SUPER SPEED LTD (IN LIQUIDATION) v. BANK OF BARODA

CACV 184/2014 AND CACV 185/2014

CACV 184/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 184 OF 2014

(ON APPEAL FROM HCCW NO. 273 OF 2012)

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CACV 185/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 185 OF 2014

(ON APPEAL FROM HCCW NO. 274 OF 2012)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  I agree with the reasons given by Kwan JA.

Hon Yuen JA:

2.  I agree with Hon Kwan JA’s reasons for judgment.

Hon Kwan JA:

3.  On 4 August 2014, Anthony Chan J dismissed two applications brought by the liquidators of Super Speed Ltd (“Super”) and Marshel Exports Ltd (“Marshel”) against the Bank of Baroda (“the Bank”) pursuant to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.  These are the appeals of Super and Marshel.

4.  By their summonses filed on 28 November 2013, Super and Marshel sought the following orders:

(1) declarations that the loans made by the Bank to Super and Marshel after 3 August 2012 (the date the winding-up petitions were presented against the companies by creditors) are void under section 182 and be set aside; and

(2) declarations that the charges or mortgages by reason of or resulting from the post-petition loans against (a) Super’s property at Office No 02 on 9^th Floor, Empress Plaza, Nos 17 to 19, Chatham Road South, Kowloon, Hong Kong (“Super Property”) and (b) Marshel’s property at Office Nos 01 and 08 on 9^th Floor, Empress Plaza (“Marshel Property”) are void under section 182 and be set aside.

5.  The question arising in these appeals is whether the Bank’s post-petition loans to the companies constitute dispositions of the companies’ assets and are therefore invalidated by section 182[1].

6.  We dismissed the liquidators’ appeals at the end of the hearing.  I now give the reasons for judgment.

Background

7.  The relevant background matters are comprehensively set out in the decision of the judge at §§3 to 13 and I gratefully adopt them here:

“3. Both Super and Marshel are the Bank’s customers. Marshel opened its bank account with the Bank on 28.7.2007 whereas Super’s account was opened on 24.8.2007. At all material times, Mr Sharma Nipun, a director of both companies, operated the 2 bank accounts on behalf of the 2 companies.

4. On 17.9.2007, Marshel granted a first mortgage over the Marshel Property in favour of Dah Sing Bank Limited to secure “all monies” in respect of general banking facilities and interest (“Dah Sing Mortgage”). On 7.8.2008, Marshel granted a second mortgage over that property in favour of the Bank to secure all monies obligations and liabilities owing or incurred by Marshel (“Marshel Mortgage”).

5. On 25.10.2007, Super granted a mortgage over the Super Property in favour of the Bank to secure a term loan in the sum of HK$3,500,000. In around October 2010, that mortgage was discharged and on 28.10.2010, Super granted a new legal charge/mortgage over the same property in favour of the Bank to secure “all monies” in respect of general banking facilities and interest (“Super Mortgage”).

6. On 3.8.2012, 2 creditor’s winding-up Petitions were issued, one against Super and the other against Marshel. On 24.10,2012, both companies were wound up.

7. Prior to the making of the winding-up orders, the Bank was informed by the solicitors acting for Super and Marshel on 11 September 2012 that winding-up Petitions were presented against them.

8. In January 2013, the Liquidators requested the Bank for information on the loans that the Bank had advanced to Super and Marshel.

9. On 8.7.2013, the Bank submitted proofs of debt in respect of both Super and Marshel to the Liquidators. The sum due from Super was US$1,110,607.46 or HK$8,618,313.89 whereas the sum due from Marshel was US$1,665,338.03 or HK$12,923,023.12.

10. It is common ground that the Bank had advanced loans to both Super and Marshel after 3.8.2012. Further, the Bank acknowledges that despite the fact that it became aware of the winding-up Petitions against Super and Marshel by 12.9.2012 (the Liquidators contend that the Bank had constructive knowledge of the Petitions on 24.8.2012 when they were gazetted), it nevertheless continued to advance further loans to the 2 companies.

