Coutts & Company v Stock
| Jurisdiction | England & Wales |
| Judgment Date | 24 November 1999 |
| Judgment citation (vLex) | [1999] EWHC J1124-11 |
| Docket Number | 1998 C No 1024 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 24 November 1999 |
[1999] EWHC J1124-11
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Honourable Mr Justice Lightman
1998 C No 1024
Mr Michael Lazarus instructed by Farrer & Co for the Claimant
Mr Christopher R Parker instructed by Berrymans Lace Mawer for the Defendant
Hearing: 11th November 1999
This is the official judgment of the Court and I direct that no further note or transcript be made
INTRODUCTION
This is an action by the claimant Coutts & Co ("the Bank") against the defendant Mr Stock ("the Guarantor") to enforce the guarantee given by the Guarantor ("the Guarantee") of the account with the Bank of Love This Records Limited ("the Debtor") . In this action the Bank is applying under what was RSC Order 14A, and what is now CPR R24.2, for the determination two issues of law of some importance. These issues concern the effect of Section 127 of the Insolvency Act 1986 ("Section 127") on the liability of a guarantor of the overdraft arising from the bank's continuing to honour cheques of an insolvent company over the period between the date of presentation of a petition to wind up the company and the date of the subsequent winding up order.
FACTS
On the 25th March 1997, the Bank granted to the Debtor a £200,000 overdraft facility secured by a personal guarantee given by the Guarantor who was a director of the Debtor. Three weeks later on the 16th April 1997 a winding up petition was presented against the Debtor. On that date the Debtor's account with the Bank was £500 in credit. The petition was advertised in the London Gazette on the 30th May 1997. On that date the account was overdrawn in the sum of £121,875. A winding up order was made on the petition on the 11th June 1997. The overdraft by then had increased to at least £190,000. The increases in the overdraft reflected the honouring by the Bank of cheques drawn in favour of third parties. Of the increases, the larger part totalling £139,564.10 reflected cheques drawn by the Debtor in favour of three companies owned and/or controlled by the Guarantor. On the 15th June 1997 pursuant to the provisions of the Guarantee the Bank demanded payment by the Guarantor of the balance of £192,602.34, a demand repeated by the Bank's solicitors on the 28th May 1998. The writ in this action was issued on the 11th June 1998. On the 15th July 1998, the liquidators of the Company demanded repayment by the three companies of the three sums paid to them, but the companies have made no repayment. No validation order under Section 127 has been applied for or made.
ISSUES
Section 127 provides as follows:
"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."
The only defence of the Guarantor is invocation of Section 127. Absent Section 127, there could be no defence to the claim by the Bank against him. The two questions raised are:
(1) whether (in the absence of a validation order under that section) upon the making of the winding up order Section 127 operated retrospectively to disentitle the Bank from debiting the Debtor's account in respect of cheques honoured after the date of the presentation of the petition and accordingly (leaving aside the provisions of clause 10 of the Guarantee) retrospectively disentitled the Bank from recovering the amounts in question from the Guarantor;
(2) (if the answer to question (1) is in the affirmative) whether nonetheless the provisions of clause 10 of the Guarantee are effective to impose on the Guarantor a liability for the amounts in question as sole or principal debtor.
I shall consider each of these questions in turn.
SECTION 127 AND OVERDRAFTS
4. There is one decision of the English Court of Appeal, namely In Re Gray's Inn Construction Co Ltd [1980] 1 WLR 711 (" Gray's Inn") , a very recent decision of Blackburne J., namely Hollicourt (Contracts) v. Bank of Ireland ("Hollicourt")and a body of authority in Commonwealth jurisdictions on the impact of Section 127. The authorities are in disarray and the state of the law is uncertain, if not confused. In the circumstances it is appropriate to consider first what as a matter of principle should be the answer to the question raised, and then second whether the authorities require some other answer to be given.
