A claim under s 127 is restitutionary (see Hollicourt (Contracts) Ltd v Bank of Ireland and Ahmed v Ingram), and in a case involving the payment of money is for unjust enrichment (see Officeserve Technologies Ltd v Annabel’s (Berkeley Square) Ltd). In principle a change of position defence is generally available (Rose v AIB Group (UK) plc, Clark v Meerson, Re D’Eye, Re MKG Convenience Ltd, Re Changtel Solutions UK Limited and Officeserve v Annabel’s). The central question in Re James Court Ltd (In Liquidation) v Hindsight Contractors Ltd [2023] EWHC 1101 (Ch) was in which circumstances a change of position defence may be raised: as DJ Bond pointed out at an early stage in her judgment, the circumstances are constrained in the same way as is the exercise of the court’s discretion to validate or ratify payments, as ICC Judge Barber held in Re Changetel Solutions UK Limited.
The s 127 application before DJ Bond in Re James Court Ltd arose out of a particular set of facts. The company, JCL, had been wound up by the court on 9 April 2019. On 12 and 13 February 2019 it had paid £23,000 and £14,000 to a related company, HCL. Its director had known that JCL had been served with a winding-up petition at the time he caused the payments to be made but claimed that he had not understood the significance of the petition or how it would affect the payments.
On 19 July 2021 HCL made an application for validation/ratification of the payments made to it by JCL. That application came before HHJ Kelly sitting as a judge of the High Court, who, on 27 August 2021 dismissed it. On 27 June 2022 JCL made an application seeking restitution. In opposition, HCL relied on the equitable defence of change of position. It was common ground that the payments in issue had been made and that they were void, so the starting point for the application before DJ Bond was that JCL was entitled to restitution subject to HCL’s change of position defence. Whether that defence could now be raised depended on the effect of HHJ Kelly’s determination of the ratification/validation application.
DJ Bond dealt with the application by reference to three main points: issue estoppel (by reason of Judge Kelly’s decision to refuse relief), abuse of process and the merits of HCL’s defence.
For its defence of change of position to succeed HCL had to show that:
(a) it had changed its position in good faith consequent on or in a way that was referable to the void payments;
(b) it would suffer an injustice if called upon to repay;
(c) a validation order would be made in the circumstances;
(d) the injustice to it outweighed the injustice of denying JCL restitution.
(This was not a case where HCL could say that the payments were made for the benefit of the general body of creditors. It relied on exceptional circumstances.)
DJ Bond held that there was, prima facie, an issue estoppel as a result of HHJ Kelly’s determination. She found for a number of reasons that there were no special circumstances why the estoppel bar should not apply, among them the fact that JCL had not pursued a claim in restitution at the same time as it sought ratification/validation. HCL was thus estopped from contending that the payments were capable of being validated. In those circumstances HCL’s change of position defence failed: there were no countervailing considerations that could lead the court to conclude that the case was an exceptional case where the change of position defence could succeed in the face of the failed application to ratify or validate the payments.
While that was enough to dispose of the application, the judge went on to deal with the other two matters.
Having concluded that issue estoppel did not apply, she said, “[I]t is difficult to express a concluded view on abuse of process. It is only having identified the reasons why cause of action and issue estoppel do not apply that it is then possible to evaluate whether it is a case of abuse.”
But she went on to say:
“It does seem to me that it would be manifestly unfair to JCL to be vexed twice with the validation issue. It is precisely the same issue in both sets of proceedings. HCL is seeking to have a second bite at the cherry by adducing fresh evidence in these proceedings that it could and should have adduced in the earlier proceedings. It also goes further than the narrow validation point. HCL’s change of position defence requires consideration of all of its factors. By running that defence in circumstances where an essential element has already been determined against it, HCL is putting JCL to the trouble of dealing with all matters raised by that defence in circumstances where it is bound to fail if the validation element cannot be satisfied.
“I am also satisfied that it would bring the administration of justice into disrepute. Claims to restitution and validation order applications, if they are made, are inextricably linked due to the special context in which they arise under section 127. As night follows day, if a validation order is refused a liquidator will seek to recover the void payments; they are duty-bound to do so. In that context litigants who do not adduce all of their evidence on an issue in earlier validation order proceedings, and obtain an undesirable outcome, should not be seen to be able to relitigate precisely the same issue against the same party in a claim to restitution, with new evidence, in the hope of achieving a different result. HCL’s attempt to do that in this case is, in reality, an attack on the decision of HHJ Kelly. It is mere window dressing to say that the issue in these proceedings is whether the payments are capable of being validated today, as opposed to whether they ought to have been validated on 27 August 2021. That it is an attack based on new evidence does not alter its essential character as a challenge to the earlier decision which was final on the issue of validation.”
Finally, she said that in any event, on the evidence, and even in the absence of cross-examination of witnesses, none of the requirements of a change of position defence were made out:
“Whilst [counsel for HCL] is strictly correct in saying that HCL paid to PPL [a third party] monies that it was otherwise entitled to retain, that assertion belies the reality of the situation. On HCL’s own case HCL received the monies as a loan, which it knew it always had to repay. It did not receive those monies in the expectation that it was absolutely entitled to retain their value; it was always going to have to return monies of equivalent value. HCL made a conscious choice to obtain discharge for its debt by payment to a third party, PPL, rather than directly to JCL and did so in full knowledge that JCL was in insolvent liquidation.”
Furthermore, the judge said, even if there had been a change of position in good faith, the court would have to weigh the injustice to HCL against the injustice of denying JCL restitution. In the judge’s view JCL was entitled to rely on the pari passu principle:
“From the time that the winding-up petition was presented JCL’s interests were in its creditors being paid rateably according to their rank. The preferential treatment of PPL by payment in full of its debt is contrary to the statutory regime. JCL lost the benefit of the debt of £29,000 due from HCL and paid £26,500 to PPL in full, which it would never have done had the statutory scheme been applied. On a balance sheet basis it might be said that, but for the £2,500, the arrangement was financially neutral, but having regard to the statutory scheme governing JCL’s affairs, the arrangement was far from neutral. It is irrelevant that these monies may in fact go to payment of the costs and expenses of the winding-up, which are themselves part of the statutory scheme: see Dean v Stout […]. The balance of injustice weighs in favour of restitution.”
The liquidator succeeded. The lesson is to run all issues relating to the validation or ratification of any relevant transactions in one go: it is likely to be too late to do so if you fail on an earlier attempt, even in a slightly different context, where the issues are in reality the same.