Bank Of Ireland v Hollicourt (Contracts) Ltd [2000] EWCA Civ 263

EWCA-Civ
Bank Of Ireland v Hollicourt (Contracts) Ltd
[2000] EWCA Civ 263 · 2000-10-20
[1]This is the judgment of the court.[2]Introduction.[3]Section 127 of the Insolvency Act 1986 provides:
" In a winding up by the court, any disposition of the company's property, and any transfer of shares, or alteration in the status of the company's members, made after the commencement of the winding up, is, unless the court otherwise orders, void."
In the case of compulsory liquidation , the winding up of a company is deemed to commence at the time of the presentation of the petition: section 129 (2).[4]"Property" includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property: section 436 of the 1986 Act.[5]This appeal concerns the impact of section 127 in the context of payments made to creditors of Hollicourt (Contracts) Limited (the Company) after the presentation of a winding up petition. The payments were made by cheques drawn on the Company's bank account with the Bank of Ireland (the Bank). The account was in credit at all material times.[6]The question is: does section 127 make the Bank, which continued to operate the account in accordance with the instructions of the Company, liable, on the application of the liquidator, to make restitution to the Company of the amounts of those cheques? Or does section 127 make only the payees of the cheques liable to make restitution to the Company?[7]The normal and prudent practice of banks, upon becoming aware of a winding up petition against a corporate customer, is to take prompt action. The bank freezes the company's existing bank accounts, whether in credit or overdraft, as at the date of the presentation of the petition and insists that all subsequent dealings be on a new and separate account in respect of which a validation order may be obtained: see Paget's Law of Banking (11th Ed) p. 207. The presentation of the petition usually comes to the notice of banks on publication of the advertisement of the petition.[8]According to the evidence in this case the Bank operates a manual system of checking for the presentation of winding up petitions against its customers by using a member of staff to consult that week's edition of Stubbs Gazette which records all winding up petitions that have been presented. If a petition is shown as having been presented against a customer a block is placed upon the account.[9]Unfortunately that did not happen in this case. As a result of human error the advertisement was missed. The bank account continued to be operated by the Company for over three months after a winding up petition was presented. The issue on this appeal from the judgment of Blackburne J (delivered on 11 November 1999 and now reported at [2000] 1 WLR 895) is whether in these circumstances the Bank is liable, on the application of the liquidator of the Company, to restore the account to the position which it would have been in had withdrawals not been made from it in the interval between presentation of the petition and the making of the winding up order. The Judge held that the retrospective effect of the statutory declaration of voidness of post-presentation dispositions in section 127 is to render the Bank liable to make restitution to the Company.[10]Within two weeks of that decision judgment was given by Lightman J in Coutts & Co v. Stock in which he said that "The authorities are in disarray and the state of the law is uncertain, if not confused." His judgment was delivered on 24 November 1999 and is now reported at [2000] 1 WLR 906 , immediately after the judgment in Hollicourt . He held that the bank in that case, which concerned post-presentation drawings by a company on an account in overdraft at all material times, was not liable. Mr Stock, who was held liable as the guarantor of the company's overdraft, appealed, but he was subsequently made bankrupt. This court was notified on the day before the hearing of the appeals in both cases that Mr Stock's appeal would not be pursued. Nevertheless there was detailed argument at the hearing of this appeal on the judgment in the Coutts case.[11]The Facts The facts of the case are simple. The Company carried on business in the construction industry. On 5 February 1996 a winding up petition was presented. The petition was advertised on 26 February. A compulsory winding up order was made on 7 June 1996.[12]At the time of the presentation of the petition the Company had a credit balance in its account No 605409353 with the Bank at its branch at 31 King Street, Leeds. Notwithstanding the presentation and advertisement of the petition and the absence of any court order under section 127, the account was not frozen. The Bank continued to debit that account with payments in favour of third parties totalling £156,200. Money continued to be paid into the account. The Bank first became aware of the petition on 16 May 1996. Only then was the account frozen.[13]No proceedings have been taken by the liquidator of Company to recover the amounts from the payees of the cheques. No repayments have in fact been made by them. Instead, the liquidator, Mr Raymond Claughton, issued an Originating Application on 9 September 1998 seeking repayment by the Bank to the Company of the monies paid out to third parties by the Bank after the commencement of the winding up.[14]On 11 November 1999 Blackburne J gave judgment for the Company against the Bank. He decided that all the post-presentation payments made out of the account were void under section 127 and he required the Bank to reconstitute the account. The Bank appeals.[15]The Judgment Blackburne J set the legal scene at [2000] I WLR 898G- "There is no doubt that, where a company withdraws a sum of money from its bank account in credit and pays that sum to a third party, there is a disposition of the company's property which, if it occurs after the commencement of the winding up, is avoided by section 127. There is also no doubt that the third party recipient can be required to repay the sum so received, subject to validation of the payment by recourse to the dispensing power contained in the section. The question for decision on this application is whether, in these circumstances, the bank as well as the third party recipient of the payment can be required to make repayment."[16]After reviewing English and Australian authorities cited to him