11. In respect of Super, the Bank had advanced a total of US$743,534.74 (principal) to it between 24.8.2012 and 18.9.2012:

Date of Loan	Principal Amount of Loan (US$)
24.8.2012	44,368.35
12.9.2012	97,464.90
13.9.2012	93,100.80
14.9.2012	34,320
14.9.2012	61,582.30
17.9.2012	59,157.80
17.9.2012	70,310.50
18.9.2012	68,370.90
18.9.2012	40,731.60
18.9.2012	66,673.75
19.9.2012	21,868.99
19.9.2012	85,584.85
Total:	743,534.74

12. As for Marshel, the Bank had advanced a total of US$1,655,671.03 (principal) to it between 23.8.2012 and 28.9.2012.

Date of Loan	Principal Amount of Loan (US$)
23.8.2012	41,467.03
24.8.2012	147,004
19.9.2012	105,120
20.9.2012	104,000
20.9.2012	103,200
21.9.2012	101,600
21.9.2012	100,800
21.9.2012	100,480
26.9.2012	124,000
26.9.2012	123,200
27.9.2012	122,400
27.9.2012	121,600
28.9.2012	120,960
28.9.2012	120,640
28.9.2012	119,200
Total:	1,655,671.03

13. On 28.11.2013, the Liquidators issued the Summonses in respect of the 2 applications that are before this court.”

The decision below

8.  Before the judge, the liquidators contended that the post-petition loans have reduced the equity in the mortgaged properties belonging to Super and Marshel and such reduction constituted dispositions for the purpose of section 182.  Their contention is founded on the view of Professor Roy Goode in his work, Principles of Corporate Insolvency Law (4^th ed) at §13-133 p 619, the relevant parts of which read as follows:

“My contention, then, is that s.127[2] can never apply solely by reason of the drawing on an overdrawn account. In Coutts & Co v Stock[3], Lightman J. entertained no doubt that an increase in the company’s overdraft fell outside s. 127. However, it does not follow that use of an overdraft can never give rise to a disposition of the company’s property. There appear to be at least three cases where it does. The first is where the bank holds security for future advances, for an increase in the overdraft automatically expands the quantum of the bank’s security interest, and correspondingly reduces the company’s equity in the charged assets, unless these were already charged to their full value at the time of the further drawing on the account. …”

9.  It is common ground that the accounts of Super and Marshel with the Bank were overdrawn at all material times.

10.  The judge found on the expert evidence adduced by the Bank that the estimated value of the Super Property was US$679,487 as at 24 August 2012 and US$729,769 as in September 2012.  As for the Marshel Property, it was worth US$1,474,359 as at 23 August 2012 and US$1,583,462 as in September 2012.  There is no appeal against the judge’s findings of the estimated values of the properties at the material times.

11.  Next, the judge found that between 23 August 2012 and 19 September 2012 (the period during which the post-petition loans were advanced to Super), the daily total principal sum due from Super to the Bank fluctuated between US$1,167,597.54 and US$2,231,878.22.  As for Marshel, between 22 August 2012 and 28 September 2012 (the period during which the post-petition loans were advanced to Marshel), the daily total principal sum due to the Bank fluctuated between US$1,521,101.85 and US$2,726,895.  In addition, the outstanding principal and interest calculated up to 28 September 2012 due from Marshel to Dah Sing Bank, which was and is secured by the Dah Sing Mortgage, stood at US$611,236.  Thus, the lowest amount of the combined sum Marshel owed to Dah Sing Bank and the Bank between 22 August 2012 and 28 September 2012 was in the region of US$2,132,337.95.

