Osman Mohammed Arab Wong Tak Man Stephen, Joint and Several Liquidators of Agi Logistics (Hong Kong) Ltd (in Compulsory Liquidation) v. Commissioner of Inland Revenue

CACV 201/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 201 OF 2015

(ON APPEAL FROM HCCW NO 704 OF 2009)

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REASONS FOR JUDGMENT

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Hon Harris J giving the Reasons for Judgment of the Court:

Introduction

1.This is an appeal by the Commissioner of Inland Revenue (“CIR”) against the judgment of Anthony Chan J dated 15 July 2015 in which he held that a tax refund of HK$549,600 due to AGI Logistics (Hong Kong) Limited (“Company”) paid by the Inland Revenue Department (“IRD”) at the Company’s direction to Careship International Transportation Limited (“Careship”) on 27 January 2010, which was after presentation on 8 December 2009[1] of the petition to wind up the Company, was void under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”).

2.The judge’s judgment was consistent with decisions of this Court in Bank of East Asia Ltd v Rogerio Sou Fung Lam [2] and Chevalier (HK) Ltd v Joint Liquidators of Right Time Construction Co Ltd [3].  The CIR invites this Court to depart from those decisions and to overturn the judgment.  The CIR also advances 2 other alternative grounds of appeal, which are explained later in this judgment.

3.At the hearing, we dismissed the appeal with costs.  Our reasons appear below. 

Background

4.The Company failed to file a tax return for the 2008/9 year of assessment.  As a consequence, the IRD estimated the tax for that year of assessment and the provisional tax for 2009/10.  Following receipt of the assessment the Company entered into correspondence with the IRD seeking a re-assessment, which the IRD undertook resulting in a reduction of the original assessment.

5.On 6 January 2010 the IRD’s computer system generated a standard letter to the Company informing it of the re-assessment of its tax liability and that it would be informed by a separate letter of the tax refund.  Coincidentally 6 January 2010 was the same date as that on which a copy of the Government Gazette published on 31 December 2009 including notice of the presentation of the petition on 8 December 2009 was provided to Assessing Group at the IRD dealing with the re-assessment of the Company’s tax liability. This came to the attention of the assessor dealing with the file, Li Pui Ling, on about 14 January 2010.

6.An exchange of correspondence ensued after 6 January 2010 in which the sole director of the Company, Ke Wanye, informed the IRD that the Company no longer had a bank account and requested that the refund be made payable to Careship of which he was also the sole director.  The IRD complied with this request and on 27 January 2010 a cheque was issued to Careship and it was cashed on the same day.

7.On 10 February 2010 the Company was wound up pursuant to an order of Master Hui and subsequently the Joint and Several Liquidators (“Liquidators”) were appointed.  The Liquidators requested repayment of the sum paid to Careship.  This was declined leading to the application determined by Anthony Chan J on 15 July 2015.

The existing law in Hong Kong

8.Section 182 of the Ordinance provides:

“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.”

9.Section 184(2) of the Ordinance provides that in cases other than a voluntary winding-up initiated by a company by resolution passed in general meeting, a winding-up is deemed to commence on the day the petition is presented.

10.The term “disposition” is not defined in the Ordinance.  It was common ground before us that its meaning is broad and that it encompasses any dealing in the tangible or intangible assets of a company and any other act that reduces or extinguishes a company’s rights in an asset and transfers value in it to another person[4].  Weagree.

11.In the present case the Company directed that its creditor, the IRD, pay a third party, Careship, a sum owed to the Company thus extinguishing the debt owed by the IRD to the Company.  This is analogous to a bank at the direction of a corporate client paying a third party at the client’s direction after presentation of a winding-up petition.  This situation was considered by the Hong Kong Court of Appeal in Bank of East Asia Ltd v Rogerio Sou Fung Lam [5]. The bank honoured a cheque presented to it after presentation of a petition to wind up the company on whose account it was drawn.  The liquidator of the company sought repayment from the bank.  The bank complied with the request and then sought to recover the amount it had paid to the liquidator from the payee. In the resulting High Court action judgment was given in favour of the plaintiff (the bank) against the defendant (the payee).  The defendant appealed. The appeal was dismissed.  The Court of Appeal found that transaction had involved two dispositions of the company’s property.  The first was the payment to the defendant by the bank.  The second was the extinguishment of the company’s liability to the defendant when payment was made to the defendant by the bank.  Both dispositions were made void by section 182.  The Court of Appeal found that as the defendant held the company’s property as a result of a void transaction it was the party primarily liable to repay the company.  The bank had discharged its liability to the company and was entitled to recover the amount it had paid upon the common law principle of recoupment.  The Court of Appeal’s reasoning leading to these findings are to be found in the following passages of the judgment of Clough JA given on behalf of the Court:

