[CHANCERY DIVISION]

In re J. LESLIE ENGINEERS CO. LTD. (IN LIQUIDATION)

[No. 001601 of 1970]

Company - Winding up - Disposition of property - Cheque cashed by director from company's hank account - Purchase of money orders to pay part of business debt - Remainder paid by cheque from director's private bank account - Company's moneys paid into private account without creditors' knowledge - Whether "disposition" of "property of the company" - Companies Act 1948 (11 & 12 Geo. 6, c. 38), s. 227

A petition to wind up the company was presented on September 14, 1970, and a winding up order was made on December 15. The respondents had done some work for the company in the summer of 1970. Their charges came to

£1,050, and, without knowing about the presentation of the petition, they were pressing the company for payment. On October 2 the controlling director H made out a "cash" cheque for £250 on the company's bank account. He obtained the cash and bought five money orders of £50 each and sent them to the respondents. On November 5, H sent to the respondents a cheque for £800 drawn on the joint account of himself and his wife st the same bank. The joint account was overdrawn. H paid a cheque from the company's account to cover the overdraft and the £800 cheque and other cheques which he had issued on the joint account. The respondents presented the cheque without knowing that the company's moneys had been paid into the joint account to create a credit balance so as to meet the cheques. The respondents thought that the cheque was being paid by H and his wife from their own resources. On November 20 the cheque was cashed.

On a summons by the liquidator for a declaration that the payment of £1,050, having been made since the commencement of the winding up of the company, was void under section 227 of the Companies Act 1948¹, and for an order that the respondents should pay the £1,050 to the liquidator: -

Held, (1) that, on the true construction of section 227 of the Act of 1948, the term "dispositions" included dispositions of a company's property whether made by the company or by a third party or whether made directly or indirectly; that the payment of £250 was a void disposition within the section because the bank notes received from the bank were as much the company's property, and identifiable as such, as were the moneys in the account and they were throughout clearly identifiable as the company's property which passed directly from the company's hands into the respondents'; and that it was immaterial that the director took the bank notes and converted them into money orders (post, p. 297F-H).

(2) That for the purposes of the section "the property of the company" was not the credit balance in the joint account but was the sum total of the rights of the company created by the transactions leading up to the creation of that balance: and that, accordingly, the payment by the bank of the cheque in favour of the respondents was not a disposition of the company's property avoided by the section (post, p. 299D-E).

(3) That once it was accepted that the respondents were innocent recipients without notice that the account from which they were paid had been fed by a payment of the company's moneys wrongfully procured by its controlling director, there was no principle on which they could be called on to repay (post, p. 299E-F); that the respondents were not volunteers and the evidence gave rise to an inference that they had used the moneys to pay their own creditors; and that, accordingly, although the company might be able to trace its funds in the joint account, those funds could not be traced in the hands of the respondents (post, p. 300B-D).

In re Hallett's Estate (1880) 13 Ch.D. 696, C.A. and In re Diplock [1948] Ch. 465, C.A. considered.

(4) The invalidation of a disposition of the company's property under section 227 and the recovery of the property disposed of, were two distinct matters (post, p. 298B), that the section said nothing about recovery, it merely avoided dispositions, gave discretionary power to the court to validate such dispositions and its object was that the creditors should be paid pari passu (post, pp. 298C-D, 304C); that since the payment of the £250 was clearly a preferential payment to validate it simply because the creditor preferred did not know he was being preferred would be to defeat the whole purpose of the section; and that, accordingly, the liquidator was entitled to

1 Companies Act 1948, s. 227: see post, p. 298B-C.

the declaration sought in respect of the £250 and an order for repayment of that amount (post, p. 304E-G).

In re Civil Service and General Store Ltd. (1887) 58 L.T. 220 applied.

In re T. W. Construction Ltd. [1954] 1 W.L.R. 540 considered.

The following cases are referred to in the judgment:

Civil Service and General Store Ltd., In re (1887) 58 L.T. 220.

Diplock, In re [1948] Ch. 465; [1948] 2 All E.R. 318, C.A.

Hallett's Estate, In re (1880) 13 Ch.D. 696, C.A.

London, Hamburg, and Continental Exchange Bank, In re (1866) L.R. 2 Eq. 231.