12.  On the basis of the above findings, the judge was satisfied that at all material times, both the Super Property and the Marshel Property were charged to their full value when each of the post-petition loans was advanced.  There was therefore no reduction of the equity in the Super Property and the Marshel Property by reason of or resulting from the post-petition loans, and hence no disposition within section 182.  The judge did not find it necessary to deal with the Bank’s further arguments that Professor Goode’s opinion is wrong in law.  He dismissed the liquidators’ applications with costs.

The arguments on appeal

13.  Ms Elizabeth Cheung, who appeared for the liquidators on appeal but not below, submitted that the post-petition loans (or some of them) were void under section 182 on two main grounds.  Firstly, she contended that all the loans per se were dispositions of the companies’ assets and were void by reason of section 182 as no validation orders have been obtained.  Further or alternatively, she argued that some of the loans had the effect of reducing the respective value of the equity of the Super Property and the Marshel Property and were thus dispositions of the companies’ assets.

14.  Mr Anthony Chan, who appeared for the Bank on appeal and below, submitted that the loans from the overdrawn accounts were not dispositions of the companies’ assets but were dispositions of the bank’s assets to the companies.  As for the alternative argument of the liquidators, he repeated his submission below that immediately before each of the loans was advanced, the relevant property was already charged to its full value and so the loans did not cause any reduction of the respective value of the equity of the properties.  He also contended that Professor Goode’s opinion is wrong in law.

Whether all of the post-petition loans were dispositions of the companies’ assets and caught by section 182

15.  In support of her arguments, Ms Cheung relied on the dictum of Buckley LJ in Re Gray’s Inn Construction Co Ltd [1980] 1 All ER 814 at 819a which was as follows:

“It follows, in my judgment, that unless validated under the section all the payments into and all the payments out of the company’s account during the period 3^rd August to 9^th October 1972 were invalid.”

16.  The bank account in that case was overdrawn throughout the relevant period.  The creditor’s petition for winding up was presented on 3 August 1972.

17.  Ms Cheung submitted that the dictum of Buckley LJ was applied in two decisions of the Hong Kong Court of Appeal in Bank of East Asia Ltd v Rogerio Sou Fung Lam [1988] 1 HKLR 181 and Chevalier (HK) Ltd v Joint Liquidators of Right Time Construction Co Ltd [1990] 2 HKLR 223 and these decisions are binding on this court.

18.  We are concerned only with the payments out of the overdrawn accounts after the commencement of the winding up[4].  The companies’ bank accounts were not frozen after the presentation of the petitions and payments were made into the accounts thereby reducing the extent of the overdraft.  But the liquidators’ summonses only sought a declaration that the loans made to the companies are void, i.e. the withdrawals from the accounts.  The liquidators did not seek to impugn the repayments made to the Bank, nor have they sought to be reimbursed by the Bank for any loss incurred by the companies for trading after the presentation of the petitions (as in Re Gray’s Inn Construction).  So for present purpose, it is not necessary to be concerned with the payments into the accounts.

19.  The dictum of Buckley LJ regarding payments out of an overdrawn account (which was obiter, based on a concession of counsel at 818j that all payments out of the company’s accounts to third parties are dispositions of the company’s property[5]) must be considered in the light of the decision of Lightman J in Coutts & Co v Stock, which was approved by the English Court of Appeal in Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch 555.

20.  The relevant principles are stated in Coutts at 909H to 910H:

(1)     The invalidation of dispositions of a company’s assets after the presentation of a winding-up petition is part of the statutory scheme designed to prevent the directors, when liquidation is imminent, from disposing of the company’s assets to the prejudice of its creditors and to preserve those assets for the benefit of the general body of creditors.  Accordingly, it does not bite when the disposition can have no impact on the creditors.

(2)     The retrospective invalidation effected by section 127 [our section 182] does not change what happened between the date of the petition and the date of the winding-up order.  It merely denudes any disposition of the company’s property during that period of legal effect.

