United Kingdom- High Court sets precedent on ‘value’ in post-bankruptcy petition payments
An appeal submitted by a trustee in bankruptcy, alleging that transfers made by the bankrupt to corporations after the presentation of a bankruptcy petition is void, was rejected by the High Court.
The court found that the funds had been obtained in good faith by the companies, with value and without notice of the motion for bankruptcy, and thus fell under the scope of the constitutional exemption.
The court considered the need to retain the bankruptcy assets while shielding innocent third parties who are struggling with future bankruptcies.
The court found that the value did not have to be given directly to the bankrupt or the estate of the bankrupt, but may also allow the payment of value to a third party.
Edwards (trustee in bankruptcy of Wasu) v Aurora Leasing Ltd and others  EWHC 96 (Ch)
This is a significant and beneficial decision, eventually giving a reported authority on the grounds of which insolvency professionals can examine the nature of "value" while trying to see whether payments rendered for the benefit of creditors following a bankruptcy claim can be reversed.
HM Revenue and Customs (HMRC) filed a bankruptcy petition against Jagdev Singh Wasu on 23 March 2013. Jagdev made payments to Aurora Leasing Ltd (Aurora) and Howard de Walden Estates Ltd (de Walden) after the presentation of the petition, resulting in the bankruptcy of the trustee (the trustee) demanding that the payments under section 284 of the Insolvency Act of 1986 be invalid (IA 1986).
Aurora ran a firm that bought machinery and rented it to clients. Aurora made a bid to Wasu Medical Centre, a partnership made up of parents of Jagdev that worked as a doctor's surgery and was looking to grow into dental practice, the day before the bankruptcy petition was submitted. The bid aimed to fund the procurement of dental instruments. Guarantees from Jagdev and his parents endorsed this agreement. The bid was approved, and Jagdev paid £ 27,972 for the initial rental of the equipment on 26 July 2013.
At a property let by de Walden to Wasu Property Ltd, the dental equipment was to be installed; a company set up for the planned dental practice in which Jagdev and his parents were directors and shareholders. Jagdev made three payments totaling £ 81,006 to de Walden in July 2013 and August 2013, paying for Wasu Property Ltd's rent arrears. In October 2013, the bankruptcy order was issued.
Section 284 of IA 1986 lays down the general rule that, unless rendered with the permission of the judge, any disposition of property or payment made by a bankrupt after the presentation of a bankruptcy motion and before vesting of the bankrupt's assets in a trustee is invalid.
Section 284(4)(a) IA 1986, which allows for an exception to the general law, which includes any property or reward obtained by an individual in good faith before the bankruptcy begins, was found by the court to be of worth and without warning that the petition for bankruptcy was registered.
The trustee claimed that this exception fell short of Aurora and de Walden because there was a condition that "value" could be given directly to the debtor or the estate of the bankrupt rather than to a third party. The court dismissed that meaning and found that there was no clear qualification for the term "value" in the exemption.
Judge Prentis found that section 284 balanced the need to "protect the bankruptcy estate, and thereby the creditors of the bankrupt as a whole" and the need to "avoid the consequences if parties could no longer safely deal with a person, honestly and for value, on the chance that a bankruptcy petition had, or was to be, presented".
Accordingly, the statutory exception was "designed to avoid unfairness and promoted certainty in a bankrupt's dealings for value with innocent third parties". The balance was met because the exception also provided "certainty in a trustee's later investigations into the dealings of the bankrupt", and the exception was "strictly limited to its three elements". In this case, Aurora provided the value of dental equipment and de Walden provided value of property letting; both consequences intended by Jagdev when making the payments. Importantly, neither Aurora nor de Walden had knowledge of the bankruptcy petition at the time the payments were made.
The trustee's appeal was rejected.
The case is the first in which the High Court has interpreted the sense of 'value' in the form of a request for payment following bankruptcy, and is therefore relevant. We also traditionally had to rely on the similarities between fees for corporate and personal post petitions, but there are important variations between the two.
Trustees in bankruptcy should be told to pay particular attention to the situations under which the bankrupt rendered payments to third parties before making an appeal under section 284 IA 1986. In order to decide if the legislative exception under section 284(4)(a) could be valid, particular communications between the bankrupt and the recipients, as well as any details received by the recipients in the course of the trustee's inquiries into the affairs of the bankrupt, should be checked.