I must first identify certain significant facts in this case:
(a) the question raised in this case arises, not between the liquidators of the Debtor and a third party (whether the Bank or the payee of monies paid out by the Bank) , but between the Bank and the Guarantor;
(b) the Bank or such a payee, so long as it was ignorant of the presentation of the petition at the date of any payment or receipt of the Debtor's money, could have applied for a validation order validating payments by or to it between the date of presentation and the date of advertisement and on such an application a validation order would have been granted almost as a matter of course (see Hollicourt page 3) . But the Bank has made no application for validation: the Bank maintains that it does not need any such order to obtain full recovery from the Guarantor;
(c) the issue is confined to the impact of Section 127 on the creation of, and subsequent increases in, the Debtor's overdraft with the Bank. Attention is to be focused on payments made by the Bank to third parties which gave rise to and built up the overdraft producing today the figure claimed in this action. No question is raised as to the validity or voidness of payments received by the Bank and applied in reduction of the overdraft (as in Gray's Inn) or of payments made by the Bank which operated in reduction of the Company's credit balance (as in Hollicourt) .
Principles
The following are the principles which would be expected to operate in a case where Section 127 applies:
(1) the invalidation of dispositions of a company's assets after the date of presentation of a winding up petition is 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. It does not accordingly bite when the disposition can have no impact on the creditors e.g. in case of dispositions by receivers appointed under charges of the company's property or by the company where it holds legal title to property as bare trustee or subject to a specifically enforceable obligation to convey the property to a third party.
(2) the retrospective invalidation effected by Section 127 does not change what happened between the date of the petition and the date of the winding up order: it merely denudes any disposition of the company's property during that period of legal effect;
(3) the invalidation is limited to dispositions of property:
(a) the section does not invalidate a company's assumption of liabilities. The section in no way precludes a company incurring or continuing to incur liabilities (e.g. for rates, electricity or the services of employees) nor does it invalidate liabilities so incurred. An increase in a company's overdraft over the period between presentation of the petition and the making of the order for winding up is accordingly outside the ambit of Section 127;
(b) nor does Section 127 have any impact on the company's use, consumption or exhaustion of its assets. Thus though an agreed overdraft limit has been held to be "property" which can be the subject of theft by presentation of forged cheques (see R v. Kohn (1979) Cr App R 395) , it must be clear that (notwithstanding the contrary view expressed by Professor Goode in Principles of Corporate Insolvency Law at p.432) the use and indeed partial or total exhaustion of that overdraft limit by the company cannot constitute a disposition within Section 127;
(4) presentation of the winding up petition has no impact on the powers of the directors of the company, the authority of the company's agents or the powers of disposition of the company. In particular the presentation does not invalidate the mandate of the company's bank to honour the cheques of the company. The subsequent winding up order accordingly does not invalidate the loan made by the bank to the company constituted by honouring cheques drawn on the company's overdrawn account;
(5) if (contrary to my view) the acts of the bank of honouring cheques drawn on a company's overdrawn account constitute payments by the bank (by way of loan to the company) of its own monies to the party in whose favour the cheques are drawn, the transaction is outside Section 127, for there is no disposition of the company's property: the disposition is of the bank's property and the increase in the company's overdraft itself does not constitute a disposition within Section 127: see (3) above. (This is the analysis by Professor Goode at pp. 429–431) . The liquidator of the company can accordingly make no recovery from the payee nor can he challenge the state of the overdrawn account of the bank reflecting the payments drawn on the company's overdrawn account;
(6) on principle however the acts of the bank in honouring cheques drawn on a company's overdrawn account constitute (i) loans of the sums in question by the bank to the company and (ii) payment by the bank as agent of the company of the sums loaned as monies of the company to the party in whose favour the cheques are drawn. On this analysis, the loan by the bank to the company is not a disposition of the company's money (it is a disposition of the bank's money to the company) and is therefore outside Section 127; but the payment by the bank as agent for the company of the company's money does...
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