Taylor v. Plumer (1815) 3 M. & S. 562.

T. W. Construction Ltd., In re [1954] 1 W.L.R. 540; [1954] 1 All E.R. 744.

The following additional case was cited in argument:

Dalton (A Bankrupt), In re [1963] Ch. 336; [1962] 3 W.L.R. 140; [1962] 2 All E.R. 499.

European Arbitration, In re, National Bank Case (1873) European Arbitration, L.T. 92.

Steane's (Bournemouth) Ltd., In re [1949] W.N. 490; [1950] 1 All E.R. 21.

Wiltshire Iron Co., In re, Ex parte Pearson (1868) 3 Ch.App. 413.

SUMMONS

On September 14, 1970, a petition to wind up the company, J. Leslie Engineers Co. Ltd., was presented and a winding up order was made on December 15. The liquidator issued a summons against the respondents, C. & D. Greaves & Sons (a firm), seeking a declaration that the payment to them of £1,050, of which £250 was paid on October 2, 1970, and £800 on November 20, was void under section 227 of the Companies Act 1948.

The summons further sought an order that the respondents should pay to the liquidator the £1,050.

The facts are sufficiently stated in the judgment.

E. C. Evans Lombe for the liquidator.

Robin Potts for the respondents.

November 13. OLIVER J. read the following judgment. This is a liquidator's summons for a declaration that two payments totalling £1, 050 paid to the respondents after the commencement of the winding up of the company were void under the provisions of section 227 of the Companies Act 1948, and for an order for the recovery of those sums from the respondents. The company, J. Leslie Engineers Ltd., was incorporated in 1969 and was at all material times controlled by a Mr. Hadrys, who was a director. On September 14, 1970, a creditor presented a petition to wind up, and that was advertised on September 25. In October 1970 the Inland Revenue Commissioners were substituted as petitioners, the original petitioner's debt having been paid, and a winding up order was made on December 15, 1970.

The present summons concerns two cheques which were drawn on the company's bank account at Lloyds Bank, Leigh-on-Sea, the first payable to cash for £250 on October 2, 1970, and the second for £800 drawn in favour of Mr. Hadrys on November 17, 1970, and paid into a joint personal account of Mr. Hadrys and his wife at the same bank. Although, as I

have said, the petition was presented and advertised in September, both these cheques were, rather surprisingly, honoured by the bank, but I am not concerned here with any claims against the bank to which this fact may have given rise. The first cheque was dated October 2, was made out by Mr. Hadrys to "cash," was signed by him "for J. Leslie Engineers Co. Ltd." and was encashed on the same day. He seems to have taken the cash thus obtained straight to the post office and to have purchased with it five telegraphic money orders for £50 each in favour of Mr. Dennis Reginald Greaves. As I understand it, the reason for sending five orders instead of one was that this minimises the poundage charged by the post office on the transaction.

The circumstances in which the second cheque was negotiated were these: Mr. Hadrys and his wife maintained a joint bank account at the same bank as that at which the company's account was kept. At the beginning of November 1970 it was overdrawn. On November 5 Mr. Hadrys drew a cheque on the joint account in favour of the respondents (named in the cheque as "C. and D. Grieves (sic) & Son") for £800. Mr. Dennis Greaves, who gave evidence before me, told me that after this cheque had been posted to him he received a telephone call from Mr. Hadrys who told him that it might not be met and instructed him, if that occurred, to re-present it. Well, that prediction proved correct. The cheque was presented on November 11 but was returned "refer to drawer, please re-present," and the entries in the joint bank statement of Mr. and Mrs. Hadrys of that date, shows a payment of £800 and a contra entry of the same amount. The account continued to be overdrawn until November 16 on which date the overdraft was £183 11s. 10d. On the following day there were paid into the account cheques to a total value of £1,135 8s. 2d. and it is clear that this figure included the cheque for £800 drawn on the company's account to which I have referred. This resulted in a credit balance of £951 16s. 4d. against which were drawn cheques totalling £115, so that on November 20 there was a credit balance of £836 16s. 4d. On that date the bank honoured three further cheques, one for £15 17s. 1d., one for £20 15s. 0d., and the third, the re-presented cheque for £800 in favour of the respondents, thus leaving a credit balance of 4s. 3d.

