Industrial Services Company (Dublin) Ltd. (In Liquidation), Re [2001] IEHC 49; [2001] 2 IR 118 (23rd March, 2001)

JUDGMENT of Mr Justice Kearns delivered the 23rd day of March, 2001 1. This matter comes before the Court by way of Notice of Motion seeking a declaration that the transactions both out of and into the Industrial Service Company (Dublin) Limited Account in the Ulster Bank Ltd., account number 74003067, made after the commencement of the winding up, are void. The Motion also seeks an Order requiring the Ulster Bank Ltd. to account for all such sums to the Company and for such other Orders as may be appropriate. 2. The Application is brought by Simon Coyle the Official Liquidator appointed by Order of the High Court dated the 23rd of March 1998. He was granted leave under Section 231(a) of the Companies Acts 1963-1990 to proceed against Ulster Bank in this matter on the 19th of April 1999. 3. The Petition in the case was presented on the 16th of January 1998 which is therefore deemed to be the date upon which the winding up of Industrial Services Company (Dublin) Limited (hereinafter called “the Company”) under Section 202 (2) of the Companies Act 1963 occurred 4. This Application concerns the proper interpretation of Section 218 of the Companies Acts 1963 which states that:- “In a winding up by the Court, any disposition of the property of the Company, including things in action, and any transfer of shares or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the Court otherwise orders, be void.” 5. The Application relates to the status of payments made in and out of the Company’s account with Ulster Bank at their branch in Coolock Co. Dublin since the 16th of January 1998. Since that time, and prior to the freezing of the account by the Bank on the 23rd of March 1998, payments amounting to £16,003.53 were paid into the account, and payments amounting to £16,784.24 were paid out of the account. 6. The petition was advertised on the 27th of February 1998. Payments were, however, made in and out of the account both prior to and subsequent to the 27th of February 1998. 7. On the 21st of August 1998 the Liquidator wrote to the Bank pointing out the activity on the account and asserting that each such disposition was void under Section 218 . He therefore required Ulster Bank to fully compensate the Company in respect of the dispositions made. 8. By letter dated 16th of October 1998, the Solicitors for Ulster Bank advised that the Bank through inadvertence had failed to notice the advertisement in either Iris Oifiguil or in the daily newspapers. The Bank’s Solicitors further pointed out that the account in question was a credit account so that the Company was never indebted to the Bank. Any monies paid out were in the normal course of the Company’s business and Ulster Bank had not applied any incoming lodgements for its own use or benefit. Thus, it was asserted on behalf of the Bank, there had been no gain or benefit for the Bank which could result in any claim by the Liquidator. 9. However, it was accepted by the Bank that it did allow the account to become overdrawn between 25th February and the 6th March, 1998, excess payments being allowed in respect of normal trade cheques and wages. 10. The matter comes before the Court in circumstances where, although Irish case law has hithereto recognised all such payments as ‘dispositions’ within the meaning of Section 218 , a recent decision of the Court of Appeal in Hollicourt (Contracts) Limited (in Liq) -v- Bank of Ireland (2001) 1A. E. R. 289 suggests that such payments should be regarded as dispositions only in the hands of the ultimate recipient, and not as regards a Bank, as the bank was, in facilitating such a payment, merely obeying as agent the order of its principal to pay out the principals money. 11. Before this Court, the parties agreed that the Court should limit its ruling to a consideration of the nature of a “disposition” within the Section and to defer consideration of any downstream consequential issues, including the retrospective validation of payments, to a later date. 12. There is no dispute between the parties as to the underlying purpose of the Section. As pointed out by Breslin’s Banking Law in the Republic of Ireland (1998 Ed.) at p.385:- “ The purpose of the Section is to ensure that at the time of liquidation all the assets of the Company are ‘frozen’ so that they may be distributed in accordance with the statutory rules.” 13. In other words the objective is to preserve the net value as of the date of the Petition for the benefit of the general body of creditors. In Re: Pat Ruth Limited (1981) ILRM 51, Costello J. was in no doubt what that such payments were ‘dispositions’ within the meaning of Section 218 , be they lodgements into a company’s bank account or payments out. In that case, the company’s Liquidator applied to the Court for directions as to the validity of three lodgements into the Company’s overdrawn account and payments made by cheque out of the account. All of the transactions, both into and out of the account, had occurred after the presentation of the petition. Two of the lodgements were made prior to the bank having received actual notice of the presentation of the petition. The payments out of the account had been