Laura Masterson on winding up petitions and banks.

The Vice Chancellor’s recent decision in Hollicourt (Contracts) Limited v Bank of Ireland attempted to clarify a bank’s liability under Section 127 of the Insolvency Act 1986 for transactions into and out of a customer’s account, standing in credit, following the advertisement of a winding up petition.

The liquidator of Hollicourt sought to recover close to £156,000, which was paid out of the company’s account after advertisement of a winding up petition against it. Counsel for the Liquidator relied upon Re: Grays Inn Construction Limited, which suggested that payments into and out of a company’s account, standing in credit, could amount to a disposition in favour of the bank, and be avoided under Section 127.

Counsel for the bank urged the vice chancellor to accept the reasoning of the Australian authorities which hold that Section 127 merely invalidates a disposition between the company and the ultimate recipient of the company’s money, the bank, which is merely acting as agent, is not liable.

The vice chancellor had to determine the ultimate liability of the bank. In a reserved judgment, he held that a transaction which is avoided by Section 127 is avoided not only against the third party recipient but also against the paying bank. The bank was required to reconstitute the account by adding to the opening balance all sums credited to the account since the winding up began. The vice chancellor held that the liquidator could pursue the bank before exhausting his remedies against the ultimate recipients.

But less than one week later, Justice Lightman in the case of Coutts & Co v Stock suggested that the Hollicourt decision was wrong, and the bank could avoid liability under Section 127 by applying the Australian authorities.

Both Hollicourt and Coutts & Co v Stock are likely to be appealed. Banks and insolvency practitioners must await determination by the Court of Appeal to see how this area of the law will develop.