“ To all intents and purposes, but subject to the possible hazard created by s. 182 which had no operation at the time of the transaction, the honouring of the company’s cheque for $600,000 on the 8th February 1984 was a routine banking transaction resulting in the discharge of the company’s obligation to the defendant and the consequential debiting of the bank’s account in respect of the amount of the payment. There were therefore two distinct dispositions of the company’s property involved. As between the bank and the company, the bank by debiting the company’s account to the extent of $600,000, reduced its debt to its customer. As between the company and the bank on the one hand and the defendant on the other hand, the bank had acted as the company’s agent and paid the company’s money to the defendant in discharge of the company’s obligation to the defendant.

The combined effect of ss. 182 and 184(2) is to render both these dispositions void with effect from the date they were effected. My understanding is that it is for this reason that the English courts regard a payment of this kind as being recoverable by a liquidator against both the payee and the company’s bank, albeit primarily against the payee: see Re Gray’s Inn Construction Co. Ltd. per Buckley, L.J. at p.721F cited above.

In that case the English Court of Appeal evidently was not persuaded to accept the reasoning of Street, C.J. in re Mal Bower’s Macquarie Electrical Centre Pty. Ltd. (in liquidation) [1974] 1 NSWLR 254 to the effect that in a similar situation the relevant paying bank was not a disponee for the purposes of the equivalent provision in New South Wales legislation to s. 227 of the Companies Act 1948 (and s. 182 of the Hong Kong Ordinance). Mr. Knos did not seek to rely on the Mal Bower’s case on the appeal.

...

As regards the defendant as the payee of the sum of $600,000 belonging to the company to which the defendant was not entitled, a liability to account for that sum to the company arose and the company, acting through the liquidators, was entitled to sue the defendant for that sum as money paid to it by the company’s agent the bank to the use of the company: Duke of Norfolk v. Worthy (1808) 1 Camp 337; Bowstead on Agency, 15th ed., p. 281, article 75. However the bank as the company’s agent was also entitled to bring such an action in its own name against the defendant because it was entitled to relieve itself from its liability to its principal, the company: Holt v. Ely(1853) 1 E & B 795 at p. 799; Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia (1885) 11 App Cas 84 atpp. 90-91; Bowstead on Agency, p. 480, article 117; Halsbury’s Laws of England, Vol. 1 para. 866.

If, therefore, the bank had sued the defendant and recovered the sum of $600,000 the defendant’s liability to account to the company would have been discharged. The bank, in its turn, would have been liable to account to the liquidators for the money so recovered.

In fact what happened in this case was that the bank first accounted to the liquidators and then sued the defendant as payee. It seems to us, as it seemed to Mortimer J., that it makes no difference that the bank took this course. The defendant was in receipt of the company’s property from the company, acting through its agent, the bank. Accordingly, as it held the company’s property without entitlement it was, as Buckley L.J. observed in the Gray’s Inn Case at p.721F, the party primarily or ultimately liable to repay the company: see also the dictum of Lord Greene, M.R. to similar effect in re Diplock at p. 481. The bank has discharged this liability under threat of legal action to enforce its own obligation to account to the company in respect of the money and has thereby become entitled to recoup itself from the defendant as payee in reliance upon the common law principle of recoupment as stated in the 1st edition of Leake on Contracts and cited by Cockburn, C.J. in Moule v. Garrett.

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The fact that the bank, being disentitled to debit the company’s account in respect of the payment to the defendant, has actually performed its duty to reimburse the company, seems to us to be no bar to the bank’s claim against the defendant based on failure of consideration.

Although there had been no mistake by the bank when making payment of the company’s money to the defendant, the effect of the failure of consideration is, in our judgment, the same as that considered by Goff, J. in Barclays Bank v. W.J. Simms Ltd. at p. 703 D in relation to a cheque mistakenly honoured by a bank without mandate from its customer.