to discharge sums due to the exhibit “B” creditors. There was no explanation of the nature of these creditors and whether they were incurred pre or post liquidation. Costello J. stated (at p.52):- “ I am quite satisfied that each of the payments into the company’s bank account by way of the three lodgments to which I have referred amounts to a ‘disposition’ within the meaning of Section 218 of the Act . This has not been contested in the course of the submissions made to me and the nature of this transaction in a similar case in the English Courts has been referred to. The Court of Appeal clearly indicated that lodgments in such circumstances amounted to a ‘disposition’ within the meaning of the corresponding English Section (see in Re: Gray’s Inn Construction Company Limited (1980) 1 A. E. R. 814.) Similarly the payments out to the third parties by means of the cheques referred to in exhibit b are ‘dispositions’ within the meaning of the section. Therefore, prima facia, all these payments are void unless validated by a Court Order under Section 218 .” In Gray’s Inn Construction , Buckley L. J. considered the issue directly in point. In his Judgment, he analysed the implications of the corresponding section of the Companies Act, 1948 as follows (at p. 818): “The Judge proceeded on the basis, which he held to be the position in law, that payment of monies to the credit of a company’s account, whether it is in credit or not, do not constitute a disposition of the company’s property. That is a view with which, with deference to the Judge, I feel unable to agree. When a customer’s account with his banker is overdrawn he is a debtor to his banker for the amount of the overdraft. When he pays a sum of money into the account, whether in cash or by payment in of a third parties cheque, he discharges his indebtedness to the bank pro tanto. There is clearly in these circumstances, in my Judgment, a disposition by the Company to the Bank of the amount of the cash or of the cheque. It may well be the case, as Counsel for the Bank has submitted, that in clearing a third party’s cheque and collecting the amount due upon it, the Bank acts as the customers agent, but as soon as it credits the amount collected in reduction of the customer’s overdraft, as in the ordinary course of banking business it has authority to do in the absence of any contrary instruction from the customer, it makes a disposition on the customer’s behalf in its own favour discharging pro tanto the customers liability on the overdraft. Counsel for the Bank was constrained in the course of the argument to accept that this is so. In the present case the Company’s account with the Bank was overdrawn, so I need not consider what the position would have been if any cheque had been paid in when the account was in credit, but I doubt whether even in those circumstances it could properly be said that the payment in did not constitute a disposition of the amount of the cheque in favour of the Bank. Counsel for the Bank does not dispute that all payments out of the Company’s account to third parties, not being payments to agents of the Company as such, are dispositions of the Company’s property; but he contends (as I understand his argument) that they are only relevant for the purposes of Section 227 to the extent that payments out during the relevant period exceed payments in. That all such payments out must be dispositions of the Company’s property is, I think indisputable, but I cannot accept Counsel’s contention. The Section must, in my judgment invalidate every transaction to which it applies at the instant at which that transaction purports to have taken place. I cannot see any ground for saying that the invalidation can be negatived by any subsequent transaction. It follows, in my judgment, that unless validated under the Section all the payments into and all the payments out of the Company’s account during the period August 3 to October 9 1972 were invalid. No one, however, suggests that the Bank should repay to the Liquidator £25,313 and that all the recipients of the £24,129 should repay to the Liquidator the sum so received by them. The problem is how in these circumstances the discretionary power of the Court under the Section to validate dispositions which would otherwise be invalid should be exercised.” 14. Mr Hastings on behalf of Ulster Bank submits that Section 218 does not apply to such payments as were made in the instant case. He submits that money passing through the account was never transferred to the Bank but was only held by them as agent. In order to constitute a ‘disposition’ there must be a disponer and a disponee. The Company is the disponer. The recipient/payee is the disponee and beneficiary. The Bank is not a beneficiary. The Section renders void the disposition to the recipient/payee, but does not operate to affect the agency interposing between the Company and the recipient/payee. The Bank is an intermediary, carrying out the instructions of the Company, and is not within the invalidating provisions of the Section. To do so would be unjust and beyond the policy promoted by the Section and in effect would allow the real beneficiaries of the actions of the Directors/Company to escape the invalidating provisions of the Section. Essentially therefore, he argues, the Liquidator has chosen “the wrong target” in this Application and has not proceeded against the actual beneficiaries. The reality is that the Liquidator seeks to impose a liability on a convenient “broad shoulder” rather than pursue the actual beneficiaries as is intended by the Section. 