After commencement of winding up company's bank account transactions all void (Part 1)

In the matter of Industrial Services Company (Dublin) Limited (in liquidation).

And in the matter of Section 218 of the Companies Acts 1963-1990.

Companies - Winding up - Company's bank failing to notice advertisement of winding up petition - Payments continuing to be made into and out of company's account - Account in credit for greater part of period in which payments made - Whether all payments "dispositions" - Whether all payments void as against bank - Whether bank liable to account to the official liquidator - Companies Act 1963, section 218.

The High Court (Mr Justice Kearns); judgment delivered 23 March 2001.

Once a winding up had commenced, all payments made either into or out of the bank account of that company were "dispositions" within the meaning of section 218 of the Companies Act 1963, and were consequently invalid. This was so notwithstanding that the payments in this case were paid into an account which was largely in credit.

Mr Justice Kearns so held in making a ruling that section 218 must invalidate every transaction to which it applied at the instant at which that transaction purported to have taken place, both as regards third parties and also as regards the bank processing the particular account.

Michael Tuite BL for the official liquidator; Robert Hastings BL for the bank.

Mr Justice Kearns said that the matter came before the court by way of an application by the official liquidator of Industrial Services Company (Dublin) Ltd ("the company") for a declaration that the transactions both out of and into the company's account with Ulster Bank Ltd ("the bank") made after the commencement of the winding up were void. The petition to wind up the company was presented on 16 January 1998, which was therefore deemed to be the date upon which the winding up of the company under section 220(2) of the Companies Act 1963 had begun.

Mr Justice Kearns said that the application concerned the proper interpretation of section 218 of the 1963 Act which provided as follows: "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." Between 16 January 1998 and 23 March 1998, when the bank had frozen the account, payments amounting to £16,003.53 had been paid into the account, and payments amounting to £16, 784.24 had been paid out of the account. The petition had been advertised on 27 February 1998. Payments had been made in and out of the account both prior to and subsequent to that date. On 21 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, and requiring compensation for the company in respect of the dispositions made.

By letter dated 18 October 1998, solicitors for the 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 had never been 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 that there had been no gain or benefit for the bank which could result in any claim by the liquidator. However, it was accepted by the bank that it did allow the account to become overdrawn between 25 February and 6 March 1998, excess payments being allowed in respect of normal trade cheques and wages.

Mr Justice Kearns said that, although Irish case law had recognised all such payments as "dispositions" within the meaning of section 218, a recent decision in the English Court of Appeal in Hollicourt (Contracts) Ltd (in Liquidation) v Bank of Ireland [2000] 1 All ER 289 suggested that such payments should be regarded as dispositions only in the hands of the ultimate recipient, and not as regards a bank which was, in facilitating the payment, merely obeying as agent the order of its principal to pay out the principal's money, as had happened in this case.

Mr Justice Kearns said that, the parties to this case had agreed that the court should limit its ruling to a consideration of the nature of a "disposition" within the meaning of section 218, and might defer consideration of any consequential issues, including the retrospective validation of payments, to a later date. There was no dispute between the parties as to the underlying purpose of the section which was to ensure that at the time of the liquidation all the assets of the company were "frozen" so that they might be distributed in accordance with the statutory rules, in other words to preserve the net value as of the date of the petition for the general body of creditors.

In Re Pat Ruth Limited [1981] ILRM 51, which concerned payments into and out of a company's overdrawn account after presentation of a winding up petition, Mr Justice Costello had been in no doubt that such payments were "dispositions" within the meaning of section 218, whether they were lodgments into a company's bank account or payments out of it. In Re Gray's Inn Construction Company Limited [1980] 1 All ER 814, Lord Justice Buckley had analysed the implications of the corresponding section of the Companies Act 1948, and had stated: "It may well be the case . . . that in clearing a third party's cheque and collecting the amount due upon it, the bank acts as the customer's agent, but as soon as it credits the amount collected in reduction of the customer's overdraft . . . it makes a disposition on the customer's behalf in its own favour discharging pro tanto the customer's liability on the overdraft." Lord Justice Buckley had also stated that even if the cheque had been paid in when the account was in credit, he doubted whether it could properly be said that the payment did not constitute a disposition of the amount of the cheque in favour of the bank.

Mr Justice Kearns said that counsel for the bank had submitted that section 218 did not apply to such payments as had been made in the instant case. He had submitted that money passing though the account was never transferred to the bank but was only held by them as agent. The recipient/payee was the disponee and beneficiary. The section rendered void the disposition to the recipient/payee, but did not operate to affect the agency interposing between the company and the recipient/payee. Mr Justice Kearns said that this submission was based on the decision in the Hollicourt case, where payments had continued to be made to third parties out of the account for over three months after the advertisement of the petition. Throughout that time, the account had remained in credit. After the company had been wound up, the 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. It was held by the Court of Appeal that where cheques had been drawn on a company's account, whether in credit or overdrawn, after presentation of a winding up petition, 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. This conclusion was based on the policy of the section, 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 creditors. That purpose was accomplished without any need for the section 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. It was not a restitutionary situation where the bank had been unjustly enriched as against the company and where the general law required restitution of the benefit.