the judge stated his conclusions in the following passage at p. 903C-H:

"....I fail to see why the consequence of the avoidance of a transaction by section 127 must be limited to the recipient (or disponee) of the property disposed of if by "disponee" is meant (as it appears to be in those [Australian] decisions) the person to whom the sum withdrawn from the company's account was paid. Nor, for that matter, do I follow why, where payment is made by cheque, the disposition of the company's property is confined to delivery of the company's cheque to the third party. The debiting to the customer's account of the amount of his cheque on presentation for payment (by paying out that amount to the third party in satisfaction of the cheque) seems to me to be in every sense a disposition of the company's property. In my judgment, the transaction which is avoided by section 127, i.e. the withdrawal from the account, is avoided not simply as against the third party recipient of the money in question but also as against the bank which makes the payment. The amount of the company's credit balance on its account with the bank constituted a debt owed by the bank to the company. The action of the bank in debiting the company's account with the various payments had the effect of reducing the bank's liability to the company. The bank's liability to the company arising out of their relationship of banker and customer could only be reduced by those payments if they were validly made (i.e.not avoided). Section 127, however, renders all such payments void and ineffective with effect from the commencement of the company's winding up. The consequence of such avoidance, so far as the bank is concerned, must therefore be that its liability to the company falls to be considered as if those payments out had not been made. In short, the bank's liability to the company must be what it was (i.e. the credit balance) as at the date of commencement of the winding up together with all sums credited to the account since the winding up began."
[17]Blackburne J considered that this was in accord with the conclusion of the Hong Kong Court of Appeal in Bank of East Asia Ltd v. Rogerio Sou Fung Lam [1988] 1 H.K.L.R. 181. We shall return to that decision later in this judgment.[18]He made two further points at the end of his judgment. 1. "The fact that the relationship between the company and the bank is also that of principal and agent (in respect of the drawing and payment of the customer's cheques as against money of the company in the banker's hands) does not afford the bank a defence against the liquidator's claim." (P. 905C-D). 2. "...the fact that the liquidator is entitled to seek recovery from the individual recipients of the withdrawals from the company's account (the "disponees" to adopt the Australian terminology) does not deprive the liquidator of his remedy against the bank. He is under no duty to exhaust his remedies against the recipients before resorting to the bank." (P. 905D-E).[19]Grounds of Appeal. Mr Gabriel Moss QC, appearing for the Bank, made two main points which he developed in his citation of the authorities, including the Australian cases which were not followed by Blackburne J, and the later decision of Lightman J in Coutts, which was not, of course, available to him . 1. The Double Disposition Point. This point turns on the identity of the relevant dispositions at which section 127 is aimed. The section refers to " any " disposition of the company's property. It is common ground that, where a company pays a creditor by cheque drawn on an account in credit between the date of a petition and the winding up order, there is a disposition of the company's property in favour of the creditor falling within section 127. But it is contended that the judge was not required by principle nor by authority to hold (and he was wrong in holding) that there was another relevant disposition of the company's property in favour of the Bank when the Bank debited the Company's account with the sum paid to the creditor and that that disposition was avoided by section 127, so as to render the Bank liable to restore the Company's account to its pre-disposition condition. 2. The Void Point. This related point turns on the extent of the legal consequences flowing from the undoubted application of section 127 to the dispositions of the company's property in favour of the payees of the cheques. How far do the consequences of that statutory avoidance extend? It is contended that the judge was wrong to hold that the legal effect of applying section 127 to those dispositions was to avoid not only those dispositions of the company's property as between the Company and the payees of the cheques, but also the related transactions between the Company and the Bank, as customer and banker. Blackburne J's construction of section 127 renders the Bank liable to make restitution to the Company for what it has done as agent of the Company in honouring the cheques in accordance with its mandate.