The story of Officeserve Technologies Limited shows the importance of reviewing the position under Section 127 of the Insolvency Act 1986 when applying for an Administration Order and also provides clarity as to the breadth of dispositions which can be brought within Section 127.
Officeserve Technologies Limited and its subsidiaries traded in the food delivery services throughout the UK.
Officeserve became insolvent and a Winding Up Petition was presented by two creditors who had sold their businesses to Officeserve for debts of £3 million and £284,000 respectively.
The Directors made an application to Court for an administration order but Judge Purle, after learning that Officeserve had, after the presentation of the Petition, received approximately £2 million in tax refunds most of which had been spent, decided that the ability for a Liquidator to use Section 127 to avoid post Winding Up Petition dispositions by the company outweighed the benefit to the creditors of an administration. He therefore ordered the company to be placed into liquidation on 5/5/17.
Liquidators were appointed and commenced collecting the dispositions which were void under Section 127 of the Insolvency Act. In their investigations the Liquidators came across a payment to a former Director in the sum of £535,477.31 which had been made on 23 December 2016, after the presentation of the Petition and before the Liquidation order.
The case came back to court on 28/7/17 for directions in relation to the S127 claim against the director. The director defended this case on the basis that the settlement agreement had included a clause where the parties accepted that the payment was in full and final settlement of all claims and therefore the company agreed not to take any action against the former Director.
After a full review of the law under Section 127 the Judge came to the conclusion that the release of contractual rights set out in the Settlement Agreement was a disposition of property and therefore caught by Section 127.
He confirmed that to be caught by S127 it is sufficient that identifiable property was disposed of by some act having legal consequences even though the other person to the contract cannot necessarily be said to become the owner of the property (as in the case of a release of a debt).
The Judge therefore found the settlement agreement to be void under Section 127 and duly set it aside with the effect that the former Director had to pay the money back and the liquidators could also take other actions against the director for other misdemeanours.
It has long been established that a valid reason for the refusal of an Administration Order is to avoid the loss of possible actions under Section 127 of the Insolvency Act 1986. When considering an Administration Application, dispositions other than simple payments out of the company’s account should also be reviewed.
This case shows how important it is for Liquidators to not only review the bank accounts for payments that have been made out of the company so that they can be recovered, but also review all the contracts and other documents and agreements that the company has entered into since the presentation of the Petition.
For instance, the granting of a credit note to a debtor would be a disposition of assets under Section 127 and that credit note should be reversed re-creating the debt. It may be that the credit note was initially issued because of a valid dispute with the debtor had but this is certainly something that should be investigated by Liquidators as a possible asset to chase
Edward Judge, Partner - Restructuring and Insolvency
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