THE BANK OF EAST ASIA, LIMITED v. ROGERIO SOU FUNG LAM AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ACTION NO. 2889 of 1985

BETWEEN

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JUDGMENT

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1. Before the 20th of August 1983, the plaintiff bank had a customer, Bylamson and Associates Enterprises Limited. On that date, the bank presented a winding up petition against Bylamson. In the winding up, which followed the bank proved for a sum of about $90,000,000.

2. The petition had a chequered history. In November 1983 when it came on for hearing, it was dismissed. On the 16th February 1984 after a successful appeal, a winding up order was made.

3. On the evidence I have had, on the 31st January 1984, Bylamson had an account with the plaintiff bank. It was then in credit. This account was open at the time of the presentation of the petition. It had not been frozen on the presentation of the petition and had continued to operate.

4. In the period between the time when the petition was dismissed in November 1983 and the time when the appeal was allowed and the winding up order made on the 16th February 1984, a cheque was drawn by Bylamson (on the 8th February 1984) in favour of the defendants in this action.

5. The evidence is that Mr. ROGERIO SOU FUNG LAM, one of the partners in the defendant firm, was also a director of Bylamson. The only relevance of that evidence is that he must have been aware on the 8th February 1984 of the presentation of the petition, and that the petition had been dismissed.

6. The effect of the winding up order was that all dispositions made by the company Bylamson after the 20th August 1983 were void by statute; see section 182 of the Companies Ordinance. After the winding up order, the Official Receiver (who was the provisional liquidator) demanded recompense from the bank who had allowed the account to operate. On investigation, it was found that a sum of $1,190,505.40 had been disposed of out of the company's assets through that account.

7. Meetings took place between the bank and the liquidators. (The present liquidators took over on the 9th May 1984.) The liquidators and the bank took advice. On advice, the liquidators wrote to the creditors who had received money through the account, and, so far as the present defendants are concerned, got no satisfaction. So the liquidator turned to the bank. The bank, on the evidence, was reluctant to pay, but on advice they did pay. They were threatened with action if they did not. They clearly took the view that they could be compelled to pay. So the bank paid over the sum mentioned of over $1,000,000. That sum included a payment in respect of the $600,000 which had been paid out of Bylamson's account to the defendants.

8. The bank paid the liquidators the sum of one million plus on the 11th January 1985. In this action, the bank seek to recover from the defendants $600,000; part of that one million odd that they paid over to the liquidators. They seek restitution of that money which they say was paid to the benefit of the defendants. Also they say that they are entitled to be subrogated to the company's claim against the defendant; more appropriately the liquidators' claim against the defendants'.

9. The defendants resist the claim on a number of grounds. Primarily, as pleaded in their amended defence, they contend that when the bank honoured Bylamson's cheque for $600,000, they did so consequent upon a mistake of law, and therefore they say that sum is not recoverable by the bank in law.

10. Secondly, the defendants say that the plaintiffs have not established their claim to restitution because they were not liable to pay the liquidator in respect of this sum. It is said the plaintiffs were volunteers when they made the payment to the liquidators. The basis of that assertion being that it is not proved that the payment was a disposition under section 182, and in any event, that it is not proved that the defendants benefited from the payment; either from the original payment or the plaintiff's payment to the liquidator on the 11th January 1985.

11. In my judgment, the payment by the company to the defendants by the cheque for $600,000 drawn on the 8th February 1984 and honoured by the bank was a disposition within the meaning of section 182 of the Companies Ordinance. It follows that subject to that transaction being validated by the court the transaction is void in consequence of the provisions of the ordinance.

12. There have been no applications by any party to validate the transaction. It may well be that it would have been impossible for the bank to seek validation on the grounds that it was a transaction made in good faith in the ordinary course of business when the bank was unaware of the petition because the bank itself had presented the petition.

13. Similarly, it may have been difficult for the defendant to seek validation because one of the partners was a director of the company Bylamson. I cannot be certain because I am unaware of the exact situation on the 8th February 1984 - a time when the petition had been dismissed and the appeal had not then been allowed.

14. It is certain that no one has sought to validate, nor have any grounds been advanced to me to suggest that any court would have validated this transaction if such had been sought. There has been no evidence to suggest that this is a transaction which any court would have validated. So, having considered the matter, I am satisfied that this transaction is void by statute.

15. I must consider now the basis upon which the payment was made by the plaintiff bank to the defendant. The reason is that the defendants submit that it was paid under a mistake of law and therefore is in any event not recoverable. A broad statement of law that a payment made under a mistake of law is irrecoverable is, in my judgment too simple. It is based upon a misunderstanding of a case decided long ago in 1802 - Bilbie v. Lumley [1802 ] 2 EAST 469.

16. However, it is not necessary for me to consider this matter further because on the evidence I am not able to decide on what basis that payment was made, or even whether it was made as a result of a mistake. The most that can be said is that it is likely that the payment was made consequent upon a lack of information distributed within the bank itself, and as a result of some kind of muddle.