[20]The Legal Position In our judgment this appeal succeeds on both points. 1. The Policy of Section 127. Both grounds of appeal turn on the construction of the width of the section. Account must be taken of the purpose of this provision and of equivalent provisions in earlier corporate insolvency legislation. In Re Wiltshire Iron Company (1868) LR 3 Ch App 443 at 446 Lord Cairns LJ referred to section 153 of the Companies Act 1862 (which was in similar terms) as "....a wholesome and necessary provision , to prevent, during the period which must elapse before a Petition can be heard, the improper alienation and dissipation of the property of a company in extremis."[21]In Coutts & Co v. Stock at p. 909H Lightman J, in a valuable summary of the relevant principles, described the provision as " ...part of the statutory scheme designed to prevent the directors of a company, when liquidation is imminent, from disposing of the company's assets to the prejudice of its creditors and to preserve those assets for the benefit of the general body of creditors."[22]As Oliver J pointed out in Re J Leslie Engineers Co Ltd [1976] 1 WLR 292 at 298 the invalidating provisions (then to be found in section 227 of the Companies Act 1948) do not spell out the appropriate remedy of the company when the disposition is avoided. The right of recovery of the company's property which has been disposed of is determined by the general law. It is common ground in these proceedings that the right of recovery, whether invoked against the payees or against the Bank, is restitutionary. There is no claim against the Bank in these proceedings for damages either for breach of an alleged duty of care owed to the Company and to the general body of its creditors or for breach of an express or implied term of a contract between the Company and the Bank.[23]In our judgment the policy promoted by section 127 is not aimed at imposing on a bank restitutionary liability to a company in respect of the payments made by cheques in favour of the creditors, in addition to the unquestioned liability of the payees of the cheques. The Bank operated the Company's account as agent for the Company. In accordance with its mandate it debited the account with the amounts of the cheques. Those amounts have been received by the payees of the cheques in consequence of the Bank duly honouring the cheques drawn in their favour by the Company. The section impinges on the end result of the process of payment initiated by the Company, i.e. the point of ultimate receipt of the Company's property in consequence of a disposition by the Company. The statutory purpose stated by Lord Cairns LJ and Lightman J is accomplished without any need for the section to impinge on the legal validity of intermediate steps, such as banking transactions, which are merely part of the process by which dispositions of the Company's property are made.This is not a restitutionary situation where the Bank has been unjustly enriched as against the Company and where the general law requires the restitution of the benefit. Mr Jory for the Company has directed us to no case where in comparable circumstances restitution has been ordered. 2. Dispositions of the Company's Property. Consistent with that legislative policy the only dispositions of the Company's property affected by the section in this case are the payments to the payees of the cheques drawn, after the presentation of the petition, on the Company's bank account.What is needed for the section to operate is a disposition amounting to an alienation of the Company's property(see Mersey Steel and Iron Co. v. Naylor Benzon & Co. (1884) 9 App.Cas. 434 at p.440 per Earl of Selborne LC). The Bank in honouring the Company's cheque obeys as agent the order of its principal to pay out of the principal's money in the agent's hands the amount of the cheque to the payee (see Westminster Bank Ltd. v. Hilton (1926) 136 LT 315 at p. 317 per Lord Atkinson). The beneficial ownership of the property represented by the cheque was never transferred to the Bank, to which no alienation of the Company's property was made.[24]We therefore reject the contention that there were additional relevant dispositions of the Company's property to the Bank to which section 127 applies. The reasoning in the Australian authorities is convincing on this point. Lightman J expressed the view in Coutts (see p.190g-i) that the Australian cases are in accord with and supportive of the general principles expounded by him at pp. 187-188. In a recent and perceptive discussion of the authorities Professor L Sealy expressed the same view, with which we agree (See Issue 57, Company Law Newsletter 11 July 2000).[25]We also accept Mr Moss's submission that there is no binding English decision to the contrary and that the decision of the Court of Appeal of Hong Kong relied on by Blackburne J is not persuasive on this point. (a) The Australian Authorities. The combined effect of sections 223 (2) and 227 (1) of the Australian Companies Act 1961 is the same as section 127 of the 1986 Act. In Re Mal Bower's Macquarie Electrical Centre Pty. Ltd. [1974] 1 NSWLR 254 Street CJ in Eq held that the invalidating provisions do not operate to affect agencies, such as a bank interposing between the company making the disposition and the recipient of the property as "disponee." That case concerned payments out of the company's bank account which was in credit throughout the relevant period. The liquidator made a claim against the bank for the amount of the payments out of the account