Mr Justice Lightman has recently held that Section 127 of the Insolvency Act 1986 has no effect on the liability of either a company or a guarantor to pay sums due on an overdrawn account. Section 127 was limited to dispositions of property, and did not apply to increases in a company's overdraft. (Coutts & Co v Stock - judgment delivered 24 November 1999)
Facts
A debtor company had a £200,000 overdraft facility with Coutts & Co which was secured by a personal guarantee given by the defendant guarantor, who was a director of the debtor company. When a winding up petition was presented against the company in 1997, the bank account was in credit. The account was overdrawn by £121,875 by the time the petition was advertised, and by the time the winding up order was made, the overdraft had increased to more than £190,000.
The increase in the overdraft reflected the Bank honouring cheques drawn in favour of third party recipients. Cheques amounting to £139,564 were drawn in favour of three companies which were controlled by the guarantor. No order to validate any of these payments under Section 127 had been applied for. The company's liquidator sought repayment of sums paid, from these three companies but was unsuccessful. The Bank therefore called on the guarantor to pay the full amount of the company's overdraft (£192,602) and issued proceedings and sought a determination on two issues of law.
Issues
- Whether the Bank was entitled to make payments out of the company's account without a validation order under Section 127 of the Insolvency Act 1986.
- Whether, if Section 127 retrospectively invalidated the payments as against the Bank, the Bank could recover from the guarantor by virtue of Clause 10 of the guarantee.
Held
The act of the Bank in honouring cheques drawn on the company's overdrawn account constituted (i) loans of the sums in question by the Bank to the company, and (ii) payment by the Bank acting as an agent, of such loaned sums as moneys of the company to third party recipients. The loan by the Bank was not a disposition of the company's money but a disposition of the Bank's money to the company and therefore did not fall within Section 127. The payment by the Bank as agent for the company of the company's money to the third party, however, did constitute a disposition to the payee by the company within Section 127 and was therefore recoverable by the liquidator from the third party.
Mr Justice Lightman referred to the decision of Mr Justice Blackburne in Hollicourt (Contracts) Limited v Bank of Ireland (judgment dated 11 November 1999) (see Practice Note No.1/00) in which payments made, after a petition had been presented, out of a company's account which was in credit, were held to be dispositions under Section 127 which were then invalidated against the Bank. Mr Justice Blackburne had not considered the position relating to payments made out of an overdrawn account.
Although unnecessary in light of the decision on the first issue, Mr Justice Lightman also considered the second issue. It was found that Clause 10 of the guarantee provided that the guarantor's liability was not to be affected by any "legal limitation, bar or restriction" or "dissolution disability incapacity or want of borrowing powers" of the debtor company. If Section 127 had retrospectively invalidated the payment of cheques as against the Bank, the words of Clause 10 would not have been apt to cover that situation, i.e. a debt validly incurred but subsequently retrospectively invalidated. Therefore, if Section 127 invalidated the debt of the company, Clause 10 would have been insufficient to validate the liability of the guarantor.
Comment
The company and the guarantor were both liable for the payment in full of sums due on the overdrawn account. Section 127 did not affect this liability, and as a matter of principle, did not have any effect on the state of account between the Bank and the company. Section 127 only applied to dispositions of property, not to any increases in an overdraft, the powers of the directors or the Bank's mandate to honour cheques. Forms of guarantee should be reviewed to ensure that they apply in the circumstances that the guaranteed debt is voided under Section 127 of the Insolvency Act.
© MACFARLANES January 2000
This note is intended to provide general information about some recent and anticipated developments as of the date at the head of this note, which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice. It will not necessarily be updated and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained. If you would like further information or specific advice, please contact Tony Evans at Macfarlanes London Office.