Does section 127 of the Insolvency Act 1986 void payments made by the insolvent company’s bank after the presentation of a winding-up petition

This article was first published on Practical Law: Restructuring and Insolvency

Does section 127 of the Insolvency Act 1986 void payments made by the insolvent company’s bank after the presentation of a winding-up petition but pursuant to payment instructions issued by the company before presentation of the petition?

Section 127(1) of the Insolvency Act 1986 (IA 1986) states that in a compulsory winding up, any disposition of the company’s property (amongst other things) made after the commencement of the winding up is void unless the court orders otherwise. By operation of section 129(2) of the IA 1986, a compulsory winding up is deemed to commence on presentation of the winding-up
petition.

Money held in a bank account is a debt owed by the bank to the account holder and so is a chose (or ‘thing’) in action. The definition of “property” under section 436 of the IA 1986 is wide and includes (amongst other things) money, goods and choses in action.

The question is therefore whether the disposition of all or part of the company’s property in the bank account is made when instructions are given to the bank to make a payment, or when those instructions are later actually processed by the bank.

There appear to be no English cases directly on the point, which is unsurprising given that the situation will rarely arise in the context of the speed of transactions ordinarily achieved in modern banking. The Supreme Court of Queensland considered the issue under the equivalent Australian legislation as it pertains to cheques and found that the disposition was made at the time the cheque was drawn, rather than when it was later presented for payment (Re: Loteka Pty [1990] 1 Qd R 322).

However, the ratio of that decision was that a cheque is a chattel belonging to the company and for that reason the disposition is made at the time the cheque is physically handed over. This reasoning is plainly of no application in the present scenario. Further, authorities concerning the time at which payment is made by bank transfer state that instructions given to a bank may be revoked at any time until the bank processes those instructions and that payment only occurs when the bank debits the paying account and when the recipient of the payment is able to make immediate use of the funds (see The Brimnes [1975] QB 929; The Chikuma [1981] 1 WLR 314).

In that regard, an order given to a bank is, unlike a cheque, not a negotiable instrument and does not constitute a disposition. For these reasons, section 127 of the IA 1986 does, in the author’s view, void payments made by the insolvent company’s bank after the presentation of a winding-up petition but pursuant to payment instructions issued by the company before presentation of the petition.

One final point to note is the effect of such a disposition being void and against whom the legal consequences bite. In processing a payment, a bank merely acts as the company’s agent, and so there is no disposition to the bank itself. A restitutionary claim only lies as against the recipient of the payment by the bank (see Hollicourt (Contracts) Ltd v Bank of Ireland [2001] EWCA Ch 555). This will be the case whether the result of that payment is a reduction of the positive balance of the account or an increase of its overdraft, though again the analysis will differ where payment is made by cheque (see Coutts & Co v Stock [2000] 1 WLR 906).