Your customer has paid you but you now find they have gone into liquidation and the liquidators want the money back. Why? What can you do?
Payments made by a company after a winding up petition has been presented are void if a winding up order is made. This is the case even if the petition had not been served or advertised when the payment was made, meaning you or the company would not know about it without making enquiries/searches (see ‘Could you have known about the petition’ below).
Until the last few years, liquidators often did not pursue repayments if the payment had been received in good faith i.e. you hadn't known about the petition. These days, liquidators are much more likely to go after repayment. So, is there anything you can do?
Is it worth arguing with the liquidator?
Cost effectiveness is an important consideration. If you are going to argue with the liquidators, you need to consider the likely legal costs and the cost of you or your staff being diverted from other profitable activities. When calculating this keep in mind that any repayment comes straight out of your profit. If your charge to your customer and the payment was, say, £650 and your profit margin is 10% then only £65 will be your profit.
However, if you repay the money, it all comes out of your profits and you would need to earn another £6,500 to replace it. So, it may well be worth incurring costs up to a significant part of the payment in trying to resist the liquidators’ demand.
Before paying the money back you should check the following:
Change of position
- Have you changed your position, as a result of receiving the payment, in such a way that would make it unfair for you to repay the money?
- For example, have you bought some equipment that you would not have bought unless you’d received that particular payment? If so, you could argue that you have changed your position as a result of the payment and refuse to repay the money.
- However, simply using the money in the ordinary course of your business e.g. to pay bills doesn’t count. There has to be something more that would make it unfair for you to have to repay the money.
- Generally, you won’t be able to successfully argue that a change of position makes it unfair to repay the money unless you can also successfully argue for a validation order (see below).
- This is very similar to the change of position defence. In theory this defence is available but it is difficult to see how you could use it in practice and in most cases it probably won’t add anything to the change of position defence.
- You would need to show that there was (1) a representation by your customer about the payment e.g. that the money was owed (2) you acted on the statement (3) and this would be to your detriment if you had to repay the money.
- However, a statement that the payment was not void as a result of the petition would not be enough and the simple fact of making the payment is not a representation that the money was owed. There could be an estoppel if the liquidators said they did not intend to seek repayment but later changed their minds and pursued repayment - but that is unlikely.
Would you be entitled to a validation order?
- The court can make an order allowing you to keep the money but you have to show there was some benefit to the unsecured creditors generally from your supply. For example you may have enabled the company to complete a particular project that was profitable, or enabled the company to continue trading in a way that benefited its creditors, presumably by reducing the company’s indebtedness.
- Just because the company continued to trade after your supply doesn’t mean that trading was for the benefit of the creditors, but the court may be able to infer that this was the case, particularly if the liquidators don’t put in any evidence to the contrary.
Have you supplied the company on favourable terms?
- You could argue that you’d get a validation order if the company wants to place a further order(s) and you are refusing to supply them unless the existing debt is paid.
- You might also be able to argue for a validation order if you were misled e.g. your customer suppressed information about the petition and deceived you into dealing with them.
- In every case, you have to show that you dealt with the company in the normal course of business e.g. on your normal credit terms and that you didn’t know about the petition when you received the payment.
- If it is reasonably clear you could get a validation order, the liquidators are unlikely to pursue you further and force you actually to get an order. The liquidators will do the same sort of cost/benefit analysis as you do and will only pursue debts where they have a reasonable chance of getting paid.
Is there anything else that makes it unfair for you to repay the money?
Most of us feel it is unfair to have supplied goods or services and then not get paid, or worse still, have to make a repayment. The law says this unfairness has to be shared equally by all creditors. However, if there is something else, apart from the points dealt with above, perhaps some action or statement, that makes it additionally unfair, it is worth taking advice.
Often in the law, it’s not a question of being absolutely right or absolutely wrong but of being able to make a reasonable argument. If you can do this, you may be able to reach a satisfactory compromise rather than having to accept defeat.
Could you have known about the petition?
It is relatively easy to find out about petition once it has been advertised. You can search the London Gazette online for the notice that the petition has been presented and the petition should show up on a credit check. Before a petition is advertised the only way to find out about it is to phone the court. Not something most creditors would think of doing. However, the liquidators may argue that you could/should have known about the petition when you received the payment and would not therefore be entitled to a validation order.