(3)     Section 127 does not invalidate a company’s assumption of liabilities.  It does not preclude a company incurring or continuing to incur liabilities, nor does it invalidate liabilities so incurred.  An increase in a company’s overdraft over the period between presentation of the petition and the making of the winding-up order is accordingly outside the ambit of the section.  Nor does the section have any impact on the company’s use, consumption or exhaustion of its assets.  So the use and partial or total exhaustion of the overdraft limit by the company cannot constitute a disposition within the section.

(4)     Presentation of the winding-up petition has no impact on the powers of the directors of the company, the authority of the company’s agents, the powers of disposition of the company and the mandate of the company’s bank to honour the company’s cheques.  The subsequent winding-up order does not invalidate the loan made by the bank to the company by honouring cheques drawn on the company’s overdrawn account.

(5)     The acts of the bank in honouring cheques drawn on a company’s overdrawn account constitute (i) loans of the sums in question by the bank to the company and (ii) payment by the bank as agent of the company of the sums loaned as moneys of the company to the party in whose favour the cheques are drawn.  The loan by the bank to the company is not a disposition of the company’s money and is outside section 127.  But the payment by the bank as agent for the company of the company’s money does constitute a disposition to the payee by the company within the section and is recoverable by the liquidator from the payee.

21.  Professor Goode in Principles of Corporate Insolvency Law, op cit, at §13-133 p 618 to 619 gave a similar explanation of the effect of a withdrawal from a company’s overdrawn account:

“What is the effect of a withdrawal from a company’s overdrawn account where that is the only relevant fact? The short answer is that it merely increases the company’s liability to the bank. If there is one thing that is still clear in the increasingly complex financial scene leading to the credit crunch, it is that a liability is not an asset and that an increase in a liability is not by itself a disposition of an asset. Section 127 cannot apply unless there is a disposition of the company’s property. What, then, was the item of property supposedly disposed of in the Gray’s Inn case? Again, the short answer is: none. The payments out of the account were all in discharge of pre-liquidation debts for goods and services supplied and (since the account was at all times in overdraft) did not involve the application of a single asset of the company. Not one tiny tittle of a right in tangible or intangible property was affected one iota. Not one smidgen of interference with the pari passu principle resulted. All that happened was that the bank used its own moneys to meet the company’s cheques for what were presumably payments to suppliers and other creditors in the normal course of business, so that in relation to such payments the bank became substituted as creditor for the persons to whom they were made, leaving the position of other creditors entirely unchanged.”

22.  The above explanation of Professor Goode is premised on the situation where the withdrawal from a company’s overdrawn account is “the only relevant fact”.  In a subsequent paragraph at p 619, he went on to say where there are other relevant facts, the use of an overdraft may give rise to a disposition of the company’s property within section 127, and one of them is the situation relied on by the liquidators, namely, where the increase in the overdraft expands the quantum of the bank’s security interest and correspondingly reduces the company’s equity in the charged assets, unless these were already charged to their full value at the time of the further drawing on the account.

23.  Lightman J was concerned with an overdrawn account in Coutts.  In Hollicourt, the account was in credit at all times after the presentation of the petition.  The English Court of Appeal approved Coutts and declined to apply the dicta of Buckley LJ in Re Gray’s Inn Construction.  Coutts and Hollicourt held that where a bank acts as the company’s agent and pays out from the company’s account, whether in credit or overdrawn, section 127 invalidates only the payment made to the third party but not the intermediate steps in the process of payment through the bank.  In so doing, these English cases followed a line of Australian cases in In re Mal Bower’s Macquarie Electrical Centre Pty Ltd [1974] 1 NSWLR 254; In re Loteka Pty Ltd (1989) 7 ACLC 998 and Tasmanian Primary Distributors Pty Ltd v R C and M B Steinhardt Pty Ltd (1994) 13 ACSR 92.  In giving the judgment of the court in Hollicourt , Mummery LJ said in §§28 to 32:

“28 …There are certain passages in the judgment of Buckley LJ in the Gray’s Inn Construction case [1980] 1 WLR 711 (concurred in by Goff LJ and Sir David Cairns) which, when read out of context, appear to lend some support to the propositions that: (i) all post-presentation cheques drawn in favour of third parties on a company’s bank account, whether that account is in credit or in debit, involve a disposition of the amount of the cheque in favour of the bank and are invalidated by the provisions, unless validated by the court (see pp 715H-716F); (ii) in consequence of statutory avoidance of such dispositions, the bank may be liable in proceedings by the liquidator for the amounts of the dispositions of from the creditors who were paid: see p 721 F-G.

29 In our judgment the Gray’s Inn Construction case is not binding authority for either of these propositions. It was unnecessary for the court to examine, let alone arrive at a final view on, either of these far reaching propositions, because of the concessions made by counsel in the passages referred to in (i) and because the decision in the case was in fact concerned with payments made into an overdrawn account and not, as is the case here, with payments made out of an account in credit. The judgment also dealt in detail with the exercise of the court’s discretion to validate otherwise invalid dispositions. In those circumstances the passages in question cannot be relied on as part of the ratio of the decision. In view of the absence of full argument on these points it is even difficult to treat these statements as considered dicta carrying the weight which they normally would when coming from a judge as experienced and eminent in company law as Buckley LJ.

30 This court has had the benefit of full argument and citation of authorities on these points, as did Lightman J in the Coutts case [2000] 1 WLR 906.

31 In summary, our conclusion, in the light of these authorities, is that section 127 only invalidates the dispositions by the company of its property to the payees of the cheques. It enables the company to recover the amounts disposed of, but only from the payees. It does not enable the company to recover the amounts from the bank, which has only acted in accordance with its instructions as the company’s agent to make payments to the payees out of the company's bank account. As to the intermediate steps in the process of payment through the bank, there is no relevant disposition of the company’s property to which the section applies.

32 We would add that, even if the company’s bank account were in overdraft, which is not this case, the foregoing analysis of the legal effect of section 127 would produce the same result in respect of a claim for recovery against the bank. This result has the very real practical advantage of not requiring what in some cases could be a complex analysis of whether payments were made out of an account which was in debit or in credit. The need for such an analysis cannot be justified by any sensible view of the purpose of section 127.”

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

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

26.  I agree with Mr Chan that the post-petition loans per se were not dispositions of the companies’ assets and were not caught by section 182.

27.  Ms Cheung drew our attention to various matters in the evidence that raised suspicion regarding the underlying transactions with a supplier for which most of the post-petition loans advanced to the companies were utilized and that the Commercial Crimes Bureau has been conducting investigations into these transactions.  She submitted that the Bank was either aware of or reckless to the fact that these were not genuine commercial transactions.  Moreover, given that the Bank had known of the petitions since 12 September 2012, Ms Cheung argued that had it applied for a validation order, the court would not have exercised its discretion in favour of the Bank, but would have frozen the companies’ accounts to preserve the value of the charged properties and to prevent the Bank from enlarging the value of its security interest to the detriment of the general body of creditors.

28.  For present purpose, I do not think it relevant to consider the suspicious circumstances alleged by the liquidators.  If the post-petition loans to the overdrawn accounts, which are the only transactions impugned by the liquidators, are not dispositions within section 182, no relief may be granted to the liquidators under that provision.  It was not necessary for the Bank to seek a validation order in respect of the post-petition loans to the accounts which remained overdrawn at all times, as there were no dispositions caught by the section.  Whether the Bank should have applied for a validation order in respect of the repayments made into the overdrawn accounts and how the court would have dealt with such an application are not matters that concern us in these appeals.

Whether some of the post-petition loans had the effect of reducing the companies’ security interest and were dispositions of the companies’ assets

29.  This is premised on the correctness of Professor Goode’s opinion in his work at §13-133 p 619.  The companies accept that if the Super Property and the Marshel Property had been charged to their full value at all times of the loan transactions on the overdrawn accounts, there would be no disposition of the companies’ assets for the purpose of section 182, as the further advances would be no different from unsecured loans.

