BAILII is celebrating 24 years of free online access to the law! Would you
consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it
will have a significant impact on BAILII's ability to continue providing free
access to the law.
Thank you very much for your support!
[New search]
[Printable RTF version]
[Buy ICLR report: [2001] 2 WLR 290]
[Buy ICLR report: [2001] Ch 555]
[Help]
Case No: A3/1999/1261
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE BLACKBURNE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 20 October 2000
B e f o r e :
LORD JUSTICE PETER GIBSON
LORD JUSTICE MUMMERY
and
LORD JUSTICE LATHAM
|
BANK
OF IRELAND
|
Appellant
|
|
-
and -
|
|
|
HOLLICOURT
(CONTRACTS) LIMITED
|
Respondent
|
- - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2HD
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - -
Mr Gabriel Moss QC & Mr David Marks (instructed by Brooke North for
the Appellant)
Mr Hugh Jory (instructed by Messrs Eversheds of Cloth Hall Court for
the Respondent)
- - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright
LORD JUSTICE MUMMERY:
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) all 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 Coutts 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.)
BAILII:
Copyright Policy |
Disclaimers |
Privacy Policy |
Feedback |
Donate to BAILII
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/263.html
