After commencement of winding up company's bank account transactions all void (Part 2)

Mr Justice Kearns said that the Court of Appeal had also held in Hollicourt 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, and secondly, that the bank may be held liable by the liquidator in proceedings to the extent that the amounts proved to be irrecoverable from the creditors who had been paid. The court had distinguished the cases on the basis that Gray's Inn Construction concerned payments into an overdrawn account, and not, as in Hollicourt, with payments out of an account in credit.

Mr Justice Kearns said that counsel for the liquidator had submitted that the analysis must begin and end with a proper understanding of the word "disposition" and of the relationship between bank and customer. The word "disposition" had been defined in McGain v Commissioner for Taxation (1965) 112 CLR 3 to include the payment by a lender to a borrower of a sum of money agreed to be lent. The general relationship of a banker with a customer was one of borrower and lender. This gave the bank property over the money held by it subject to rights of repayment on demand or otherwise. Payment by a bank on foot of a cheque to a third party involved the bank in a dual relationship. The bank either increased or reduced its indebtedness to the customer by making a payment to a third party. Counsel for the liquidator submitted that the bank was a real party to any transaction when money was lodged with it and in the transfer of money to a third party of sums which it owed to its client (where the account was in credit) or of the money that the client had agreed to owe it (where the account was in overdraft). The bank was more than an agent: it was the disponee because property in the money passed to it. To find otherwise would remove the banks from the ambit of section 218 in a manner that would truncate the clear meaning of the section. Counsel for the liquidator relied on the views of Mr Justice Blackburne J, who, in the decision at first instance in Hollicourt, had stated: "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 relation of banker and customer could only be reduced by those payments if they were validly made (i.e., not avoided)."

Mr Justice Kearns said that the issue had been addressed by Breslin: Banking Law in the Republic of Ireland (1998) at page 386, where the author, in considering the relevance of section 218 to the bank with whom the company in liquidation operated its trading accounts, stated that 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, which might be represented by an overdraft or loan account, would amount to a disposal of the company's property. However, the author went on to state that where the bank collects a cheque on behalf of the company, but credits it to an account with a zero balance, or to one which was in credit, the money was collected by the bank as agent for the customer, although strictly speaking title to the money represented by the cheque vested in the collecting bank, which then became creditor of the company in the amount of the cheque. The author submitted that, from a commercial point of view, the views expressed obiter by Lord Justice Buckley in Gray's Inn Construction were wrong.

Mr Justice Kearns said that, notwithstanding those views, something more than a commercial desideratum as considered form the bank's viewpoint would be required to persuade him to take a different view from that expressed by Mr Justice Costello in Re Pat Ruth Limited. Mr Justice Kearns said that he was not convinced that the reasoning by the Court of Appeal in Hollicourt was preferable to the different view taken by the same court in Gray's Inn Construction. He did not see that some commercial interpretation advantageous to the bank must be given to section 218 when its meaning was 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.

Mr Justice Kearns said that the banks discharged a dual function in their relationship with their customer. In one sense they acted as agents, but, given that property in money passed to them, the true relationship was that of borrower and lender. The banks had a very special role of responsibility in a winding up, including that of vigilance in respect of their client customers which, because of their assets and expertise, they were well placed to perform. Where they did exercise that role and function, it seemed at least they serve a wider commercial interest so the narrow commercial contention of the bank's interest was not the issue. If the bank in exercising its functions responsibly ensures greater protection for the general body of creditors, that surely was consistent with the policy of the section. The Oireachtas, by providing for the advertisement of a petition must be seen 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 was in financial difficulty.

The court also retained the important power of validation, which gave it a wide discretion to ameliorate and mitigate the rigours of section 218. For example, any problem with "double accounting" could be dealt with on application to the court by the bank to validate dispositions made. Mr Justice Kearns said that it did not necessarily follow from the conclusions he had reached that there was any justification for arguing that a liquidator could set his sights against the bank only, ignoring the ultimate recipients of payments made. He made 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.

Solicitors: L. K. Shields (Dublin) for the liquidator; McKeever Rowan (Dublin) for the bank.