between the date of the petition and the date of the order and the date when the account was subsequently closed. The claim was dismissed. Street CJ considered (at p. 258) that there was "great force " in the argument that "...the paying by a bank of a company's cheque, presented by a stranger, does not involve the bank in a disposition of the property of the company so as to disentitle the bank to debit the amount of the cheque to the company's account. The word "disposition " connotes in my view both a disponor and a disponee. The section operates to render the disposition void so far as it concerns the disponee. It does not operate to affect the agencies interposing between the company, as disponor, and the recipient of the property, as disponee.....The intermediary functions fulfilled by the bank in respect of paying cheques drawn by a company in favour of and presented on behalf of a third party do not implicate the bank in the consequences of the statutory avoidance prescribed by s. 227....I consider that the legislative intention....is such as to require an investigation of what happened to the property, that is to say what was the disposition, and then to enable the liquidator to recover it upon the basis that the disposition was void. It is recovery from the disponee that forms the basic legislative purpose of s. 227..."[26]This approach was followed by the Supreme Court of Queensland in Re Loteka Pty. Ltd. (1989) 7 ACLC 998 in which a claim was made by the liquidators of the company, whose account with the bank was in credit in the relevant period between the presentation of the petition and the winding up order, against the bank in respect of payments out of the account by cheques to third parties. McPherson J analysed the relation between banker and customer and held that the winding up of the company had not terminated the mandate by the company to the bank to pay the amount of the cheque drawn by the customer, provided there are funds in the account to meet it; that the invalidating provisions do not operate upon a mere contract after winding up, unless it was one that of its own force served to transfer an interest in a corporate asset away from the company; and that in the course of the transaction there was nothing in the nature of the disposition of the property of the company as customer to the bank. He said ( at p. 1, 004) that "The amount standing to the credit of the customer's account is simply diminished thus reducing pro tanto the indebtedness of the bank to the customer. It is the payee of the cheque that receives the benefit of the proceeds of the cheque. All that happens between customer and banker is an adjustment of entries in the statement recording the accounts between them."[27]He concluded at p.1,005 that " ...although there was a disposition of property of the company, it took place not when the cheques were paid but on the date or dates on which each cheque was issued; and [that] the disponee in each case was not the bank but the particular creditor in whose favour the cheque was drawn and delivered....[It] is therefore only against those creditors as disponees, and not against the bank, that the disposition of company property is avoided by the operation of [sec.368(1)]...."[28]The same view was taken by Underwood J in the Supreme Court of Tasmania in Tasmanian Primary Distributors Pty. Ltd v. R C and M B Steinhardt Pty. Ltd (1994) 13 ACSR 92 in the case of a "bank cheque" (or bankers order) (see p.97) and by the Federal Court of Australia in Wily v. United Telecasters Sydney Ltd (1996) 14 ACLC 863 per Lindgren J at pp. 870-872, approving the view that where a company makes a payment by cheque, thereby reducing the amount standing to its credit in its bank account, the property of the company disposed of in such a case is, for the purpose of the corporate insolvency invalidating provisions (in that case section 468(1) of the Australian Corporations Law), the property in the cheque as tangible property and the payee must make restitution of the benefit obtained at the cost of the company i.e. the amount of the cheque. (b) The English Authorities. The only two English authorities are the decision of this court in Gray's Inn Construction Co. Ltd [1980] 1 WLR 711 and of Lightman J in the Coutts case (supra). There are certain passages in the judgment of Buckley LJ in the Gray's Inn Construction case (concurred in by Goff LJ and Sir David Cairns) which , when read out of context, appear to lend some support to the propositions that-(i) (I) a ll post-presentation cheques drawn in favour of third parties on a company's bank account,whether that account is in credit or in debit, involve a disposition of the amount of the cheque in favour of the bank and are invalidated by the provisions, unless validated by the court (see p.715H-716F);(ii) in consequence of statutory avoidance of such dispositions, the bank may be liable in proceedings by the liquidator for the amounts of the dispositions of property, albeit only to the extent that the amounts prove to be irrecoverable from the creditors who were paid (see p.721F-G).[29]In our judgment the Gray's Inn Construction case is not binding authority for either of these propositions. It was unnecessary for the court to examine, let alone arrive at a final view on, either of these far reaching propositions, because of the concessions made by Counsel in the passages referred to in (i) and because the decision in the case was in fact concerned with payments made into an overdrawn account and not, as is the case here, with payments made out of an account in credit. The judgment also dealt in detail with the exercise of the court's discretion to validate otherwise invalid dispositions. In those circumstances the passages in question cannot be relied on as part of the ratio of the decision. In view of the absence of full argument on these points it is even difficult to treat these statements as considered dicta carrying the weight which they normally would when coming from a judge as experienced and eminent in Company Law as Buckley LJ.