Transaction avoidance claims and the change of position defence

In Bucknall v Wilson [2021] EWHC 2149 (Ch), an appeal to a High Court judge, Trower J has clarified that a defendant’s change of position will rarely be relevant in transaction avoidance claims under ss 238, 238, 339 and 340 of the Insolvency Act 1986 (IA86).

The case involved a preference claim by a trustee in bankruptcy under s 340 of IA86. At first instance, the Insolvency and Companies Court judge found that the defendant’s change of position was a “strong factor” in the court’s discretion whether to give relief and refused relief despite finding a payment was a preference. The first instance judge was influenced by authority suggesting that a defendant’s change of position was relevant in the context of claims under s 423 of IA86 (Transactions defrauding creditors).

A defendant’s change of position

Trower J concluded that a defendant’s change of position will only rarely be relevant in preference or transaction at an undervalue claims. When claimants can establish the elements of a transaction avoidance claim courts will only refuse relief in exceptional circumstances and Trower J’s decision indicates that a defendant’s change of position is not in itself an exceptional circumstance.

Trower J’s reasoning gives significant weight to the policy basis for transaction avoidance claims being the principle of pari passu distribution between creditors. The fact that transaction avoidance claims are brought by insolvency practitioners on behalf of all unsecured creditors for the purpose of bringing assets into the insolvent estate for pari passu distribution means that the court generally should not attempt to look at the position of the defendant and balance it against the position of creditors. This analysis distinguishes s 423 claims, which may be brought by private claimants and so do not necessarily involve the collective interests of creditors.

Exceptional circumstances

Despite Trower J’s narrow view of when a court should take into account the defendant’s interests, he agreed with the first instance judge that the circumstances were sufficiently exceptional to justify refusing relief.

1. The defendant had acted in good faith in the sense that she had played no part in the giving of the preference (other than by receiving it) and had no reason to question whether it was right to accept the payment.
2. The preference claim was only possible because the defendant was the bankrupt’s step daughter and therefore an ‘associate’ of the bankrupt for the purpose s 341 of IA86, with the result that the look-back period for the preference claim was two years before the presentation of the bankruptcy petition rather than the usual six months. However, the defendant’s status as an associate had played no part in the bankrupt’s decision to give her a preference. The preference was a payment for accountancy services provided by the defendant on arm’s length, commercial terms. Significantly and most unusually, the bankrupt had paid his other, non-associate creditors (except the petitioning creditor) at the same time as the preference to the defendant, with the difference that he had paid his other creditors in full but the preference to the defendant was only a part payment. The bankrupt had given less priority to paying the defendant because she was his step daughter. In these circumstances, the policy behind the longer look-back period for associates was not engaged.
3. The bankruptcy was effectively a single creditor insolvency, with the claim of the judgment creditor who had petitioned for bankruptcy dwarfing all other claims. This meant that the trustee in bankruptcy effectively represented a single party rather than the usual collective interests of creditors, and so it was a rare case where it was practical to balance the interests of the defendant against the interests of other creditors. It was therefore possible for the court to take into account that ordering repayment of the preference would only produce a small increase in the dividend to the main creditor, but would have a disproportionate impact on the defendant, requiring her to sell the family home to satisfy the judgment. At this point it became relevant that the defendant no longer had the preference payment.
4. Whilst a repayment of the preference could have gone towards paying the costs of the bankruptcy, the amount of the preference was only £47,675.51 so this benefit to the bankrupt estate was not proportionate to the hardship that would be caused to the defendant.