On the facts of this case it would be indeed strange if the law could afford no full relief to the bank. For the reasons given above we dismiss this appeal and make an order nisi awarding the costs of the appeal to the bank.”

12.The Court of Appeal’s decision in Bank of East Asia was followed in a subsequent case that came before the Court in 1990: Chevalier (HK) Ltd & another v Joint Liquidators of Right Time Construction Co Ltd [6]. In that case the employer, Reality, of a main contractor, Right Time, paid, with Right Time’s consent, two of Right Time’s nominated sub-contractors, Chevalier and Regent, after a petition to wind up Right Time been presented.  Right Time’s liquidators sought repayment from Chevalier and Regent of the sums received by them from Realityon the grounds that the payment by it of sums due to Right Time in respect of work, which formed part of Chevalier and Regent’s nominated sub-contract, was a disposition of Right Time’s property.  Chevalier and Regent argued that the payments were dispositions of Reality’s own property with the consequence that Reality’s payment to Chevalier and Regent did not extinguish the amount due under the main contract to Right Time in respect of work carried out by them under their nominated sub-contracts.  The Court of Appeal rejected this argument.  Applying Bank of East Asia the Court held that the payment with Right Time’s consent to Chevalier and Regent gave rise to two dispositions.  The first arose from the reduction in Reality’s liability to Right Time and the second arose when Reality, acting in effect as Right Time’s agent, paid sums owed by Right Time to Chevalier and Regent thus reducing Right Time’s debt to its two nominated sub-contractors.  Consequently, the payments were caught by section 182 and void.  The reasoning that led to that conclusion is more fully explained in the judgment of Clough JA:

“ As Oliver, J. (as he then was) observed in In re Leslie Engineers Co. Ltd. at p. 297G, in relation to s. 227 of the Companies Act 1948 which formerly corresponded with section 182 of the Companies Ordinance, it is ‘wholly immaterial so long as one is dealing with the company’s property, whether the purported disposition is made by the company or by a third party, or whether it is made directly or indirectly.’ The same judge drew attention, in the same case at p.298 B-D, to the fact that the section says nothing about recovery but merely avoids dispositions and leaves it to the general law to determine what is the appropriate remedy in respect of the invalidated dispositions.

Having disposed of the two preliminary matters in the manner indicated above we are left with a situation where, but for the effect of s. 182, Reality had, with the authority of Right Time, discharged part of Reality’s debt to Right Time by making payments by cheque to Chevalier and Regent respectively in discharge of a corresponding amount of Right Time’s debt to Chevalier and Regent. As between Right Time on the one hand and Chevalier and Regent respectively on the other hand, again subject to the effect of s. 182, Right Time had partially discharged its debt to Chevalier and Regent through a third party, Reality. For all practical purposes the result would, but for s. 182, have been the same as if Reality had paid Right Time direct and then Right Time had paid Chevalier and Regent direct.

In such circumstances it would seem at first sight that as between Right Time and each of the appellants there had been an indirect disposition of Right Time’s property in the form of the payment to each of the appellants of money to which Right Time was entitled and that s. 182 had rendered each of the payments void. ...

...

However these arguments were not, in our opinion, based on a correct or a complete analysis of the situation. Ignoring for the moment the effect of s. 182, when Reality (with the authority of Right Time) paid its own money to each appellant, the position was that Reality was entitled to, and no doubt did, in its books, debit the Right Time account to the extent of the payments made to each of the appellants. This reduction in the debt owed by Reality to Right Time was a reduction made with the authority of Right Time and amounted to a disposition of Right Time’s property within the meaning of s. 182.

Furthermore there was also a disposition of Right Time’s property effected when Reality made the payments to each of the appellants because, as between Right Time and Reality on the one hand and each appellant on the other hand, Reality had acted, in effect, as the agent of Right Time and paid the sums of money to which Right Time was entitled (under the main contract) to the appellants in partial discharge of Right Time’s debt to each of them.

Section 182 retrospectively renders both these dispositions void and produces the result that the liquidators of Right Time became entitled to recover the amount of the relevant payments from Reality, on the basis that the reduction in Reality’s debt to Right Time under the main contract was made without lawful authority, or from the appellants as money paid to them by Reality to the use of Right Time. We consider that the liquidators acted properly in making their first claim on the appellants who had received the money rather than on Reality: cf In re Gray’s Inn Construction Co. Ltd. [1980] 1 WLR 711 (C.A.) per Buckley, L.J. at p. 721F.