Those are the facts immediately surrounding the payment of the sums now claimed by the liquidator but I ought. I think, to say something of the background which has formed the basis of some of the submissions made.

It seems that Mr. Hadrys, before setting up the company, had been employed by a company which did business with the Tully Engineering Co., an organisation by which, until April 1970, Mr. Dennis Greaves was employed. They thus became acquainted. After Mr. Hadrys had left his employment and set up the company in 1969, Mr. Greaves left Tullys and started an engineering business of his own in partnership with his brother, and it seems that in the early stages a good deal of the work done by them was done for Tullys. In the summer of 1970, Mr. Hadrys called at Tullys in order to get them to do some sub-contract work for him at a colliery controlled by the National Coal Board. Tullys were not able to accept the work because of the holiday period, but Mr. Greaves told me that their manager telephoned to him, told him that Mr. Hadrys was with him and wanted this work done, and asked him whether he and his brother could help out. They agreed to do so and, as a result, Mr. Hadrys came straight over to their workshop and instructed them on the job. A few days later, he called and said he was going into

hospital and asked them to deal with his foreman, a Mr. Irvine, who lived in the neighbourhood. Mr. Greaves' evidence was that he did not know anything about the structure of Mr. Hadrys' business, but got the address to which to send invoices from Mr. Irvine.

The work was carried out, and on July 28, 1970, an invoice for £1, 050 was sent to "J. Leslie Engineering, 18, Rigg Approach, Leytonstone, E. 10." Mr. Greaves' evidence was that invoices were prepared by him in longhand and then typed by his sister-in-law, who did the office work for the business, which was then running on very slender resources. Normally they expected payment within a month, but none came and at the beginning of September a statement was sent. Mr. Greaves says that he does not think that he wrote this out but it was, of course, a long time ago. That statement was addressed this time to J. Leslie Engineering Ltd. and is dated, "As at August 31, 1970." It set out the figure and the date of the invoice, and concludes, "This account is now due for payment and we would appreciate your cheque or your reason for non-payment within the next seven days."

Mr. Greaves said he telephoned several times to press for payment, and this is borne out by a letter of September 16 in which he protested at the continued non-payment and asked for prompt settlement. That letter, like the invoice, was addressed to "J. Leslie Engineering." Before the sum of £250 arrived at the beginning of October, Mr. Hadrys telephoned to say that it was on the way and Mr. Greaves' evidence is that he also telephoned before the cheque for £800 was sent, as well as telephoning afterwards to say that the cheque might not be met. Despite the reference in the statement of August 31 to J. Leslie Engineering Ltd., Mr. Greaves says that neither he nor his brother had any idea that they were dealing with a limited company, and, indeed, that the first intimation that a company existed was when in May 1971, he received an undated letter from Mr. Hadrys in which he said, "As you will know, the company went into liquidation." The reference to J. Leslie Engineering Ltd. in the statement of August 31 to which I have referred, is explained, I think a little speciously, by saying that his sister-in-law thought this "more businesslike." There is no evidence from Mrs. Greaves herself.

I have seen extracts from the ledger sheets of the respondents, which were kept by her, and which indicate that the word "limited" was not consistently used in making entries relating to debtors or creditors which were limited companies - sometimes it appears, sometimes it does not, so I derive very little assistance from this. In cross-examination, however, Mr. Greaves said that he and his brother were not surprised to receive the money in October. They thought, he said, that Mr. Hadrys and his wife were "directors of the company." Furthermore, in a letter written by the respondents' solicitors in June 1973 I find this statement:

"It has been our client's contention all along that they were not in fact paid by the company but by Mr. Hadrys personally, and certainly the cheque for £800 did not come from the company. We gather that Mr. Hadrys had promised to pay our clients himself if necessary."