30.  Ms Cheung submitted that the judge had fallen into error in that he had only considered the “daily total principal sum due” and concluded that as the lowest daily total principal sum due for both companies was still higher than the value of the charged properties, then the properties at all material times were charged to their full value and accordingly there was no reduction of the equity in the Super Property and the Marshel Property (§§36 and 38 of the decision).  For there to be an accurate assessment of whether a post-petition loan had any effect on the assets available for the general body of creditors, the judge should have assessed the situation vis-à-vis the equity of the property before each and every loan had been advanced.  Firstly, as a matter of arithmetic calculation, the very loan being considered should be excluded from the “daily total principal sum due”.  Secondly, using the “daily total principal sum due” as the ruler for comparison would be inaccurate because this aggregate figure does not differentiate between the balance of pre-petition and post-petition loans.  Only the total outstanding balance of the pre-petition loans should be compared with the value of the mortgaged property.  Thirdly, by reason of the repayments made by the companies after the commencement of winding up, some equity in the properties had been freed up such that the outstanding of the pre-petition loans became lower than the value of the properties, so the advancement of further loans post petition would have necessarily decreased the equity of the properties available for the general body of creditors and infringed the pari passu principle.

31.  Ms Cheung supplied two tables setting out the effect of the repayments on the “daily total principal sum due”, and denoted in red those of the post-petition loans when the outstanding balance of the pre-petition loans would be lower than the value of the charged property (columns I, IV and V for Super and columns I, V and VII for Marshel).  I reproduce these tables as annexure A and B to this judgment.  On her submission, the loans denoted in red should be declared void under section 182 as the relevant property was not charged to its full value immediately before each of the loans was advanced.

32.  Mr Chan submitted it is wrong to use only the outstanding balance of the pre-petition loans in the comparison exercise.  The comparison should be made between the companies’ total indebtedness immediately before the advancement of the loan under examination (i.e. all pre-petition loans and the “valid” post-petition loan or loans preceding the loan under examination), and the value of the mortgaged property at the time.  In other words, one should compare columns III (which has taken into account the repayments) and IV for Super in annexure A and columns IV and V for Marshel in annexure B.  On that basis, as found by the judge, the outstanding loan principals due from the companies to the Bank were higher than the value of the relevant property immediately before each of the post-petition loans was advanced, so the properties were at all material times charged to their full value.

33.  I am satisfied that Mr Chan’s approach is the correct one.  I do not agree with Ms Cheung that the comparison of the value of the property should be made only against the outstanding balance of the pre-petition loans.  If a post-petition loan did not lead to any reduction in the value of the equity and would not be avoided as a disposition under section 182, I do not see any sound basis why this “valid” post-petition loan should not be included in the total indebtedness when one comes to examine the next post-petition loan.

34.  I would uphold the decision of the judge on this basis.

Professor Goode’s opinion

35.  It is strictly unnecessary to decide if the opinion of Professor Goode in his work at §13-133 p 619 is correct.  The judge declined to express a view on this.

36.  In deference to the submissions made to us on both sides, I will summarise the parties’ contentions and give a tentative view, and that is entirely obiter.

37.  Ms Cheung submitted that Professor Goode’s opinion is logical and accords with first principles and the rationale and policy of section 182.  Although “disposition” is not defined in the statute, it should be given a wide meaning if the purpose of the section is to be achieved, particularly in view of the fact that there is no exemption in favour of transfers for full value (Principles of Corporate Insolvency Law, op cit, §13-128, p 612).  Professor Goode’s opinion also accords with the definition given to disposition by McPherson J in Re Loteka Pty Ltd at 1,001, namely, that within the statutory context, “there must be some change that takes out of the company at least the beneficial ownership in a corporate asset and passes it to someone else”.  Coutts and Hollicourt are not concerned with the situation where there is charged property.  As section 182 “bites on beneficial ownership” (Principles of Corporate Insolvency Law, §13-127, p 610), where the party advancing loans holds pre-existing security for the continuing advances, in the situation where further loans would have the effect of changing the company’s beneficial ownership in the security, this is very different from the case where the withdrawal from an overdrawn account is the only relevant fact.

