of any of the direct debit payments and ordered the amounts to be repaid. The court dismissed Nisa’s change of position defence on the facts, however, the court confirmed that such a defence could theoretically be available against a claim for the return of void payments. Interestingly, the judge went on to say that if a validation order was declined, it was not easy to think of circumstances in which a court could subsequently find it inequitable to order the repayment of a benefit received.

WM Comment

The judge’s analysis of the change of position defence in this case is helpful to liquidators. It emphasises that it would be unusual for a court to refuse a validation order to the defendant but uphold a change of position defence.