Hollicourt (Contracts) Ltd v Bank of Ireland

Section 127 of the Insolvency Act 1986 invalidates a post-petition disposition of company property to the ultimate recipient. Where a company pays a creditor by cheque from an account in credit, the disposition is to the payee, not to the bank which honours the cheque as the company’s agent.

The section does not invalidate the banking mandate or the intermediate transactions by which payment is transmitted. The liquidator may recover from the payee under the general law, but cannot require an un-enriched bank to reconstitute the account merely because it honoured the company’s instructions. The same analysis applies whether the account is in credit or overdrawn.

After a winding-up petition had been presented against Hollicourt (Contracts) Ltd, the company continued for more than three months to issue cheques on its account with the Bank of Ireland. The account remained in credit. The bank, having failed to detect the advertised petition, honoured payments totalling £156,200.

The liquidator sought restitution from the bank rather than the payees. Blackburne J held that section 127 of the Insolvency Act 1986 retrospectively avoided the debits and required the bank to reconstitute the account: [2000] 1 WLR 895.

The bank appealed. The central questions were whether honouring and debiting the cheques constituted additional dispositions of company property to the bank, and whether avoidance of the payments to the payees also invalidated the intermediate banker-customer transactions.

1. Appeal allowed and Blackburne J’s order set aside. Mummery LJ delivered the judgment of the court, constituted with Peter Gibson and Latham LJJ. The only dispositions invalidated by section 127 of the Insolvency Act 1986 were the dispositions of company property to the payees. The bank was not liable to restore the sums to the company.

2. Section 127 protects the insolvent estate against the alienation and dissipation of company property pending determination of a winding-up petition. Its purpose is fulfilled by avoiding the ultimate disposition to the recipient. It does not require the legal validity of every intermediate step in the payment process to be affected.

3. When a bank honours its customer’s cheque, it acts as the customer’s agent under the banking mandate. The resulting debit reduces the bank’s debt to the customer, but the bank does not receive the beneficial ownership of the property represented by the cheque. There is therefore no additional disposition of company property to the bank. The payee is the recipient of the benefit and the person against whom restitution may be sought.

4. Section 127 itself specifies no remedy following avoidance. Recovery is governed by the general law. The bank had not been unjustly enriched at the company’s expense, and the liquidator had no restitutionary claim against it merely because it had duly honoured the company’s instructions.

5. The section avoids dispositions of company property, not every associated contract or transaction. It neither revoked nor countermanded the company’s mandate to the bank. It left unaffected the intermediate agency and banking transactions used to transmit the payments to creditors.

6. The reasoning applied equally to an overdrawn account, although that situation did not arise on the facts. Gray’s Inn Construction Co Ltd did not bind the court to a contrary conclusion because its relevant statements arose from concessions and were unnecessary to its decision, which concerned payments into an overdrawn account. The contrary Hong Kong decision was not persuasive.

1. Court of Appeal: Allowed the bank’s appeal and set aside Blackburne J’s order. Permission to appeal to the House of Lords was refused.
2. High Court, Chancery Division: Blackburne J ordered the bank to reconstitute the company’s account after holding that section 127 of the Insolvency Act 1986 avoided the post-petition debits: [2000] 1 WLR 895.