38.  Mr Chan, also working from first principles, submitted that Professor Goode’s opinion is wrong in law.  Firstly, section 182 does not bite when the disposition can have no impact on the creditors (Coutts, at 909H).  When a bank acting on behalf of a company pays a third party from the company’s account that has sufficient credit, the intermediate steps in the process of effecting payment are not regarded as dispositions caught by the section because they do not affect the interest of general creditors (Hollicourt, §31; Loteka Pty Ltd at 1,004).  Similarly, the payment of a cheque into a company’s bank account in credit is not a disposition of its property to the bank because the company’s property in the cheque is converted into a pro tanto increase in the amount standing to the credit in its account and therefore does not affect the interest of general creditors (In re Barn Crown Ltd [1995] 1 WLR 147 at 156H).

39.  From these cases, Mr Chan argued that it should make no difference in the situation where the advancement of a loan reduces correspondingly the value of the equity in the property used as security, in that the company’s asset represented by the equity is merely converted into the money from the loan.

40.  Secondly, Mr Chan submitted that the reduction in the value of the equity does not involve any disposition of the company’s asset to the bank.  The disposition of the company’s beneficial interest in the mortgaged property occurs at the time of the execution of the mortgage.  An increase in the mortgaged debt, whilst reducing pro tanto any remaining value of the equity, does not take out any beneficial interest that belongs to the company and transfer it to the bank.  There is no disponor and disponee and the element of disposition only enters into the situation when something passes out from the company to a disponee (In re Mal Bower’s Macquarie Electrical Centre Pty Ltd, at 258B to D).  In obtaining the further advance, the company is just making use of or consuming its equity and that is not a disposition caught by the section (cf Coutts, at 910C to D).  By analogy, he prayed in aid Mosaic Oil NL v Angari Pty Ltd (1990) 20 NSWLR 280, which stated obiter at 284E to G that a joint venturer’s forfeiture of his share in the enterprise to the remaining joint venturers is not a disposition of his assets to the others, notwithstanding that the value of the property of those who remain in the joint venture may increase as a result.

41.  Thirdly, Mr Chan submitted that Professor Goode’s contention would require a determination of the value of the mortgaged asset vis-à-vis the indebtedness and this may be a complex exercise and fraught with uncertainty.  Valuations of the property may be disputed.  It may be difficult to ascertain the amount of the total indebtedness if the company has a revolving credit or if it has numerous accounts.  The situation may be exacerbated if the company has given more than one security.  He submitted that the court should reject Professor Goode’s opinion as this would deprive section 182 of the commercial certainty that is required of it.

42.  I am not persuaded by Mr Chan that Professor Goode’s opinion is wrong in law.  His first argument seems to me to be a circular argument.  It begs the question whether the further advances secured by pre-existing security can have no impact on the general creditors.  His second argument is highly technical and does not take into account the reality of the situation.  His third argument, based on pragmatic considerations, seems to be an exaggeration of the difficulties.

Costs

43.  At the conclusion of the hearing, we made a cost order nisi awarding the costs of the appeal to the Bank.  Mr Chan invited us to make an order nisi as to costs, as he wishes to reserve his position whether to seek taxation of costs on a higher basis with the benefit of the reasons for our judgment.  As we have indicated at the hearing, any application to vary the costs order nisi will be dealt with on paper.  In the absence of any application within 14 days of the handing down of these reasons for judgment, the costs order nisi will be made absolute.