In our judgment the principles applicable to the situation which has arisen in this case are broadly the same as were applied in Bank of East Asia Ltd v. Rogerio Sou Fung Lam [1988] 1 HKLR 181 (C.A.) where another division of this court had to consider the effect of s. 182 on a payment made by a bank to a payee when honouring a cheque drawn by an insolvent company between the date of presentation of a winding up petition and the date of the winding up order.”

13.We would note at this point that the Court of Appeal held recently in Super Speed Limited (in liquidation) v Bank of Baroda [7] that the position is different in the case of a payment made by a bank out of an overdrawn account at the direction of a corporate client after presentation of a petition.  The Court of Appeal held that the payments were dispositions of the bank’s own property rather than that of the company.  In so holding Kwan JA in a judgment, with which the other members of the Court agreed, says this in paragraphs 24 and 25 of her judgment:

“24 The cases of Bank of East Asia Ltd and Chevalier are authorities for the proposition that where the payment by the bank or an agent on behalf of the company to a third party is made from the company’s account that is in credit, section 182 invalidates not just the disposition between the company and the payee but also the debiting of the company’s account by the bank or agent as the reduction of the indebtedness constitutes a disposition. Further, as Mummery LJ observed in Hollicourt at §33, the focus in Bank of East Asia Ltd was not on a claim by the company against the bank for restitution, but on a claim by the bank, which had reimbursed the company, for reimbursement by the payee and it was a case which assumed, rather than decided, that the bank was liable under section 182 to make restitution to the company.

25. The present situation is entirely distinguishable from Bank of East Asia Ltd and Chevalier in that we are concerned with overdrawn accounts and, in advancing loans to the companies, the Bank was disposing of its own assets to the companies and using its own assets to pay third parties.  It seems to me that in respect of an overdrawn account, this court is free to follow the law in Coutts and Hollicourt and to hold that payments out of an overdrawn account do not constitute dispositions of the company’s property within section 182.”

14.The decisions of Lightman J in Coutts & Co v Stock [8] and the English Court of Appeal in Hollicourt (Contracts) Ltd v Bank of Ireland [9] to which Kwan JA refers differ in their conclusions on the character of payments made by a bank at the direction of a corporate client after a petition had been presented and the impact of the English equivalent of our section 182, namely, section 127 of the Insolvency Act 1976.  In short they conclude that payments made by a bank do not constitute dispositions and are not caught by section 127.  We were invited by Ms Cheung on behalf of the CIR to depart from this Court’s previous decisions in Bank of East Asia and Chevalier and adopt the reasoning in the two English decisions.  The Court of Final Appeal in Solicitor (24/07) v Law Society of Hong Kong[10] decided that the Court of Appeal is bound by its previous decisions unless satisfied that the decision is plainly wrong.  This explains why the passage of Kwan JA quoted above is couched in the language that it is.  The Court of Appeal in Super Speed was not required to address directly the conflict between the English and Hong Kong authorities and determine whether the latter are plainly wrong.  This Court is.  In the next section of this judgment we explain why in our view the previous decisions of this Court are not plainly wrong and, on the contrary, why, in our view, they are to be preferred to the English decisions.

The English Authorities

15.In Coutts & Co the bank had honoured cheques drawn after presentation of the petition and at a time when the account had gone into overdraft.  A personal guarantee had been given by the defendant in respect of the company’s account.  Following the making of a winding-up order the bank made a demand on the defendant for payment of the debit balance in the overdrawn account.  The bank in the action to recover from the defendant applied for a determination of whether section 127 operated to disentitle the bank from debiting the company’s account in respect of payments made after the presentation of the petition and thus recovering the sums claimed from the defendant under his guarantee.  As Lightman J notes at paragraph 5 of his judgment the issue before him was confined to the impact of section 127 on the creation of, and subsequent increases in, the company’s overdraft after presentation of the petition.

16.Lightman J sets out in paragraph 6 of his judgment what he understands are the principles which he suggests would be expected to operate in a case where section 127 applies, which is not identical to section 182 and is in the following terms:

“In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.”