The clear implication of this is that the liability was known to be a company liability which was being guaranteed by Mr. Hadrys. Nor does the matter end there, because in August and September 1971, the liquidator wrote to the respondents pointing out that the company was in liquidation and asking for "a statement of the account of J. Leslie Engineers Co. Ltd. with yourselves showing transactions effected during 1970." Tn response,

there were sent three invoices for goods and services all dated September 4, 1970, and addressed to J. Leslie Engineering, a statement similarly addressed dated October 9, 1970, and showing a balance outstanding of £894 15s. 11d. (subsequently corrected in ink to show the £800 received) and a letter dated January 8, 1970, pressing for the outstanding balance of £94 15s. 11d. and addressed to "J. Leslie Engineering Co." These were accompanied by a compliment slip upon which is written:

"Your letters dated 12/8 and 9/9, I enclose copies of most of our correspondence with J. Leslie Engineering. You will see from this that our total invoices to the firm amounted to £1,144 16s. 11d., of which we are still owed £94 15s. 11d. If you require any further information, please do not hesitate to contact us. (signed) J. E. Greaves."

I am bound to say that I find myself unable to accept Mr. Greaves' evidence that he did not appreciate that he was dealing with a limited company. Quite apart from the indicia to which I have already referred, his evidence was that in 1970 he had known Mr. Hadrys for five or six years. It is evident both from Mr. Greaves' own evidence and from the documents that the respondents were having the very greatest difficulty in extracting payment for the work done. If Mr. Greaves had really believed that he was dealing with Mr. Hadrys personally, I find it quite incredible that he did not address a single letter to him personally asking for payment, and equally incredible that, when approached by the liquidator, he did not at once say that he had no knowledge of the company and had had no dealings with it. I am sure that Mr. Greaves was not, in his evidence, deliberately seeking to mislead me and was doing his best to reconstruct events which, after all, took place some five years ago. But I am driven to the conclusion, on the material before me, that at the material time he knew that there was a company and believed Mr. Hadrys to be a director of it and that it was for that entity that the work carried out in the summer of 1970 was undertaken.

It is submitted by Mr. Potts, on behalf of the respondents, that the "dispositions" which were avoided by section 227 do not include such dispositions as are constituted by the payments to the respondents in this case: that "the dispositions" at which the section is aimed are the initial dispositions only - that is to say the encashments of the two cheques - and that it is against Mr. Hadrys alone that any claim will lie. I cannot think that as a general proposition that can be right. It seems to me to be 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.

I feel, therefore, no difficulty - and, I may add, no doubt - about the initial payment of £250. The bank notes received from the bank were as much the company's property, and identifiable as such, as were the moneys in the account, and it seems to me to make not the slightest difference that Mr. Hadrys took the bank notes and converted them into money orders payable to Mr. Greaves. There was, throughout, a clearly identifiable property of the company which passed directly from the company's hands (in the person of Mr. Hadrys, its controlling director) to those of the respondents: see for instance. Taylor v. Plumer (1815) 3 M. & S. 562. That disposition was, in my judgment, quite clearly invalidated by the section unless and until this court otherwise orders.

The second payment, however, creates to my mind, very much greater

difficulty. The disposition which Mr. Evans Lombe, on behalf of the liquidator, attacks, is not the drawing of the cheque to Mr. Greaves or the sending to him of that cheque, and it is not - or it is not alone - drawing by Mr. Hadrys of the cheque on the company's account. It is the application by the bank of the funds in the joint account to meet Mr. Greaves' cheque when it was re-presented. That, says Mr. Evans Lombe, was the disposition of the company's property which is avoided and which gives the liquidator the right to recover the sum claimed from the respondents. Now, it must be remembered that the invalidation of a disposition of the company's property and the recovery of the property disposed of, are two logically distinct matters. Section 227 says nothing about recovery; it merely avoids dispositions and is in these terms:

"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 members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void."

What is the appropriate remedy in respect of the invalidated disposition is a matter not regulated by the statute and that has to be determined by the general law. In order to succeed against the respondents, the liquidator does not necessarily have to demonstrate a transaction invalidated by section 227 for there may be claims to recover moneys paid on other grounds. He does, however, have to show a right of recovery, and it is Mr. Evans Lombe's contention that he does that if he demonstrates that the transaction is one which is bitten by section 227 and persuades the court that it ought not to validate it. I think that I should say straight away that although, as I have said, I cannot accept that the respondents were not aware that they were contracting with a limited company, I cannot on the evidence before me find any indication that when the £800 payment was made, or indeed at any material time, the respondents knew or had reason to suspect that the funds to meet it had been provided by the company. I cannot, therefore, treat the case as one of a collusive payment, and I think that I must accept that, so far as the respondents were concerned, they thought that the moneys were being paid by Mr. Hadrys or his wife out of their own resources.