17. Having said that, the evidence is so flimsy that no decision about the basis upon which the payment was made, could be satisfactory. There is too little evidence. The bank manager or the person in-charge of the account has not been called. I have only heard evidence from the legal adviser to the bank. He cannot remember the advice that he gave before this petition was presented or after it. He knew of the provisions of section 182 of the Companies Ordinance. One would expect the bank manager would know of it and in normal circumstances, he would freeze an account such as this. The case has shown that this is not always done.

18. In any event, it is admitted that the payment was made to the defendants. It was made in consequence of the bank honouring the cheque and there was money in the account. There has been a suggestion that the payment was made to the defendants as agents for some principal, and therefore that the defendants are not accountable for this payment to the bank or the liquidators. It is submitted that it has not been proved by the plaintiff that the defendants received any benefit from the money.

19. I reject that suggestion. There is no evidence except that the defendants were the beneficiaries of the cheque for $600,000. That evidence alone is sufficient for the court to find that the defendants had the benefit of the money. Of course, as I have already said, this is a payment to the defendants void by statute.

20. In these circumstances, it was the duty of the liquidator, when it was known that there had been dispositions through this bank account, to seek the return of the money. It was their duty to recover the money for the benefit of all other secured creditors so that those creditors could be dealt with rateably.

21. As the transaction was void, they were entitled to seek the return of the money from either the bank or the defendant who received it. The liquidator was advised to seek recovery first from the recipient of the money, for the purposes of this case, the defendant. I have been shown two letters, a letter asking for payment, and a letter from the defendant's then solicitors declining payment.

22. No doubt, the basis of that advice was a passage in the judgment of Buckley L.J. assented to by Goff L.J. and Sir David Cairns, in Re Gray's Inn Construction Company Limited [ 1980] 1.W.L.R. 711 at 721(F) where in relation to money which had been paid through a bank account to creditors, he said, "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."

23. Relying upon that passage, it is suggested that the liquidator should first seek to recover from those who are primarily liable. It is submitted that unless the liquidator has sought to recover from those primarily liable and has found those sums to be irrecoverable, then the liquidator cannot recover from anyone who is liable in a secondary way; the bank in this case. It is submitted that in the circumstances, the bank was not liable to pay because the sums had not been found to be irrecoverable from the defendants.

24. In Gray's Inn Construction the bank sought validation of payments when, for part of the time, at any rate, it had been operating an account in the knowledge that winding up proceedings had been started. If it be thought that the Court of Appeal was ruling that the liquidator must always seek recovery from creditors and pursue their remedies to a conclusion in order to show that the money is irrecoverable before they can recover from a bank in these circumstances I decline to follow such a rule. I do not believe the Court of Appeal was laying down any such rule. Nevertheless, the creditor is primarily liable, therefore, the liquidator will usually seek to recover from the creditor if it is reasonable to do so. This does not mean that the liquidator has no right of recovery from the bank when the transaction is void and has not been validated.

25. In this case, the liquidator claimed against the defendant. The defendant declined to pay. Therefore, the liquidator turned to the bank. I am satisfied that turning to the bank was the practical way for the liquidator to discharge his duties to the creditors; particularly in this case, because the bank was the petitioner, and therefore, (as submitted by Mr. Knos,) the bank must be deemed to know that a petition has been presented, even though this cheque was honoured at the time when the petition had been dismissed, and the appeal had not been heard. The possibility of an appeal must have been appreciated.

26. Now, if in these circumstances a bank continues to operate an account and to dispose of company assets, and it appears later that those dispositions are void, it seems to me the liquidator can, with justice, turn to the bank because that disposition of the company's assets was consequent upon its activities. When the bank is the petitioner, it is not unjust for the liquidator to seek recovery from the bank first, and then allow the bank to recover what it can from the creditors.

27. The situation in this case is not quite as simple because the liquidator did seek to recover first from the creditor (the defendants), and having failed to get satisfaction he turned to the bank. In my judgment, the liquidator acted properly and in my judgment, the bank was liable to pay in respect of this void transaction as well as others.

28. 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.

29. 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.

30. So, the bank was compellable by law to make the payment. The bank made the payment reluctantly and on advice, certainly not voluntarily. That payment discharged the liability of the defendant to the liquidator. The defendant therefore obtained the benefit of the payment which discharged its liability. In these circumstances, it was a payment made by the bank to the liquidator for the benefit of the defendant.

31. In the circumstances, the plaintiff in this case is entitled to recoup the money as to $600,000 from the defendant. That is a recoupment of part of the payment made on the 11th January 1985.

32. It is not necessary for me to consider whether the plaintiff is entitled to further relieve by subrogation to the company's claim (more properly the liquidator's claim). I make no decision upon that.

33. I have considered a number of cases which have been cited to me. In particular, in Re Bifield 1982 1. Ch. 267., a case in which a bank was seeking to prove in a bankruptcy. There is nothing in that case which I find either relevant or helpful. It is to be noted that the injustice of that case, if it be such, has been remedied by statute in England although not in Hong Kong.

34. Other cases have been cited which are instances of the application of the principle which I have stated, or are related to payment by mistake of one kind or another. I have dealt with that in my judgment.

35. In the circumstances, there will be judgment against the defendant for $600,000.

36. I will now hear counsel as to any further - any other relief.