17.The relevant part of paragraph 6 is as follows:

“6. The following are the principles which would be expected to operate in a case where section 127 applies. (1) the invalidation of dispositions of a company's assets after the date of presentation of a winding up petition is part of the statutory scheme designed to prevent the directors of a company, when liquidation is imminent, from disposing of the company's assets to the prejudice of its creditors and to preserve those assets for the benefit of the general body of creditors. It does not accordingly bite when the disposition can have no impact on the creditors e.g. in case of dispositions by receivers appointed under charges of the company's property or by the company where it holds legal title to property as bare trustee or subject to a specifically enforceable obligation to convey the property to a third party. (2) The retrospective invalidation effected by Section 127 does not change what happened between the date of the petition and the date of the winding up order: it merely denudes any disposition of the company's property during that period of legal effect. (3) The invalidation is limited to dispositions of property. (a) The section does not invalidate a company's assumption of liabilities. ...”

18.We accept that the purpose of section 182 is to preserve the assets for the benefit of the general body of creditors and that it is well established that if, for example, a company holds real property on trust for a purchaser following its sale section 182 has no application. However, we do not consider it helpful to characterise the section as not biting “when the disposition can have no impact on the creditors...”  That invites dispute over at what point in time the “impact” is to be assessed and by whom.  It is considerably more straightforward to proceed on the basis that any disposition is caught; an issue we address further in paragraph 20.

19.In paragraph 7 Lightman J considers the substance of the transaction between the company, the bank and the payee:

“7. This last approach reflects the substance of the transaction between the company, the bank and the payee. It also gives due weight to the facts that (a) the company validly made conditional payment to its creditors by delivery to them of the cheques; (b) the bank lawfully and properly honoured the cheques drawn by the company, and indeed to have failed to have honoured them, (at least without knowledge of the advertisements and possibly presentation of the petition) would have constituted a breach of contract with the most serious possible repercussions for the bank and the company; (c) the common understanding of all involved would have been that it was the company (and not the bank) paying the company's debts; and (d) section 127 has no retrospective operation or effect on the increases in the overdraft consequent upon the bank honouring the cheques.”

20.Whether or not a failure to honour a cheque would give rise to a breach of contract by a bank will depend on the terms of the facility.  Even assuming that the terms do not deal expressly with the impact of the presentation of a petition, which commonly they would, it seems to us that this analysis is circular.  If section 182 applies to a disposition by a bank between the date of presentation of a petition and the making of a winding‑up order it seems highly unlikely that the common understanding of a company, its bank and creditors would be that the bank would honour cheques and thus expose itself to a potential application by a liquidator for return for the payments. We would expect the opposite as, indeed, has been the case in Hong Kong for at least 25 years without any serious repercussions for banks.  The practical position in Hong Kong is that after a petition is presented local banks freeze accounts and will only debit them after a validation order has been obtained.  In practice, applications for validation orders in cases where the petition is based on insolvency rather than unfair prejudice petitions, which include a prayer for winding-up order commonly as an alternative to a buy-out order, are very rare.

21.The Court of Appeal in Bank of East Asia refers to the decision of the English Court of Appeal in re Gray’s Inn Construction Co Ltd [11] and Lightman J acknowledges in paragraph 10 that this is the most important of the English authorities.  In Gray’s Inn Buckley LJ, with whom Goff LJ and Sir David Cairns agreed, held that payments made into a company’s over drawn bank account after presentation of a petition discharged its indebtedness to the bank and that this constituted a disposition caught by section 127.  The Court of Appeal also considered whether a validation order should be granted in respect of any part of the dispositions, but that part of the decision is not relevant for present purposes.  The relevant part of Buckley LJ’s judgment is at page 716:

“Mr. Heslop does not dispute that all payments out of the company’s account to third parties, not being payments to agents of the company as such, are dispositions of the company’s property; but he contends (as I understand his argument) that they are only relevant for the purposes of section 227 to the extent that payments out during the relevant period exceed payments in. That all such payments out must be dispositions of the company’s property is, I think, indisputable, but I cannot accept Mr. Heslop’s contention. The section must, in my judgment, invalidate every transaction to which it applies at the instant at which that transaction purports to have taken place. I cannot see any ground for saying that the invalidation can be negatived by any subsequent transaction.”