Looking at the transaction in stages, there was clearly no disposition of any property of the company when the cheque in favour of the respondents was first sent and presented. When the cheque on the company's account was drawn and presented there quite clearly was a disposition of the company's property, and one which is, unless validated, avoided by section 227. But that cheque was paid in with a number of other cheques and, after allowing for the overdraft, the moneys represented by the cheque became mixed with Mr. Hadrys' own moneys throwing up a credit balance of some £950. That transaction gave rise, of course, to a number of claims against Mr. Hadrys. First, he was clearly in breach of his fiduciary duty as a director and liable to replace the money taken out of the company's account in misfeasance proceedings. Secondly, the company had claims against him for conversion and for money had and received. But at law, at least, it is difficult to see how the money could be said to be any longer "the property of the company" for it had ceased to be identifiable and the common law doctrine of tracing had ceased to be applicable when the money was mixed with the other moneys in the account. The company's cheque had lost its identity in a new chose of action, that is to say

the debt owed by the bank to Mr. and Mrs. Hadrys on the credit balance in the joint account. It would, in my judgment, be a misuse of language to describe that chose in action as "the property of the company." The fact that the disposition constituted by the payment in of the company's cheque is described by section 227 to be "void" does not mean that it never took place, and even if it did, I do not see how that would help the liquidator in his claim against the respondents, for it would simply mean that the bank had paid the cheque in their favour out of funds which did not in fact exist. Nor does it mean that the company has some special remedy - and this is really what Mr. Evans Lombe suggests - which enables it to proceed with a claim against the respondents for money had and received in circumstances where, had the disposition been invalid on some other ground than the section, no such remedy would have lain.

The position immediately after the payment of the company's cheque into the joint account was that the company had against Mr. Hadrys (among other remedies) the remedies which any beneficiary has against a fiduciary who has misappropriated the trust fund, that is to say a claim in personam for replacement and the right to trace the trust funds in equity.

"The property of the company" for the purposes of the section was, as it seems to me, not the credit balance in the account owed by the bank to Mr. and Mrs. Hadrys, but the sum total of the rights of the company created by the transactions leading up to the creation of that balance. I do not think that the meeting, out of the credit balance held by the bank to the order of Mr. and Mrs. Hadrys, of the re-presented cheque in favour of the respondents was a disposition of the property of the company simply because the company could, by appropriate proceedings, have obtained a declaration of charge on that credit balance. Accordingly, in my judgment, the liquidator's claim to a declaration under paragraph 1 of the summons in respect of the cheque to the respondents must fail.

That, however, is not necessarily the end of the matter, because the mere fact that a payment to the respondents is not avoided by section 227 does not mean necessarily that they are not liable to repay. I cannot, however, see upon what principle they could be made liable in the present case if one once postulates - as, in my judgment, one must - that they were innocent recipients without notice that the account from which they were paid had been fed by a payment of the company's moneys wrongfully procured by its controlling director. Any claim against them personally for money had and received would, so far as I can see, fail for want of privity between them and the company in relation to the payment which would enable such a claim to be sustained.

As regards any personal claim in equity on the analogy of a claim against an overpaid beneficiary, there appear to me to be two objections. In the first place, I do not think that it can be right to treat the respondents as volunteers who have received trust moneys, for they gave consideration in as much as it must have been implicit in the transaction that they received the payment in discharge of the debt due to them from the company. But even if they could be regarded as volunteers. In re Diplock [1948] Ch. 465 indicates a fatal objection, namely that the exertion of the personal remedy by the beneficiary (the company) against the innocent but wrongly paid recipient, is dependent upon the beneficiary first exhausting his remedies against the persons primarily responsible.

In the instant case, the liquidator, for reasons which have not been explained, has not sought to proceed either against Mr. Hadrys, who was the person directly responsible, nor against the bank without whose co-operation (procured, no doubt, in ignorance of the petition) the payment could not have been made.