15. As Mr Hastings submission is almost entirely underpinned by the decision of the Court of Appeal in Hollicourt, it now becomes necessary to consider that case. 16. Here, a petition was presented for the winding up of a company. Although the petition was advertised, the Company’s Bank missed the advertisement due to human error. As a result, payments continued to be made to third parties out of the account for over three months after the petition was advertised. Throughout that time, the account had remained in credit. After the Company was wound up, its Liquidator made an application against the Bank under Section 127 of the Insolvency Act 1986, seeking recovery of the post advertisement payments as void dispositions of the Company’s property. The Judge required the Bank to reconstitute the fund, holding that Section 127 operated not only against third party recipients, but also against the Bank which had made the payments. The Bank appealed. 17. It was held by the Court that where cheques were drawn on a company’s account, whether in credit or overdrawn, after the presentation of a winding up petition, Section 127 of the 1986 Act did not enable the Company to recover from its Bank the amounts paid. Rather, Section 127 only invalidated dispositions by a company of its property to the payees of the cheques and enabled it to recover the amounts disposed of only from those payees. Such a conclusion was consistent, the Court held, for the purpose of Section 127 which was part of a statutory scheme designed to prevent company directors disposing of company’s assets when liquidation was imminent, to the prejudice of its creditors, and to preserve those assets for the benefit of the general body of the creditors. That purpose was accomplished without any need for Section 127 to impinge on the legal validity of intermediate steps, such as banking transactions, which were merely part of the process by which dispositions of the Company’s property were made. For that provision to operate, there had to be a disposition amounting to an alienation of the Company’s property. There was no such alienation to a bank when it honoured a company’s cheque. It was merely obeying as agent the order of its principal to pay out of the principal’s money, in the agents hands, the amount of the cheque to the payee. 18. Mummery L. J. stated (at p.294):- “ 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 L. J. 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.” 19. In adopting this view, the Court cited with approval an extract from the Judgment of Street C. J. in the Australian case of Re: Mal Bower’s Macquarie Electrical Centre Pty Limited (in Liq) (1974) 1 N. S. W. L. R. 245 where Street C. J. stated (at 258):- “ 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 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 intermediate 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 Section 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 Section 227.” 20. The Court of Appeal also held that the Judgment in Gray’s Inn Construction was not binding authority for two propositions, namely, that all post-presentation cheques drawn in favour of third parties on a company’s bank account, whether in credit or debit, involve a disposition in favour of the bank or, secondly, that the bank may be held liable by the Liquidator in proceedings to the extent the amounts proved to be irrecoverable from the creditors who were paid. The Court distinguished the cases on the basis that Gray’s Inn was a case concerned with payments made into an overdrawn account, and not, as in Hollicourt , with payments made out of an account in credit. 21. In reply, Mr Tuite submitted that the analysis must begin and end with a proper understanding of the word ‘disposition’ and of the relationship between bank and customer. Words and Phrases Legally Defined (volume 2) notes that in Australia in the case of McGain -v- Commissioner for Taxation (1965) 112 C. L. R. (3 at 528), the word ‘disposition’ has been defined as follows:- “There is no doubt that when a loan of money is made by one person to another, the property in the money lent passes, upon the loan being made, from the lender to the borrower. There is, upon payment to the borrower, a disposition of the money lent notwithstanding the fact the borrower may have undertaken to repay the amount of the loan and I can see no reason why the wide words of the definition of ‘disposition of property’ (in Section 4 of the Gift Duty Assessment Act 1941-1986) as ‘any conveyance, transfer, assignment, settlement, delivery, payment or any other alienation of property’ does not fairly comprehend the payment by a lender to a borrower of a sum of money agreed to be lent from the former to the latter.” 