[30]This court has had the benefit of full argument and citation of authorities on these points, as did Lightman J in the Coutt s case.[31]In summary, our conclusion, in the light of these authorities, is that section 127 only invalidates the dispositions by the Company of its property to the payees of the cheques. It enables the Company to recover the amounts disposed of, but only from the payees. It does not enable the Company to recover the amounts from the Bank, which has only acted in accordance with its instructions as the Company's agent to make payments to the payees out of the Company's bank account. As to the intermediate steps in the process of payment through the Bank, there is no relevant disposition of the Company's property to which the section applies.[32]We would add that, even if the Company's bank account were in overdraft, which is not this case, the foregoing analysis of the legal effect of section 127 would produce the same result in respect of a claim for recovery against the Bank. This result has the very real practical advantage of not requiring what in some cases could be a complex analysis of whether payments were made out of an account which was in debit or in credit.The need for such an analysis cannot be justified by any sensible view of the purpose of section 127. (c) The Hong Kong Case. Blackburne J said (at p 905C) that the reasoning of Clough J.A. in the judgment of the Court of Appeal of Hong Kong in the Bank of South East Asia case (supra) "..is exactly in point in the present" and followed it. The relevant reasoning was that the Court of Appeal in Gray's Inn Construction Co Ltd (supra) had regarded the payment as recoverable by a liquidator against both the payee and the company's bank, albeit primarily against the payee; that that English Court of Appeal had not been persuaded to accept the reasoning of Street CJ in the Mal Bower case (which was not even relied on by counsel arguing the Hong Kong appeal); and that the basis of recovery was "obvious" in a straightforward case, as the section rendered the dispositions void and ineffective and, as between the company and the bank, the bank remained in receipt of the company's property to which it was not entitled.[33]We are unable to agree with Blackburne J on the precedent value of the decision in the Bank of South East Asia case. Its force is diminished by its reliance on those parts of the judgment of Buckley LJ in Gray's Inn Construction which, for the reasons already stated, are not considered dicta on argued points. We would also point out that the focus in the Hong Kong case was not on a claim by the company against the bank for restitution, but on a claim by the bank, which had reimbursed the company, for reimbursement by the payee to whom the amount had originally been paid. It was a case which assumed, rather than decided, that the the bank was liable under section 127 to make restitution to the company. 3. The Effect and Extent of Avoidance. It follows from the above reasoning that there is no claim for recovery from the Bank on the basis that, quite apart from the "double disposition" point, the effect of avoiding the dispositions to the payees under section 127 is, without more, to render the Bank liable to make restitution to the Company. The extent of the automatic retrospective avoidance is limited both by the terms of the section and by the purpose which it was enacted to achieve. The section only avoids "dispositions" of the Company's property (see Re Oriental Bank Corporation Ex parte Guillemin (1884) 28 Ch.D 634 at pp. 638-639 ). It does not in terms avoid all or any related transactions.As already explained, the purpose of the section is achieved by only avoiding dispositions of the Company's property to the ultimate payees of the cheques (i.e. the end result), without the need to affect the validity of any intermediate contracts or transactions occurring during the course of the agency relationship between the Company and the Bank. Section 127 did not avoid, revoke or countermand the Company's mandate to the Bank to make payments of money out of its account to meet cheques sent by the Company to the payees and subsequently presented for payment. The Company continued to use the Bank as its agent for the purpose of transmitting payments to creditors. Section 127 impinges on the dispositions to the creditors, but not on the authority of the Bank to act on the instructions of the Company or on contracts and other intermediate transactions between the Company and the Bank as part of the process leading to the ultimate disposition of the Company's property to the payees.[34]Because of this conclusion it is not necessary to say anything on the Bank's alternative argument that, if the Bank is liable, the Company cannot recover against the Bank without first exhausting its remedies against the payees.[35]For these reasons we allow the appeal and set aside the order of the judge.

Order

Appeal allowed and the order of the judge set aside. Appellant's costs in the appeal and below to be set aside if not agreed. Permission to appeal to the House of Lords refused. (Order does not form part of approved judgment.)

Cited in 21 later judgments

and 12 more of the most senior