Clearly, Mr. Hadrys was a trustee of the company's moneys and could himself have had no defence to an equitable claim by the company to trace its funds in the joint account. Equally clearly, applying the rule in In re Hallett's Estate (1880) 13 Ch.D. 696 to the payments out of the account, substantially the whole of the sum of £800 paid to the respondents could have been traced. But for a tracing claim to succeed against the respondents it would have to be established (a) that they were volunteers and (b) that the money was still capable of being followed in their hands. If the innocent recipient has, for instance, used it to discharge debts owing by him, it ceases to be traceable: see In re Diplock [1948] Ch. 465, 521, 548, 549. Even, therefore, if the respondents could properly be treated as volunteers, the liquidator has not sought to adduce any evidence that the money is traceable into any assets of the respondents and, having regard to Mr. Greaves' evidence that the business had only been going a few months and was at the time running on extremely slender resources, it may, I think, safely be inferred that the respondents used the money to pay their own creditors. Accordingly, the liquidator's claim to the sum of £800 must, in my judgment, fail.

There remains, however, the question of whether, in the exercise of the discretion conferred on the court by section 227, I ought to make an order validating the payment of £250. Mr. Potts has submitted that I should, because he says: (1) The respondents regarded themselves as dealing with Mr. Hadrys and not with the company; (2) they did not know when the payments were made that a winding up petition had been presented, nor that the money originated from the company; (3) the liquidator has delayed for a long time in making the claim; and (4) it is unfair to proceed against them without first proceeding against Mr. Hadrys, the person really responsible.

I have already rejected the first of Mr. Potts' grounds as a matter of fact. As to the second, Mr. Potts says that there is no reported case that he has been able to find where, in the case of a recipient who did not know that a petition had been presented, the payment has not been validated. He refers me to In re Civil Service and General Store Ltd. (1887) 58 L.T. 220, where the repayment was ordered, but points to the express finding that the recipient knew of the petition and to the importance attached to that. In his judgment in that case Chitty J. said, at p. 221:

"But to affirm a transaction of that kind under the discretion conferred upon the court by section 153," - which of course, was the forerunner of the present section 227 - "would be to exercise such discretion upon a totally erroneous principle. To allow the respondents to retain £175 would be to act in the very teeth of the Act of Parliament, the object of which is that creditors should be paid pari passu. Moreover, the respondents, at the least, knew at the date of the agreement that the company was in embarrassed circumstances, although they do not seem then to have had knowledge of the presentation of the petition. When, however, they actually

received the two payments of £100 and £75, they were, in my judgment, aware of a petition having been presented, and I can only treat the transaction as an attempt to get a preference over other creditors. The proposition that payment by a company, after the commencement of a winding up, of a bona fide debt previously incurred will be affirmed by the court under section 153 is wholly untenable. I therefore hold that the respondents must repay the £175. The payment, however, of the £13 for goods supplied is one which can properly be affirmed."

But it does not, of course, follow (as Mr. Potts recognises) from the fact that knowledge was considered important in a case where the court declined to exercise its discretion that the court will exercise its discretion where there is no knowledge, and Mr. Evans Lombe says that that proposition is simply not correct as a matter of law. All the cases, he suggests, where payments have been sanctioned have either been salvage cases where the creditor receiving payment has put up moneys or supplied goods and services to keep the company going, or cases where there would be some manifest injustice in declining to validate the payment.

He refers to In re T. W. Construction Ltd. [1954] 1 W.L.R. 540, where the principles are set out by Wynn-Parry J. After reading the section, Wynn-Parry J. said, at pp. 542-544:

"Certain authorities have been referred to. It may be convenient if I turn in the first place to the recent case, In re Steane's (Bournemouth) Ltd. [1949] W.N. 490 a decision of Vaisey J. In the course of his judgment in that case, Vaisey J. said: 'The legislature, by omitting to indicate any particular principle which should govern the exercise of the discretion vested in the court, must be deemed to have left it at large, and controlled only by those general principles which applied to every kind of judicial discretion. I have reviewed the facts of the present case somewhat at length because I think that such a review must usually be necessary whenever a case of this nature falls to be decided.' In the older case of In re Repertoire Opera Co. (1895) 2 Manson 314, 316 Vaughan Williams J. said 'I have an absolute discretion to validate this transaction or not. If the transaction is one which would be valid under the protective sections of the Bankruptcy Act, that would be a very strong reason for validating it here. That is what Lord Cairns means in Ex parte Pearson, In re Wiltshire Iron Co. (1868) 3 Ch.App. 443.' With that statement I respectfully entirely agree. Vaughan Williams J. continued: 'The cases on section 153,' - which was the corresponding section to section 227 - 'are an adoption by the court of the principle of the protective sections in bankruptcy. It would be very unfortunate if the principles of administration in bankruptcy and in the winding up of companies were not, so far as possible, the same.' I have some difficulty in following the reasoning in those two sentences because the protective section in the present Bankruptcy Act 1914, section 45, confers no discretion on the court. A transaction to be protected under that section must fulfil the conditions laid down in the section, otherwise it does not obtain the protection; whereas, as Vaughan Williams J. himself recognised, there was under the section corresponding to section 227 of the present Companies Act an absolute discretion, as was clearly stated by Vaisey J. in the

