High Court of Ireland Decisions

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:-

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:-

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.

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):-

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):-

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.

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:-

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:-

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:-

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):-

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.