22. Mr Tuite further submitted that the general relationship of a banker with a customer is one of borrower and lender, not as bailor or agent for the monies held. This gives the bank property over the monies held by its subject to rights of repayment on demand or otherwise. Payment by a bank on foot of a cheque to a third party involves the bank in a dual relationship. The bank either increases or reduces its indebtedness to the customer by making a payment to a third party. 23. Mr Tuite referred to Pagets Law of Banking(Tenth Edition) at p.161 which noted that the classic description of the contract constituted by the relationship of banker and customer is that of Atkin L. J. in Joachimson -v- Swiss Banking Corporation (1921) 3 K. B. 110 at 127:- The bank undertakes to receive money and to collect bills for its customers account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and attempts to repay them. The promise to repay is to repay at the branch where the account is kept, and during banking hours. It includes a promise to repay any of the amount due against the written order of the customer addressed to the bank at the branch, and as such written orders may be outstanding in the ordinary course of business for two or three days, it is a term of the contract that the bank will not cease to do business with the customer except upon reasonable notice. The customer for his part undertakes to exercise reasonable care in executing his written orders so as not to mislead the bank or to facilitate forgery. I think that it is necessarily a term of such a contract that the bank is not liable to pay the customer the full amount of his balance until he demands payment from the branch at which the current account is kept.” 24. Mr Tuite submits that the bank is a real party to any transaction when money is lodged with it and in the transfer of money to a third party of sums which it owes to its client (where the account is in credit) or of the money that the client has agreed to owe it (where the account is in overdraft). He therefore submits that the bank is more than an agent. It is the disponee because property in the money passes to it. To find otherwise would remove the banks from the ambit of the Section in a manner that would truncate the clear meaning of the Section. 25. He submitted that in Hollicourt , the views of Mr Justice Blackburne in the High Court represented a more accurate reflection of the true relationship. At (2000) 1W. L. R. 898 he stated that:- “ 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 party 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 by delivery of the company’s cheque to the third party. The debiting of the customers account to the amount of his cheque on presentation for payment ( by paying that amount to the third party in satisfaction of the cheque) seems to me in every sense a disposition of the company’s property. In my judgment, the transaction which is afforded 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 for 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 company’s winding up. The consequence of such avoidance, insofar 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 banks 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.” 26. Mr Justice Blackburne considered that this view was in accord with the conclusion of the Hong Kong Court of Appeal in Bank of East Asia Limited -v- Rogerio Sou Fung Lamb (1988) 1 H. K. L. R. 181. Further, insofar as the Court of Appeal in Hollicourt sought to rely on the decision in Coutts & Co. -v- Stock (2000) 2A. E. R.56, that case, it is submitted, is not in point, because it deals with a loan to a company to enable it make a disposition and not a disposition of company assets as such. 27. Given such evenly balanced arguments, this Court does not find resolution of the issue an easy matter. 28. The issue was addressed by Breslin’s Banking Law in the Republic of Ireland (1998)(Ed.) at p386 where the author states:- This Section (i.e. S.218) is of particular relevance to the bank with whom the company in liquidation operates its trading accounts. The appropriation by the bank of a cheque collected by it on behalf of the company to a debt owed by the company to the bank (for example as represented by an overdraft or loan account) will amount to a disposal of the company’s property. This is equivalent to the company, after the date of winding up, paying money to one of its creditors (the bank) - which is clearly not permitted as all creditors must be paid an equal proportion of their debts, which proportion is fixed by the liquidator, and not the company, still less the creditor. What, therefore of the position where the bank collects a cheque on behalf of the company, but credits it to an account with a zero balance, or which is in credit? Is this a disposition of the property of the company? Strictly speaking, of course, title to the money represented by the cheque effectively vests (as part of the global clearing-netting process) in the collecting bank. The collecting bank then becomes a creditor of the company in the amount of the cheque. However, from a commercial point of view the money is collected by the bank as agent for its customer, and a businessman would view the money as ‘belonging’ to the company. The issue has not yet been addressed in any reported case in Ireland. In Re: Gray’s Inn Construction Company Limited (1980) I W. L. R. 711 Buckley LJ. said, obiter, that the payment of funds to the bank which were then