passage in his judgment in the Bournemouth case [1949] W.N. 490, to which I have just referred. The facts in In re Wiltshire Iron Co., 3 Ch.App. 443, 446, the case to which Vaughan Williams J. refers, can be simply stated by reading a sentence from the headnote: 'Where a customer of a trading company had bona fide ordered and paid for goods, and the company had loaded the goods on a railway to his address, and sent him the invoices, after the presenting of the petition but before the winding-up order: Held, that the disposition of the property was complete before the winding-up order, and the goods ordered to be delivered to the customer.' In the course of his judgment, Lord Cairns said: ' Section 153 no doubt provides that all dispositions of the property and effects of the company made between the commencement of the winding up (that is the presentation of the petition) and the order for winding up, shall, unless the court otherwise orders, be void. This is 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. But where a company actually trading, which it is the interest of everyone to preserve, and ultimately to sell, as a going concern, is made the object of a winding-up petition, which may fail or may succeed, if it were to be supposed that transactions in the ordinary course of its current trade, bona fide entered into and completed, would be avoided, and would not, in the discretion given to the court, be maintained, the result would be that the presentation of a petition, groundless or well-founded, would ipso facto, paralyse the trade of the company, and great injury, without any counter balance of advantage, would be done to those interested in the assets of the company.' In the later case, In re Park Ward & Co. Ltd. [1926] Ch. 828, 831 Romer J. applied In re Wiltshire Iron Co., 3 Ch.App. 443. After quoting a passage from the judgment of Lord Cairns which I have myself quoted, he says, at p. 831: 'If I were to adopt the view put forward by Mr. Clayton, a company would in very few cases be able to obtain the assistance necessary to enable it to carry on business as a going concern. Lord Cairns evidently regarded the power given to the court by the section as one given for the benefit and in the interests of the company, so as to ensure that a company which is made the subject of a winding-up petition may nevertheless obtain money necessary for carrying on its business and so avoid its business being paralysed. If, therefore, I were to hold that no one who knows of the presentation of a petition can safely enter into any arrangement with the company, I think I should be depriving the company of the benefit which, according to Lord Cairns, the provision of the section was intended to secure to it.'"

After reviewing the facts of that case, Wynn-Parry J. said, at p. 544:

"... it is clear from the evidence, and to my mind it is the only possible inference from the facts, that the accommodation arranged was arranged for a limited period for the express purpose of enabling the company to continue to carry on its business. Therefore, to use the language of Romer J., it was a transaction for the benefit of and in the interests of the company. In the case before Vaisey J., In re Steane's (Bournemouth) Ltd. [1949] W.N. 490, a debenture was

issued to secure moneys which were advanced for the purpose, as stated by Vaisey J. in his judgment, of keeping the company going or of keeping things going generally. Those three authorities appear to me to govern this case and to bring it within the benefit of the section."

Then he referred to In re Liverpool Civil Service Association (1874) 9 Ch.App. 511 and In re Civil Service and General Store Ltd., 58 L.T. 220, the decision of Chitty J. to which I have referred, and he said about that last case:

"Apart from the circumstance that the Wiltshire Iron Co. case, 3 Ch. App. 443, was not cited, it appears to me that that case is clearly distinguishable from the present case."

And having reviewed the facts, he says, at p. 545:

"Then in the next sentence there is a circumstance stated which would of itself, I think, be sufficient to distinguish that case from the present case,"

and he quotes from the judgment which I have already read the passage where Chitty J. emphasises that when the payments were actually received, the recipients were aware of the petition, and he concludes, at p. 546:

"Therefore it seems to me that these two cases do not in any sense govern the present case or stand in the way of the disposition in question being validated. It appears to me, viewing the evidence as a whole and drawing the inference that I do, that this was a transaction which is directly within the passage from the judgment of Lord Cairns, ..."