22.Lightman J suggests that these observations appear to be based on a concession by counsel and that if the opposite had been fully argued Buckley LJ would not have held the bank liable.  The reasons for suggesting this are to be found in paragraph 6 of Lightman J’s own decision to which we have referred above.  Ms Cheung submitted that Lightman J’s analysis was correct and that the Hong Kong Court of Appeal’s reliance on the Gray’s Inn decision had led it into error.  We disagree.

23.The language in section 182 is clear and precise: “any disposition of the property of the company including things in action ... made after the commencement of a winding-up ... shall be void”.  The balance standing to the credit of a company in an account with a bank is property of the company: a thing in action.  If a cheque is presented to the bank and it honours it thus reducing the balance standing to the credit of the customer there is, in our view, a disposition of the property of the company. There is no basis for reading section 182 as containing the qualification “if it reduces the amount available for unsecured creditors”.  We accept that in most cases a disposition will reduce the amount available for unsecured creditors, that is the very reason for having section 182, but it does not follow that it was the intention of the Legislature that it be read as containing a qualification to this effect.  In our view, to do so would make section 182 harder to apply, not fairer, as Lightman J’s analysis implicitly assumes.  If the section were to be read as containing this qualification it would require banks or third parties in the position of the IRD to assess what the impact of any payment they might make would have on the assets available for distribution to creditors in the event of a winding-up order being made. This would be a difficult, if not impossible, task for them to undertake and we anticipate that it would in practice make no difference to the way in which banks operate: they would require a validation order to be obtained before honouring a cheque. 

24.Hollicourt (Contracts) Ltd v Bank of Ireland[12] concerned cheques honoured by a bank after presentation of a petition drawn on an account in credit.  The Court of Appeal held that the payments constituted a disposition of the company’s property in favour of the creditors, but not a disposition in favour of the bank.  Mummery LJ, giving the judgment of the court, framed the question to be addressed in paragraph 6 of his judgment and explains in paragraph 7 the normal practice of banks in England in this situation, which is the same as that currently adopted by banks in Hong Kong:

“6. The question is: does section 127 make the bank, which continued to operate the account in accordance with the instructions of the company, liable, on the application of the liquidator, to make restitution to the company of the amounts of those cheques? Or does section 127 make only the payees of the cheques liable to make restitution to the company?

7. The normal and prudent practice of banks, upon becoming aware of a winding up petition against a corporate customer, is to take prompt action.  The bank freezes the company’s existing bank accounts, whether in credit or overdraft, as at the date of the presentation of the petition and insists that all subsequent dealings be on a new and separate account in respect of which a validation order may be obtained: see Paget’s Law of Banking, 11th ed (1996), p207.  The presentation of the petition usually comes to the notice of banks on publication of the advertisement of the petition.”

25.Mummery LJ deals with the policy of section 127 in paragraphs 20 to 23 of his judgment.  After reference to earlier authorities he says this in paragraph 23:

“23. In our judgment the policy promoted by section 127 is not aimed at imposing on a bank restitutionary liability to a company in respect of the payments made by cheques in favour of the creditors, in addition to the unquestioned liability of the payees of the cheques. The bank operated the company’s account as agent for the company. In accordance with its mandate it debited the account with the amounts of the cheques. Those amounts have been received by the payees of the cheques in consequence of the bank duly honouring the cheques drawn in their favour by the Company. The section impinges on the end result of the process of payment initiated by the company, ie the point of ultimate receipt of the company’s property in consequence of a disposition by the company. The statutory purpose stated by Lord Cairns LJ and Lightman J is accomplished without any need for the section to impinge on the legal validity of intermediate steps, such as banking transactions, which are merely part of the process by which dispositions of the company’s property are made. This is not a restitutionary situation where the bank has been unjustly enriched as against the company and where the general law requires the restitution of the benefit. Mr Jory for the company has directed us to no case where in comparable circumstances restitution has been ordered.”

