Bank of Ireland -v- Hollicourt (Contracts) Limited Court of Appeal

United Kingdom

1. Introduction

The Court of Appeal have taken a fresh look at the effect of section 127 Insolvency Act 1986 ("s.127") on the operation of bank accounts.

They have concluded that whether an account is in credit or overdrawn at the time of the presentation of the petition to wind up a company, paying a cheque does not constitute a disposition of the company’s property such as to render the bank liable under s.127.

2. Summary of Judgment

The Court looked at the intention of s.127 and the judgment in re Gray's Inn in the context of an account operated in credit and concluded that s.127 only makes void the dispositions by the company of its property to the payees of the cheques. A payment into an account (whether in credit or overdrawn) with a bank cannot be treated as a void disposition by a subsequent liquidator such as would entitle him to claim restitution from the bank. The bank 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 accounts. It is important to note that the Court confirmed the bank is not unjustly enriched at the expense of the company so that the question of restitution does not arise.

The Court also commented, although these were not the facts of the case, that even if the account had been overdrawn, the legal effect of s.127 would produce the same result in respect of a claim for recovery against the bank. There is therefore no need to distinguish between payments made out of an account which is in credit or overdrawn. "The need for such an analysis cannot be justified by any sensible view of the purpose of s.127." (para. 32)

s.127 only avoids "dispositions of the company's property". It does not avoid all or any related transactions. It is worth quoting the conclusion of the judgment in full: "The purpose of the section is achieved only by avoiding dispositions of the company's property to the ultimate payees of the cheques, without the need to affect the validity of any intermediate contract or transactions arising during the agency relationship between the company and the bank. s.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. s.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." (para. 33).

3. What is the effect of Hollicourt on Bank's Practices?

The implications of this case are that there ought to be no need for banks in future to freeze the accounts of a company against whom a winding petition has been presented. However, on closer inspection, it is difficult to see how banks could feel safe in simply abandoning their existing cautious procedures in operating such accounts.

There are four conditions in which an account might be found upon the presentation of a winding-up order:

An account in credit, payments made out

A payment made out of an account in credit is not a disposition of the company's property made by the bank. (It is of course a disposition of the company's property made by the company.) So far as the bank is concerned, Hollicourt would suggest that the banks can be relaxed about instructions to pay out. The eventual Liquidator will have a right of action against the recipient payees. But should banks go so far as refusing to make such payments, in probable contradiction of the mandate on the account, by pointing out to the company (acting by its Directors) that the payment out would be a void disposition under s.127? In our view, banks would not be entitled to refuse to make payment but should advise the company to seek legal advice.

An account in credit, payment made in

There is no legal reason why the bank should refuse to accept such payments. Normal practice before Hollicourt was to accept such payments if they were made, but once it had been made clear to the company that no payments would be made out, they were seldom received. The judgment of Hollicourt does not address this point. A legally effective course would be to rule off the existing account for the purposes of post-presentation credits, pay those credits into a new account, and allow payments only out of the old account.

An account in debit, payment made out

Under Hollicourt, the position is that as the bank was acting as agent to make payments to the payees of the cheques, the bank itself is not liable for such payments. (Such payments out are only likely to have been made by the bank if it was unaware of the presentation of the petition. Otherwise, it will be increasing its overdraft in the knowledge of the impending winding-up of the company.) The bank would be best advised not to lend further money, to freeze the account and to seek legal advice.

An unsecured account in debit, payment made in

The facts of the first instance case of Coutts -v- Stock involved an overdrawn account. Regrettably, that case will not be appealed, and the judgment of Hollicourt has not speculated on what the bank's position is where its (unsecured) overdraft is reduced by the company paying money into the account. One presumes that the company is making a disposition of its property by making payment in and that the bank stands in the position of recipient payee and therefore the transaction is void under s.127. The bank is therefore liable to repay the company with the amount received. Therefore, banks should rule off the account and open a new account for post-presentation credits. It should be borne in mind that banks cannot then rely on any credit balance in that new account for the purposes of set-off against existing or future debit balances.

4. Conclusion

The effect of Hollicourt is to make the legal position of the banks operating accounts of companies against whom a winding up petition has been presented rather more complicated than it was under re Gray's Inn. Certainly in those cases where a bank is unaware that a winding up petition has been presented, and where payments have been made out of an account in credit or overdrawn, then the bank will no longer be potentially liable for those payments. (The position is unclear as explained above for payments made into an account with an unsecured overdraft.) Arguments about actual or constructive notice by advertisement to the world should cease in such circumstances.

In those cases where the bank was actually aware of the presentation of a petition for winding up, it has stripped away the blanket of protection which it was always felt that re Gray's Inn gave. Banks made a policy decision to freeze operations on an account, precisely because of the potential risk of having to reimburse monies under s.127.

The position now is that banks will find it quite difficult to justify freezing an account which is in credit and making a payment out unless they can actively persuade the company that it might be making a void disposition under s.127 (and would banks in that case run the usual dangers associated with giving advice to the company or appearing to try to direct its actions, e.g., being accused of acting as a shadow director?).

Banks either have to maintain a counsel of prudence and freeze all accounts whatever their condition, undermined nonetheless by Hollicourt, or else they need to pay particular attention to the condition of the individual account and think whether as a matter of policy they refuse to accept credits to an overdrawn account (or, of course, simply receive such credits into a new blocked account until such time as the winding up is resolved or the liquidator makes a claim.)

For further information please contact Ruth Pedley at ruth.pedley@cms-cmck.com or on +44 (0)20 7367 2098.

CMS Cameron McKenna

Please note that the views expressed in this note are of a general nature only and are not intended to be a substitute for legal advice on specific cases.