Now, although Wynn-Parry J. refers to a disposition as being for the benefit of and in the interests of the company, I do not read his judgment as indicating that the mere fact that the payment is made in respect of some past transaction from which the company may have derived a benefit is sufficient to justify the exercise of the court's discretion.

I accept that when the respondents received the £250, they did not positively know (as was the fact) that it was money of the company. But it was money which was paid to them by a director of the company in response to pressure applied by them to the company in respect of a transaction taking place before the presentation of the petition, and finding myself unable to accept that they did not regard the transaction themselves as a dealing with a limited company, I think that the natural inference that they would have drawn if they thought about it at all, would have been that it was the company's money. Certainly there was nothing, as there was in the case of the subsequent payment out of the private account of Mr. and Mrs. Hadrys, to suggest that it was not. There is, however, nothing in the circumstances of the instant case which would lead me to believe that the respondents knew at that time that a petition had been presented. They deny it, and I accept that.

If, therefore, one adopts the analogy of section 45 of the Bankruptcy Act 1914 (as is suggested in the passage from Vaughan Williams L.J. in In re Repertoire Opera Co., 2 Manson 314, 316, referred to by Wynn-Parry J. in In re T. W. Construction Ltd. [1954] 1 W.L.R. 540) this would be in favour of Mr. Potts' proposition. But I do not think that the matter can be resolved so simply. As Wynn-Parry J. pointed out, section 45 lays down specific conditions as regards payments by the bankrupt and

confers no discretion, and I am bound to say that I do not think that the two sections are really comparable. For instance, a very common exercise of the discretion under section 227 is the sanctioning in advance of payments in the ordinary course of business where everybody knows that a petition has been presented. Again, the advertisement of the petition is notice to all the world of its presentation (see In re London, Hamburg, and Continental Exchange Bank (1866) L.R. 2 Eq. 231) and there is no real or necessary parallel between that public act and the available act of bankruptcy to which a receiving order relates back. Whilst obviously the absence of any actual knowledge in the recipient of a payment that a petition is in being is a factor - indeed a very powerful factor - to be considered in relation to the exercise of discretion, I do not think that, by itself, it can be conclusive and, indeed, Mr. Potts does not so contend. I think that in exercising discretion the court must keep in view the evident purpose of the section which, as Chitty J. said In re Civil Service and General Store Ltd., 58 L.T. 220, 221, is to ensure that the creditors are paid pari passu. Obviously there are circumstances where this cannot in fairness be the sole criterion in cases where, for instance, the creditor concerned has since the presentation of the petition helped to keep the company afloat, or has otherwise swollen the company's assets, salvage cases and that sort of thing.

But I can see no considerations in the present case, nor do I think that the matter is affected by Mr. Potts' point that it is unfair to proceed against the respondents (a) because no proceedings have been taken against Mr. Hadrys or (b) because there has been long delay in proceeding. As to the first, I cannot think that the existence of an alternative remedy against somebody else can be a good reason for validating a transaction. And, as to the second, there has, it is true, been a delay, but I cannot see that in fact it has prejudiced the respondents who were clearly notified in September 1971, that proceedings were to be brought.

In the circumstances, I do not see my way to exercising my discretion to sanction what was clearly a preferential payment made with the company's money - a payment furthermore which, so far as the available evidence goes, seems clearly to have been intended by Mr. Hadrys to be preferential. It seems to me that to allow payments made in these circumstances to stand simply because the creditor preferred does not know that he is being preferred, would be to defeat the whole purpose of the section.

I have very considerable sympathy for the respondents who laboured long and hard for a reward which in the event has proved at least in part illusory. But I regretfully feel that I must in relation to the sum of £250 make the declaration sought and order its repayment as asked by the liquidator.

In the result, therefore, the liquidator's claim to the £800 fails, but there will be a declaration and order as sought in relation to the payment of the £250.

Solicitors: Goldingham, Wellington & Co.; Hodgson, Fox & Co., Newark-on-Trent.

A. R.