26.We would make 3 points in relation to this analysis.  Firstly, Mummery LJ seems to have been influenced by the description of the statutory purpose to be found in the judgment of Lightman J and also Lord Cairns LJ in In re Wiltshire Iron Co [13] in which Lord Cairns LJ refers to section 153 of the Companies Act 1862, the then equivalent of section 127, which he describes as “a wholesome and necessary provision, to prevent, during the period which must elapse before a petition can be heard, the improper alienation and dissipation of the property of a company in extremis”.  We would suggest that it would be more accurate to describe section 182 as a section intended to prevent the reduction of the assets available to creditors.  It is not just dispositions made with an improper motive that it is intended to prevent, it is any disposition that risks reducing the amount available for creditors and the assessment of whether or not that is the case is one to be made by the court on an application for a validation order if a company believes that it is in the best interests of the company and its creditors that the sum is paid.  When a winding-up order is made, a company is not divested of its property; it holds it on trust for its creditors and makes distribution in accordance with the statutory regime found in the Ordinance[14].  By virtue of section 184(2) in a case such as the present this is deemed to have been the case since the date of the presentation of the Petition.  This in our view serves to emphasise why section 182 should be viewed as a provision intended to preserve generally the property of the company once a petition is presented rather than a provision intended to prevent dispositions for an improper motive.

27.Secondly, the statutory purpose will not be achieved if the liquidators are not (as seems likely in the present case) able to recover the payment from the payee.  It is reasonable to assume that sections 182 and 184 are intended to keep assets where they are at the time a petition is presented unless a validation order is obtained.  This is the safest course if the concern is ensuring that the assets available for unsecured creditors are not depleted prior to a winding-up order being made.

28.Thirdly, we accept that this is not a restitutionary situation where the bank has been unjustly enriched.  But we are not here concerned with unjust enrichment.  The sections apply to the payee regardless of whether or not he has been unjustly enrichment.  More likely than not, the payee will be a trade creditor who is no more culpable that the bank for the disposition.  On the contrary, commonly banks are better positioned to monitor whether companies are subject to winding-up petitions and thus section 182 is engaged than the average trade creditor who will not monitor the legal pages of the press or the Government Gazette. 

29.As Mummery LJ states in the unnumbered paragraph following paragraph 23: “What is needed for the section to operate is a disposition amounting to an alienation of the company’s property: see Mersey Steel and Iron Co v Naylor Benzon & Co (1884) 9 App Cas 434, 440, per Earl of Selborne LC”. He then goes on to summarise his views for concluding that there is no disposition by a bank when it honours a cheque:

“The bank in honouring the company’s cheque obeys as agent the order of its principal to pay out of the principal’s money in the agent’s hands the amount of the cheque to the payee: see Westminster Bank Ltd v Hilton(1926) 136 LT 315, 317,per Lord Atkinson. The beneficial ownership of the property represented by the cheque was never transferred to the bank, to which no alienation of the company’s property was made.

24. We therefore reject the contention that there were additional relevant dispositions of the company’s property to the bank to which section 127 applies. The reasoning in the Australian authorities is convincing on this point. Lightman J expressed the view in Coutts case [2000] 1 WLR 906, 913B-D that the Australian cases are in accord with and supportive of the general principles expounded by him at pp 909-911. In a recent and perceptive discussion of the authorities Professor L Sealy expressed the same view, with which we agree: see Company Law Newsletter, Issue 57, 11 July 2000.

25. We also accept Mr Moss’s submission that there is no binding English decision to the contrary and that the decision of the Court of Appeal of Hong Kong relied on by Blackburne J is not persuasive on this point.  ...”

30.The following paragraphs elaborate on this reasoning and refer to Australian authorities which treat the role of banks in honouring cheques as not involving a disposition of a company’s property (see paragraph 25 considering In re Mal Bower’s Macquarie Electrical Centre Pty Ltd [15]), but as constituting an intermediary function that lacks the characteristics of a disponor necessary to justify treating its action as constituting a disposition.  We are unable to agree with this analysis.  A customer who has an account standing in credit with a bank is a creditor of the bank and the bank is its debtor.  The relevant asset is a thing in action.  If the bank honours a cheque, it reduces the asset and necessarily, as between the bank and its customer, this involves a disposition.  The alternative view may have a certain appeal when the transactions are simple and involve a payment by a bank to a third party unrelated to it, but if one considers the kind of complex transactions that can arise within financial services and investment groups the limitation of this analysis becomes clearer.  A company has a cash account in credit with a financial institution “A”, which at all times is solvent.  The company owes money to another company within the same group “B”, which trades securities.  “A” makes a transfer at its client’s direction to “B” after presentation of a petition to wind up the company.  “B” then becomes insolvent.  It seems to us artificial to suggest that a transfer between two members of the same financial group to discharge a company’s liability to one of them does not constitute a disposition of the property of the company by the transferring institution or, if it does not, the result is consistent with the purpose of section 182.  On the contrary it would clearly not be consistent with the purpose of section 182.  A transaction of this kind would constitute a disposition and we cannot see any reason to reach a different conclusion when considering the simpler one that fell for consideration in Hollicourt or in the present case.

31.It follows from what we have said that we are not satisfied that this Court’s decisions in Bank of East Asia and Chevalier are plainly wrong.  In our view they are correct.  It is not necessary to express a view on dispositions out of over-drawn bank accounts.

The Second Ground of Appeal

32.The CIR advances two other grounds of appeal. The first is that it was necessary for the Liquidators to first exhaust the remedies against Careship before they claim against the CIR.  This ground is based on passages in Gray’s Inn and Chevalier:

“39. In Gray’s Inn, Buckley LJ stated at 721F-G:-

‘It seems to me, however, that primarily these sums ...should be recovered from the creditors to whom they were paid, and that the bank should in any event only be required to repay them to the extent that the amounts, if any, which prove to be irrecoverable from those creditors exceed the dividends which would be payable in respect of them.’ ”

33.In our view these observations do not establish a rule that a creditor must be pursued before recourse can be had to a bank or a party in the position of the CIR.  They are mainly relevant in the context of a validation order sought by a bank, which has received a request for repayment from a liquidator.  The Court might be more inclined to exercise its discretion and grant a validation order if the evidence suggests it is probable that the liquidators will have little difficulty in recovering from the creditor who received the payment.  The CIR did not issue an application for a validation order, which might have made this issue relevant.

34.Insofar as the court finds itself faced with a contest between a liquidator and a bank, or party in a similar position, the principal consideration is the interests of creditors.  If the evidence suggests that the creditor may not have the assets to repay or proceedings will materially deplete the assets available to creditors we would expect a court normally to decline to validate the payment.

35.We reject the second ground of appeal.

The Third Ground of Appeal

36.The final ground of appeal is a technical one, which as formulated by the CIR, is unrelated to section 182.  The CIR argues that even if the payment to Careship was caught by section 182 and void, it was still necessary for the Company to demonstrate that it had made a claim pursuant to section 79 of the Inland Revenue Ordinance (Cap 112) for it to be entitled to recover any tax in excess of the amount with which it was charged for the relevant year: see §§24-37 of the judgement.  Sub‑section 79(1) provides:

“(1) If it is proved to the satisfaction of the Commissioner by claim duly made in writing within 6 years of the end of a year of assessment or within 6 months after the date on which the relevant notice of assessment was served, whichever is the later, that any person has paid tax in excess of the amount with which he was properly chargeable for the year, such person shall be entitled to have refunded the amount so paid in excess: (Amended 49 of 1956 s. 60)

Provided that nothing in this section shall operate to extend or reduce any time limit for objection, appeal or repayment specified in any other section or to validate any objection or appeal which is otherwise invalid, or to authorize the revision of any assessment or other matter which has become final and conclusive. (Amended 35 of 1965 s. 39)”

37.In Weson Investments Ltd v CIR[16], Tang VP (as he then was) held:

“... as a matter of construction, section 79(1) provides the taxpayer with an exclusive remedy. It could not have been intended that the taxpayer should have a choice of remedies. No doubt, when section 79(1) was enacted, it was enacted to provide the taxpayer with a remedy which was otherwise not available at common law.”[17]

Thus, says the CIR, absent a new claim for repayment within the time period specified in section 79(1) regardless of whether or not the original payment to Careship was void there is now no entitlement to payment.  We disagree.  This argument only arises for consideration once it has been determined that the payment to Careship was a disposition of the Company’s property and that the disposition is void.  It is artificial to suggest that recovery now should be viewed not as correcting the wrongful disposition of the Company’s property, but a new claim for excess tax paid for tax year 2008/9 and provisional tax for the following year.  We also reject this ground of appeal.

Conclusion

38.For the reasons above we have dismissed the appeal and ordered the CIR to pay the applicants’ costs to be taxed if not agreed.

Mr Jose Maurellet and Mr Jason Yu, instructed by ONC Lawyers, for the applicants

Ms Elizabeth Cheung, instructed by the Department of Justice, for the respondent