Hollicourt (Contracts) Ltd v Bank of Ireland
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE MUMMERY |
| Judgment Date | 20 October 2000 |
| Judgment citation (vLex) | [2000] EWCA Civ J1020-2 |
| Docket Number | Case No: A3/1999/1261 |
| Court | Court of Appeal (Civil Division) |
[2000] EWCA Civ J1020-2
Lord Justice Peter Gibson
Lord Justice Mummery and
Lord Justice Latham
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
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)
This is the judgment of the court.
Introduction.
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).
"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.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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."
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."
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.
He made two further points at the end of his judgment.
"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).
"…the fact that the...
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