credited to an account in credit would amount to a disposition of the property of the company. It is submitted that, from a commercial point of view, this is wrong; and that the law should reflect the commercial realities of the situation. Where the bank gives effect to the company’s payment orders the bank is said to be disposing of the company’s property, even if the account is in debit. Yet, strictly speaking, whether the account is in debit or in credit, the bank is paying away its own monies. It is submitted that there can be no logical basis for asserting that an increase in the company’s overdraft is automatically a disposition of the company’s property. Professor Goode identifies three situations where use of an overdraft does amount to a disposition of the company’s property. The first, where the overdraft is secured in favour of the bank; in such a situation a swelling of the assets covered by the security results in a consequential reduction in the amount of assets available for preferential and unsecured creditors. Second, where the bank has a right of set-off so that it can reduce the company’s credit balance on another account by the amount of the overdraft; this has the same practical result as where the overdraft is secured. Thirdly, where the advance is within the limit of an overdraft agreed to be extended by the bank, for, it is argued, this reduces the amount of credit available to the company.” 29. I feel that, notwithstanding the passage just referred to, something more than a commercial desideratum as considered from the Banks viewpoint would be required to persuade me to take a different view from that expressed by Costello J. in Re: Pat Ruth Limited . I am not convinced that the reasoning by the Court of Appeal in Hollicourt is preferable to the different view taken by the same Court in Gray’s Inn Construction Limited . I do not see that some commercial interpretation advantageous to the Bank must be given to Section 218 when its meaning, on the face of it, is plain and straightforward. Had the legislature intended that some sort of derogation or qualification would apply in the case of banks, it would have been easy to frame this Section appropriately. 30. I think Mr Tuite is correct in his submission that banks discharge a dual function in their relationship with their customer. In one sense they act as agents, but, given that property in money passes to them, the true relationship is that of borrower and lender. Thus the bank can be both agent, creditor and debtor. They thus have a very special role of responsibility in winding up situations. Not the least part of that role is one of vigilance in respect of their client customers which, because of their assets and expertise, they are well placed to perform. Where they do exercise that role and function it seems to me at least they serve a wider commercial interest so the narrow commercial contention of the Banks interest is not the issue. If the Bank in exercising its functions responsibly ensures greater protection for the general body of creditors, that surely is consistent with the policy of the section. 31. The Oireachtas by providing for the advertisement of a petition must be seen, it seems to me, as wishing to impose an obligation on institutional creditors in particular, not only to have regard to such advertisements, but to control the operation of company accounts in a particular way after it becomes clear that the company is in financial difficulty. 32. This may appear harsh insofar as the bank is concerned. However, that cannot be a valid reason for construing the Section in a way which banks might regard as more satisfactory from their own commercial point of view. 33. As Murphy J. pointed out in PMPA Coaches Limited (Judgment delivered on the 15th of June 1993):- “ ...all payments made subsequent to the presentation of the petition are void unless and to the extent that the same are validated by an express order of the Court. The hardship which flows from this express statutory provision could not be of itself a ground for validating a payment. Such a principle would constitute an effective repeal of the statutory provision.” 34. To uphold the contention of the Bank would in my view effectively truncate the section. 35. However, the Court retains the important power of validation. This gives the Court a wide discretion to ameliorate and mitigate the rigours of Section 218. 36. For example, any problem with “double accounting” can be dealt with on application to the Court by the Bank to validate dispositions made. It does not necessarily follow from the conclusions I have reached that there is any justification for arguing that a Liquidator can set his sights against the bank only, ignoring the ultimate recipients of payments made. 37. In the absence of agreement between the parties, I will discuss with them any downstream consequences of my ruling. That is sufficient for present purposes for me to hold, as I do, that the Section must invalidate every transaction to which it applies at the instant at which that transaction purports to have taken place, both as regards third parties and also as regards the bank processing the particular account. © 2001 Irish High Court BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII