The Bank of East Asia, Ltd v. Rogerio Sou Fung Lam and Another

Case No.CACV 49/1987[1988] 1 HKLR 181

Court

Court of Appeal

Date04 Nov 1987

Judge—

Case Document

100%

Civil Appeal No. 49 of 1987

HEADNOTE

Section 182 of the Companies Ordinance (Cap. 32)

Where section 182 of the Companies Ordinance (Cap. 32) has rendered void (there having been no subsequent validation order by the court) a payment made by a company's bank out of the company's account to a payee on the company's cheque between the date of the dismissal at first instance of the petition for the winding-up of the company by the court and the subsequent making of a winding-up order by the Court of Appeal, the bank, having re-imbursed the liquidators of the company after being threatened by them with legal action, is entitled to recover the payment from the payee in reliance on (1) common law principles of recoupment as stated in the first edition of Leake on Contracts and cited in Moule v. Garrett (1872) L.R. 7 Ex. 101 at p. 104 and (2) failure of consideration producing the same effect as in Barclays Bank v. W.J. Simms Ltd. [1980] Q.B. 677: Decision of Mortimer J. in H.C.A. No. A2889 unheld.

IN THE COURT OF APPEAL

Civil Appeal
No. 49 of 1987

BETWEEN

	THE BANK OF EAST ASIA, LIMITED	Plaintiff (Respondent)
	and
	ROGERIO SOU FUNG LAM and SAMUEL SHAU TONG LAM trading as R. LAM & COMPANY (a firm)	Defendant (Appellant)

_____________

Coram: Hon. Cons, V.-P., Fuad & Clough, JJ.A.

Date of hearing: 13th - 16th October, 1987

Date of judgment : 4th November, 1987

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JUDGMENT

_____________

Clough, J.A.

1. This is the judgment of the court.

2. This appeal raises the question whether, in the light of the defence raised, a bank, having re-imbursed a liquidator of a company in respect of the payment of the amount of a cheque drawn on the company's account with the bank in favour of a third party and rendered void by, section 182 of the Companies Ordinance (Cap. 32). is entitled to recover the same amount from the third party. Mortimer J. answered that question in the affirmative in favour of the plaintiff ("the bank") in these proceedings. The defendant, a firm named as the payee on the company's cheque, now appeals against that decision.

3. The circumstances giving rise to the proceedings concern the affairs of Bylamson & Associates (Enterprises) Limited ("the company"). On the 20th August 1983 the bank, which then claimed to be a creditor of the company to the extent of about $29.8 million (but subsequently proved in the liquidation for about $90 million), presented a petition for the winding up of the company by the court on the ground that it was insolvent and unable to pay its debts. The petition was dismissed by Jones J. on the 18th November 1983 but on the 20th December the bank appealed against that dismissal. On the 16th February 1984 the Court of Appeal set aside the order of Jones J. and ordered the company to be wound up. On the same day the Official Receiver was constituted provisional liquidator of the company. On the 9th May 1984 two chartered accountants were constituted joint liquidators. Thereafter Mr. Wardell, another chartered accountant in the liquidators' firm, was responsible for the day to day handling of the liquidation under the control of the liquidators.

4. On the 31st January 1984 (after the dismissal of the petition and pending the hearing of the bank's appeal) the company had a current account with the bank which was showing a credit balance of $22,341.68. On the 1^st and 6^th February 1984 sums of $14,000 and $2,350 respectively were withdrawn from the account leaving a credit balance of $5,991.68. On the 7th February $800,286.00 was paid in to the account, leaving a balance of $806,277.68.

5. No point was taken below regarding the validity of the crediting by the bank of the sum of $800,286.00 to the company's account. On the appeal Mr. Knos, who represented the defendant both below and on appeal, first contended that the crediting of that sum and other sums to the account at this time were void but subsequently withdrew that contention.

6. On the 8th February 1984 the bank debited the company's account with the amount of $600,000 after honouring a non negotiable crossed cheque of the same date drawn for that amount on behalf of the company in favour of the defendant. It is this payment and its subsequent reimbursement by the bank to the liquidators of the company after the making of the winding up order by the Court of Appeal, which resulted in the bank's claim against the defendant for re-imbursement, which was the subject of the proceedings below.

7. In its statement of claim, contained in a specially indorsed writ issued on the 7th May 1985, the bank pleaded the existence of the company's account, the dates of the petition and the winding up order and that by virtue of section 182 of the Companies Ordinance any disposition of the company's property made on or after the 20th August 1983 (the date of the petition) was void. The bank then pleaded the payment to the defendant made by it out of the bank's account on the 8^th February 1984 when honouring the company's cheque of that date. It was further pleaded that the payment in question was made after presentation of the petition and that, not having been validated by the order of the court, the payment constituted a disposition of the property of the company and was void.

8. The bank went on to plead that at the demand of the liquidators of the company the bank had paid the full sum in question to the company and that in the premises the defendant was liable to reimburse the bank in respect of that sum of $600,000.00. The prayer for relief sought payment of that sum with interest and included an alternative prayer for the same relief on the footing of a declaration that the bank was subrogated to the rights of the company arising under section 182 of the Companies Ordinance.

9. The defendant filed a defence on the 18^th June 1985 which, in substance, admitted the receipt of the sum of $600,000 from the bank but pleaded that the defendant had acted as the agent of the company when receiving the payment which it had in that capacity remitted to another company West L.R. Asia Limited (“West L.B.”) on the instructions of the company. Further and better particulars of the defence were sought by the bank and these were supplied on the 2^nd and 15^th May and on the 4^th July 1986.

10. Shortly before the trial the judge gave leave, on the 26th March 1987, to the defendant to amend its defence to introduce a number of alternative defences including a defence that the money standing to the credit of the company in the bank's books out of which the sum of $600,000 had been paid to the defendant was money held by the company on trust for West L.B.. Notice of partial discontinuance of this amended defence was given on the 7^th April 1987, the day the trial began.

11. On that date the defendant relied only on the amended defence as “discontinued in part”. By this pleading the defendant had abandoned much of its previous defence. There was no longer any reliance on agency or trust property belonging to West L.B. in the hands of the company. The receipt of the payment of $600,000 was admitted by the defendant but it was denied that the payment of $600,000 to the defendant was a void disposition of property of the company. It was pleaded, without further particulars, that the honouring of the company's cheque for $600,000 was a mistake of law by the bank and that the payment was therefore irrecoverable. The bank was put to proof of its alleged re-imbursement of the company.

12. By its Reply dated the 7th April and filed, after the trial, on the 13th April 1987, the bank did not admit that it made a mistake of law when honouring the company's cheque for $600,000 and contended that if it did make such a mistake it would be inequitable for the defendant to be allowed to retain any benefit from that mistake.

13. At the trial two witnesses were called for the bank. The defendant called no witnesses. The bank's first witness was Mr. Anstock, a solicitor who was the legal officer of the bank. He stated that the cheque for $600,000 drawn in favour of the defendant was paid and debited to the company's account in the normal course of business. His evidence was that this and other payments made out of the company's account were challenged by the official receiver and by the liquidators who demanded repayment of $1.19 million from the bank, including the sum of $600,000, on the footing that the bank could claim repayment from the payees. Mr. Anstock said that litigation was threatened by the liquidators and that the bank had acceded to the demand for repayment.

14. As to the circumstances under which the bank continued to operate the company's account during the vulnerable period, Mr. Anstock was able to give no evidence of any significance. He said that he gave no advice to the operating department of the bank regarding the presentation of the petition, nor did he give any advice to that department prior to the making of the winding up order by the Court of Appeal on the 16th February 1984. He acknowledged that there had been discussion between him and the senior management of the bank before the winding up order was made, but he said that he could not remember what advice he had given at the time.

15. Mr. Anstock was cross-examined at some length about the motivation of the bank when it honoured the cheque in question and when it reimbursed the liquidators in respect of the $1.19 million (including the $600,000 paid to the defendant) which it had paid out of the company's account between the date of the petition and the date of the winding up order.

16. It was formally put to him (although he was not the person who authorized the payment on the bank's behalf) that the bank was acting under a mistake of law when it honoured the company's cheque for $600,000. When pressed for an answer he replied that the account had operated normally until after the appeal hearing. When the judge intervened to remind Mr. Knos that a mistake of law was a very broad concept he put it to Mr. Anstock that if the persons who had honoured the cheque for $600,000 on the bank's behalf had been aware at the material time of the views expressed by the English Court of Appeal in Re Gray's Inn Construction Co. Ltd.(1) they would have frozen the company's account and would not have permitted any payments out of the account unless they were satisfied that the payment would be for the benefit of the creditors of the company or that the payment had been the subject of a validating order of the court. In answer to this question regarding the hypothetical conduct of third parties who did not give evidence at the trial, Mr. Anstock said that if such persons had known about the petition and about the law, then that might very well be the case.

17. The only possible conclusion that could be reached from such evidence is that the bank had continued to operate the company's account normally during the vulnerable period between the date of the petition and the date of the order to wind up the company, and that there was no evidence before the court to explain the motivation of the bank's conduct in this respect.

18. As regards the subsequent reimbursement of the liquidators by the bank to the extent of $1.19 million, including the $600,000 which had been paid to the defendant out of the company's account, Mr. Anstock said that the re-imbursement had been made on the advice of lawyers advising the bank at a time when the bank was under pressure from the liquidators and felt that they would be sued by them if no re-imbursement was made.

19. The bank's other witness was Mr. Wardell, the chartered accountant responsible on behalf of the liquidators for the day to day management of the liquidation of the company. In chief he confiremed Mr. Anstock's evidence that the liquidators had made it clear to the bank that unless it reimbursed them in respect of the relevant payments amounting in all to $1.19 million they would take legal action against the bank. He explained that he had been shown an opinion obtained by the bank from an English leading counsel and asked by the bank to write and claim repayment from all payees who had received payment out of the company's account between the date of the petition and the date of the winding up order. He had agreed to write to those payees such as the defendant who had received more substantial sums from the company's account, but when his demands for repayment were refused he had renewed his demand on the bank and threatened legal action in default.

20. In this connection the relevant correspondence between Mr. Wardell and the defendant was before the trial judge. On the 1^st October 1984 Mr. Wardell and written to the defendant demanding repayment within 7days of the sum of $600,000 paid to it by the bank on the 8^th February 1984. His letter claimed that the payment was void under section 182 of the Companies Ordinance unless the court should otherwise order. On the 9^th October 1984 the defendant's solicitors had replied giving reasons justifying the payment to the defendant as the payment of money to which West L.B. was entitled and which ahd been paid to the defendant merely as a collection agent for onward transmission to West L.B.

21. It seems hardly surprising that, faced with a reply of this nature from the defendant, Mr. Wardell and the liquidators decided not to incur delay and expense in suing the defendant but to press the bank for re-imbursement and leave it to seek re-imbursement from the defendant. It emerged in the cross-examination of Mr. Wardell that all creditor's claims in the liquidation had been stood over without objection from them.

22. Mr. Wardell disclosed in re-examination that Mr. Rogerio Lam, one of the partners in the defendant firm, was also a director of the company before it was the subject of the winding up order.

23. The judge held that the payment of $600,000 by the company to defendant on the 8^th February 1984 by means of the company's cheque drawn on the bank was a disposition within section 182 of the Companies Ordinance and that the transaction was void subject to its being validated by the court under that section. He considered the possibility of hypothetical applications by both the bank and the defendant for validation but concluded that there was no evidence before him of any ground to suggest that a court would have granted an application for validation of the transaction at the time it was entered into. He was therefore satisfied that the transaction was void.

24. Mortimer J. then went on to deal with the defence that the bank had acted under a mistake of law when it honoured the cheque in question. He held, rightly, that there was no evidence before him to decide on what basis the relevant payment had been made or whether it was made as a result of a mistake at all. He attributed it to “some kind of muddle” and declined to pursue the matter further. Mr. Knos has complained on the appeal that the judge misunderstood his argument on this issue because his contention had been below, and was on appeal, that the bank's mistake of law was in failing to heed the guidance to banks given by the English Court of Appeal in the Gray's Inn Case(1) at p.719 G-H.

25. That advice related to the desirability of a bank freezing a company's overdraft when a winding up petition had been presented in relation to a company and where it was in the interests of the general body of creditors that the company should be permitted to continue trading and to use the services of the bank. The court indicated that the practical method of achieving the freezing of the overdraft would be to discontinue all further dealings on the account as from the date of the presentation of the petition and to require all subsequent dealings to be on a new and separate account. We will return below to Mr. Knos's argument on this point.

26. The judge dismissed the defendant's contention that it had not been proved that the defendant received any benefit from the payment in question on the footing that there was no evidence except that the defendant, which had admitted the payment to it, was the beneficiary of the $600,000 received by it.

27. After holding that the liquidators were under a duty to recover the void payment and that they were entitled to do so from either the bank or the defendant the judge referred to the correspondence mentioned above between Mr. Wardell and the defendant resulting in the defendant's refusal to re-pay the liquidators. He then went on to reject the defendant's contention that the bank had not been liable to reimburse the liquidators because the money had not been found to be irrecoverable from the defendant.

28. On this point Mr. Knos had relied on a dictum of Buckley L.J. in the Gray's Inn Case(1). After stating in that case that the bank in question was vulnerable to a refusal of validation in respect of 4,824 paid out of the relevant company's account to pre-liquidation creditors, Buckley J. observed at p.721 F:

“It seems to me, however, that primarily these sums, amounting in the aggregate to £4,824, 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.”

29. On the appeal Mr. Knos said he conceded that the judge was right in “rejecting” this dictum. We do not understand the judge to have indicated any such rejection. He seems to have merely declined to treat the dictum as intended to lay down any hard and fast rule that a liquidator must always exhaust his remedies and demonstrate that nothing is recoverable against recipients of void payments from a company's bank account before recovery against the bank is permitted.

30. The relevant dictum of Buckley L.J. must, in our judgment, be understood in the context of a liquidator's proceedings to recover money paid out by a bank by way of dispositions rendered void by the equivalent of section 182 of the Companies Ordinance. Such a claim was being countered by an application by the bank for validation of such dispositions. In these circumstances the court has to decide what is just and fair in the circumstances of each case and normally pre-liquidation creditors who have been paid by the company after the presentation of the petition will be compelled to refund and prove for their debts: see Gore-Browne on Companies, 44^th edition, para. 32.15.

31. Whilst Buckley L.J. and the other members of the Court of Appeal expressed the views cited above regarding the proper action to be taken by the liquidator against the bank regarding payments made to creditors during the vulnerable period, the court had previously recognized in the judgment of Buckley L.J. at p.721 D-F that the bank was “vulnerable to a refusal to validate” in respect of these payments. There was no suggestion that the bank was not legally liable in respect of the payments, the real question before the court was whether validation should be permitted to absolve the bank.

32. In the present case, where the evidence showed that the defendant was by its solicitors raising complex defences to the liquidator's demand for repayment and that the question of possible dividends payable to creditors proving in the liquidation was indefinitely deferred by the agreed standing over of creditors' proofs, it seems to us that the judge was right in holding that the liquidators acted properly in asserting their rights against the bank.

33. Having found that the liquidator acted properly in all the circumstances in recovering from the bank and that the bank was liable to pay in respect of the void transaction “as well as others” the judge said this:

“The bank paid the liquidator the one million odd dollars under threat of action. This $600,000 was part of that payment. The effect was that the defendant, who was primarily liable, had its liability discharged. Thereafter the liquidator could not sue this defendant for the sum. I am satisfied that the plaintiff was compellable in law to pay the money. It paid the money under threat of action. It was not in any way a voluntary payment, and that payment discharged the defendant's liability to the liquidator in respect of it.”

34. Mortimer J. appears to have had in mind the statement of the law on the right to recumbent in Goff and Jones on the Law of Restitution (3^rd edition) at p.309 when he added:

“The classic statement of the law applicable is in Moule v. Garrett (1872) L.R. VII EXCH 101 at 104, per Cockburn C.J.:- (‘Where the plaintiff has been compelled by law to pay, or, being compellable by law, has paid money which the defendant was ultimately liable to pay, so the latter attains the benefit of the payment by the discharge of his liability; under such circumstances the defendant is held indebted to the plaintiff in the amount.') That is the classic statement of the law. This case is a classic instance of it.”

35. Accordingly the judge concluded that the defendant having had the benefit of the bank's re-payment to the liquidators which discharged the defendant's liability, the bank was entitled to recoup the $600,000 from the defendant. There was therefore no need, the judge ruled, to consider whether the bank was entitled to further relief on any basis of subrogation to the rights of the liquidators.

36. On behalf of the defendant on the appeal Mr. Knos challenged the judge's decision root and branch. The combined effect of the defendant's grounds of appeal and submissions may be summarized as follows:

(1) The judge was wrong to treat this as a case where the bank was entitled to recoupment from the defendant because –

(a) The judge had misunderstood Moule v. Garrett(2) and in particular the judgment of Cockburn C.J. which made it clear that the common law right of recoupment could only be available to found the banks's claim against the defendant if the defendant had been in default, but there was no evidence of any default by the defendant.

(b) There was no evidence that the defendant obtained the benefit of the $600,000 paid to it by the bank when honouring the company's cheque. No such benefit had been pleaded by the bank which had only cleaded that the money had been received by the defendant, which was admitted.

(c) The judge misdirected himself in holding that the defendant was primarily liable to repay the sum of $600,000 to the liquidators. This misdirection was attributable to two errors. The first error was the finding that the bank's honouring of the cheque for $600,000 drawn in favour of the defendant was due to “some sort of muddle”, whereas the evidence showed that the payment had been made by a mistake of law on the part of the bank when it failed to freeze the company's bank account at the material time in accordance with the guidance given by the English Court of Appeal in the Gray's Inn Case(1). The bank had thus voluntarily accepted the risk of the subsequent operation of section 182 of the Companies Ordinance.

The second error was that, in holding that the defendant was primarily liable to re-pay the liquidators, the judge failed to appreciate that, as the relevant payment had been made as the result of the bank's blunder, the effect of Re Diplock(3) was that the liquidators were not entitled to make any claim against the defendant as the recipients of the relevant money until the liquidators had exhausted their direct remedies against the bank. No legal or equitable tracing of the $600,000 received by the defendant was possible on the evidence before the judge. In the Gray's Inn Case(1) Buckley L.J. had overlooked the application of Re Diplock(3) (notwithstanding that he cited Clayton's Case(4) and that he appeared as junior counsel for the appellant when Re Diplock(3) was upheld in Ministry of Health v. Simpson(5)).

(2) The bank had honoured the compnay's cheque for $600,000 and paid that sum to the defendant by reason of the mistake of law identified in the first paragraph of (1)(c) above. The payment was accordingly not recoverable by the bank.

(3) Between the dismissal of the bank's petition on the 18^th November 1983 and the making of the winding up order against the company on the 16^th February 1984 by the Court of Appeal, section 182 of the Companies Ordinance was not applicable. The defendant was therefore free to conduct business with the company without regard to that section. This was an additional ground of appeal allowed to be filed out of time with the consent of the bank, which Mr. Knos sought to develop on the following lines. After the dismissal of the petition and pending the appeal there was no petition in being because, in accordance with the principles of res judicata applied in Marchioness of Muntly v. Gaskell(6), the dismissal of the petition was final until reversed on appeal.

Accordingly, it was contended, the defendant and all the world ere entitled, until the winding up order was made on appeal, to deal with the company on the basis that it was a viable company restored to health. It followed that if the defendant had applied for a validation order under section 182 before the appeal was allowed, the application would have been refused. It also followed that if after the winding up order the liquidators had taken proceedings to recover the $600,000 from the defendant, it could have counterclaimed for a validation order under section 182. Such an order would have been granted unless the liquidator could have shown cause to the contrary. Although Mr. Rogerio Lam was a director of the company it had not been shown that on the 8^th February 1984, when the relevant cheque was honoured, he knew that the bank had appealed against the dismissal of the petition.

The result of all this was, Mr. Knos contended, that the bank, by repaying the $600,000 to the liquidators had deprived the defendant of its opportunity of obtaining a validating order.

(4) No action for money had and received lay at the instance of the bank against the defendant because the $600,000 paid by the bank to the defendant was the money of the company and not that of the bank. The bank had re-paid the liquidators with its own money. It followed that the bank's only possible basis for recovery must be subrogation to the liquidator's claim against the defendant. As to the question of subrogation which was raised in the bank's respondent's notice, Mr. Knos, relying on Owen v. Tate(7), contended that the bank had been a “volunteer” when re-imbursing the liquidators in respect of the $600,000 paid by the bank to the defendant which had not requested the bank to make the re-imbursement. He also contended that the bank's claim against the defendant did not fall into any of the established categories of subrogation.

37. In the early stages of the hearing of the appeal Mr. Knos indicated his consent to dispense with a respondent's notice as a perquisite for advancement by Mr. Hampton, counsel for the banks, of additional alternative legal grounds to substantiate the banks' claim and the judgment of Mortimer J.. Having succeeded below in reliance on the principles of recoupment as applied in Moule v. Garrett(2) and Brooks Wharf and Bull Wharf Ltd. v. Goodman Brothers(8), Mr. Hampton sought to uphold the judge's decision on that basis but he also introduced two new alternative arguments to establish the legal basis for the bank's claim against the defendant on the facts pleaded in the statement of claim and on the evidence adduced below. These two new alternative arguments were to the following effect:

(1) The effect of section 182 rendering void the payment of $600,000 by the bank to the defendant when honouring the company's cheque is to bring about a retrospective countermaoding of the bank's mandate to honour the company's cheque. This would be equivalent to a mistake of fact in the sense that the bank was, at the time it honoured the cheque, ignorant of a situation which later arose retrospectively by operation of law. The legal result would be to entitle the bank to recover the payment from the defendant in accordance with the principles applied by Robert Goff J. (as he then was) in Barclays Bank v. W.J. Simms Ltd(9).

(2) On the alternative footing that, contrary to the argument under (1) above, section 182 did not countermand the bank's mandate retrospectively but simply rendered the transaction void and that it was the company's money which the bank paid to the defendant, it was contended that the validation cases showed that it was settled that the liquidators could claim repayment against the defendant as payee or against the bank. In the present case where the bank had re-paid the liquidators under threat of legal action and thereby benefited the payee defendant, it was contended that, as pleaded in the statement of claim, the bank should be subrogated to the rights of the liquidators.

38. For the reasons appearing below we consider that the judge's decision was right and that in any event the bank also had a direct claim for money had and received against the defendant independently of any claim based on recoupment or subrogation.

40. Section 182 of the Companies Ordinance is in the following terms:

“182. 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.”

41. In The present case the relevant payment was made on the 8^th February 1984 before the winding up order was made by this court in relation to the company on the 16the February 1984. Until the winding up order was made there was no winding up of the company and section 182 did not operate.

42. It follows that at the time the relevant payment was made it was validly made out of the company's account in reliance on the company's mandate. The validity of the payment continued until the winding up order was made on the 16^th February 1984 when, by virtue of section 184(2) of the Ordinance, the winding up was deemed to commence when the petition was presented on the 20^th August 1983. The combined effect of sections 182 and 184(2) on and after the 16^th February 1984 was therefore to render the relevant payment void with effect from the 8^th February 1984 when it was made unless it were validated by an order of the court.

43. The fact that sections 182 and 184(2) had the effect of reaching back and rendering the payment void retrospectively does not mean that the bank had no mandate from the company at the time it honoured its cheque for $600,000 drawn in favour of the defendant, nor was there any question of any mistake concerning the existence of the mandate. The bank may have been acting imprudently in not freezing the company's account pending the disposal of its appeal against the dismissal of its petition in the absence of an anticipatory validating order from the court under section 182, but at the time the cheque was honoured it made a valid and duly authorised payment.

44. The transaction in question involved three parties, namely the company as principal, the bank as the company's agent and the defendant as the payee of the company's money from its account with the bank. The relationship between the three parties was described in the following terms by Lord Atkinson in Westminster Bank Ltd. v. Hilton(10) at p.317:

“It is well established that the normal relation between a banker and his customer is that of debtor and creditor, but it is equally well established that quoad the drawing and payment of the customer's cheques as against money of the customer's in the banker's hands the relation is that of principal and agent. The cheque is an order of the principal's addressed to the agent to pay out of the principal's money in the agent's hands the amount of the cheque to the payee therof.”

45. At the time the cheque was presented the company's account was in credit and the bank had the mandate of the company to honour it. It did so and did not raise any objection, by reference to section 182 or otherwise, to the performance of its basic obligation to company as its customer. The situation was one where, in the language of Robert Goff J. in Barclays Bank v. W.J. Simms Ltd.(9) at p.699D,

“… the bank is entitled to debit the customer's account with the amount of the cheque, and further that the bank's payment is effective to discharge the obligation of the customer to the payee on the cheque, because the bank has paid the cheque with the authority of the customer.”

46. In the present case there was no evidence that the defendant was a creditor of the company at the time it received the payment but, as Mr. Knos acknowledged, the defendant is prima facie presumed to have given value for the cheque and the contrary was not pleaded or established in evidence.

47. To all intents and purposes, but subject to the possible hazard created by section 182 which had no operation at the time of the transaction, the honouring of the company's cheque for $600,000 on the 8^th 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.

48. The combined effect of sections 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 Company Limited(1) per Buckley L.J. at p.721F cited above.

49. 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.(11) 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 section 227 of the Companies Act 1948 (and section 182 of the Hong Kong Ordinance). Mr. Knos did not seek to rely on the Mal Bower's case(11) on the appeal.

50. As Oliver J. (as he then was) observed in relation to section 227 of the Companies Act 1948 in In re Leslie Engineers Co. Ltd.(12) at p.298B-D, section 182 of the Companies Ordinance says nothing about recovery but merely avoids dispositions, so that what is the appropriate remedy in respect of an invalidated disposition has to be determined by the general law. However, this was said as a preliminary to considering the effect of a payment made to a company's creditor from a joint account of a controlling director and his wife which had been fed from the company's account in circumstances of some complexity. In the same case Oliver J. made it quite clear at p.297 G-H that he had no doubt about a liquidator's entitlement to recover moneys clearly identifiable as received by a payee from a company's account.

51. The English judges do not find it necessary to embark on any jurisprudential analysis to arrive at the legal basis for recovery in such a straightforward situation. In our judgment the basis for recovery is obvious in the present case where the relevant dispositions are established. Section 182 renders the dispositions void and therefore ineffective. As between the bank and the company, the bank remained in receipt of the company's property to which it was not entitled on and after the 16^th February 1984 when the winding up order was made. Likewise, as between the company and its agent, the bank, on the one hand and the defendant on the other hand the defendant remained in receipt of the company's property to which it was not entitled.

52. 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(13); Bowstead on Agency, 15^th edition, 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(14) at p.799; Colonial Bank v. Exchange Bank of Yarmouth, Nova Scotia(15) at pp.90-91; Bowstead on Agency, p.480, Article 117; Halsbury's Laws of England, Vol. 1 para. 866.

53. 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.

54. 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.. observed in the Gray's Inn Case(1) 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(3) 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 first edition of Leake on Contracts and cited by Cockburn C.J. in Moule v. Garrett(2).

55. We are not persuaded by any of Mr. Knos's arguments to the contrary. The suggestion that the judge misunderstood Moule v. Garrett(2) which was decided, so Mr. Knos argued, on the basis of default by the party benefiting from the discharge of his obligation, does not carry weight. The judge clearly based his decision on the statement of law in Leake which was cited by Cockburn C.J. in that case and which is generally accepted as a classic statement of the relevant law. As the party whose liability was discharged by the bank, the defendant clearly obtained benefit from that discharge. No further benefit need be established as the pleadings stand.

56. Mr. Knos conceded in the course of argument that he had perhaps put his argument in support of mistake of law by the bank too high. We agree. There was no evidence of any such mistake. Then there was an attempt to rely on Re Diplock(3) as precluding any claim by the liquidators against the defendant until all its remedies against the “blundering” bank had been exhausted. In the absence of any “blunder” being established against the bank on the evidence, it is difficult to see how such an argument can be got off the ground, but it is in any event wholly ill-founded because Re Diplock(3) was in no way concerned with the common law remedy for money had and received but with claims in equity having an altogether different lineage: see Re Diplock(3) per Lord Greene at p.480.

57. The argument based on hypothetical validation under section 182 in favour of the defendant and the alleged deprivation of the defendant's alleged entitlement thereto by the bank's re-imbursement of the company, is also not sustainable. There was no pleading or evidence of facts which established any entitlement of the defendant to validation of the relevant payment. Mr. Knos contended that the defendant could have applied to the court for validation after the winding up order and could have declined to lay the full facts before the court on the footing that it would be for the liquidator to show grounds for refusing validation. In particular he argued that although Mr. Rogerio Lam was a director of the company, there was no evidence that he knew, at the date of the relevant payment, that the bank had appealed against the dismissal of its petition.

58. There was no evidence below one way or the other on the latter point and on the evidence that was adduced it would be quite impossible to decide whether the defendant would have obtained a validation order had it made an application at any time between the date of the winding up order and the date when the bank re-imbursed the liquidators. That alone justified the judge in dealing with the case on the basis that the relevant payment was void at all material times and there was no evidence raising the question of validation.

59. Accordingly it is not necessary to express any further opinion regarding the implications arising from any res judicata operating between the date of the dismissal of the petition and the making of the winding up order on appeal, nor is it necessary to determine whether the court had jurisdiction to make a validiation order under section 182 in favour of the defendant during that period or after the liquidators had recovered from the bank.

60. In all the circumstances we agree with Mortimer J. that it is not necessary to consider whether the bank was entitled to rely on subrogation to establish its claim against the defendant.

61. However it is material to observe that, in our judgment, on the pleadings and evidence in this case the bank could also justify its present claims on the alternative basis of a direct quasi-contractual claim against the defendant.

62. The effect of sections 182 and 184(2) has been to render void, and therefore ineffective, the payment of the company's money by the bank, as the company's agent, to the defendant to discharge to company's obligation to the defendant. In the absence of any validation of the disposition by the court under section 182 there had ultimately been no effective ratification of the payment or discharge of the company's obligation to the defendant: Simpson v. Egginton(16) per Partke B at p.847. The defendant is left to prove in the liquidation in respect of that obligation.

63. It follows, in our judgment, that there was a total failure of the consideration for the bank's payment to the defendant which entitled the bank to recover the payment. The payment was made by the bank as the company's agent in consideration of the discharge of the company's obligation and it was that discharge which would have enabled the bank to indemnify itself against its principal by debiting the company's account. The elimination of the discharge and of the bank's entitlement to debit the company's account by the operation of sections 182 and 184 (2) and the consequential failure of the consideration for the bank's payment entitles the bank to recover the payment from the defendant as money had and received to the bank's use: c.f. Walter v. James(17) per Kelly C.B. at p.127 and Goff and Jones, third edition at p.95 where failure of consideration arising from mistake is discussed.

64. 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 re-imburse the company, seems to us to be no bar to the bank's claim against the defendant based on failure of consideration.

65. 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.(9) at p.703 D in relation to a cheque mistakenly honoured by a bank without mandate from its customer.

66. 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.

(D. Cons)
Vice-President

(K.T. Fuad)
Justice of Appeal

(B.G. Clough)
Justice of Appeal

Eric Knos (H.H. Lau & Co.) for Defendant/Appellant.

Gordon Hampton (Wilkinson & Grist) for Plaintiff/Respondent.

(1) [1980] 1 W.L.R. 711 (C.A.)

(2) (1872) L.R. 7 Ex. 101

(3) [1948] Ch. 465 (C.A.)

(4) (1816) 1 Mer. 572

(5) [1951] A.C. 251 (H.L.)

(6) [1905] 2 Ch. 656 (C.A.)

(7) [1976] Q.B. 402 (C.A.)