Stepdaughter not liable after preferential payment

23rd June 2020

In an important case concerning antecedent transactions, a family member connected with a bankrupt, Mr Peter Herbert Fowlds, was relieved of liability following receipt of a preferential payment.

Bucknall and Anor (Joint Trustees in Bankruptcy of Peter Herbert Fowlds) v Wilson [2020] EWHC 1200 (Ch)

On 22 March 2017, Mr Fowlds was adjudged bankrupt as a result of a judgment debt of £715,876 owed to his son.

On 4 September 2014, Mr Fowlds made a payment of £47,675.51 to Ms Wilson, his stepdaughter. The payment represented 48% of the full debt owed to her. In addition all of Mr Fowlds’ creditors were paid in full with the exception of his son.

Whilst the joint trustees put Ms Wilson on notice of a potential claim against her, she had already paid off a number of debts and transferred the remainder of the payment to her father.

The joint trustees issued a preference claim pursuant to s 340 of the Insolvency Act 1986 (the Act).

The issues the court had to decide were:

  • Whether Mr Fowlds was insolvent and influenced by a desire to prefer Ms Wilson when deciding to make the payment
  • If the court considers the requirements of s 340 of the Act are met, whether relief should be granted against Ms Wilson.

Court’s decision

The judge held that the payment was a preference pursuant to s.340 as:

  • Mr Fowlds was insolvent at the relevant time as he could not pay the judgment debt owed to his son
  • It was clear that Mr Fowlds intended to pay all of his creditors with the exception of his son, and accordingly that he positively desired to prefer Ms Wilson.

Should relief be granted?

Whilst the judge found that the payment was preferential, Ms Wilson argued that the court should exercise its discretion and refuse to make an order.

Ms Wilson argued that she had limited means, a low income and her only source of funding was the equity in her home. Ms Wilson added that if she had to sell her home, the loss of the home would be extremely damaging to her and her children.

Lastly, Ms Wilson argued that a change of position had occurred in that the payment was no longer available. The funds had already been dissipated by the time she was notified about the claim by the trustees in repayment of her debts and following repayments made to her father, who subsequently used those funds for his wife’s cancer treatment.

The judge concluded that the following were factors in his decision:

  • The debt arose from a commercial relationship and represented a fair amount for the work carried out.
  • Ms Wilson played no part in the making of the preference other than receiving the payment.
  • On the evidence heard at trial the payment was no longer available to her.
  • Ms Wilson had changed her position substantially.
  • Ms Wilson would be unable to restore the payment without selling her home, which would have a direct effect on her business and her children.

Consequently, the judge refused to make the order in favour of the joint trustees. The judge also confirmed that the same conclusion would have been reached without the change of position argument as Ms Wilson was likely to face wholly disproportionate consequences if she was required to repay the payment.

What does this mean?

This is the first case that has confirmed that a change of position will be a relevant factor when seeking to persuade the court to make an order for relief under s 340. It was described by the judge as a case ‘outside of the norm’; respectfully we disagree.

Whilst it may be different to a more blatant preference claim (where the parties have conspired together, for instance) it is not hard to see how the decision may have effect in similar general circumstances, i.e. where the recipient is not aware of the circumstances giving rise to the preference and where the debt arose from a commercial relationship (where a family member has provided services or made a loan at arm’s length on commercial terms for instance). It is also commonly the case that, by the time an application comes to court, the original funds have been dissipated and a defendant’s only significant asset is his/her home.

It is hard to see how this reconciles with the pari passu principle and the statutory purpose of antecedent transaction provisions overall, which aim to ensure that creditors are treated equally and provide remedies to ensure equal distributions insofar as possible, even where payments are made in good faith and in the ordinary course of business to unconnected third parties.

It also remains to be seen how much this decision was influenced by the coronavirus climate, where the judge noted that ‘the right-thinking person representing the current view of society would not consider it right to exercise legal rights resulting from a preference’ where this would lead to the sale of someone’s home.

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