TaxTMI 
TaxTMI 
1964 (6) TMI 29
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....pt to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge, together with interest..." and so forth. The liquidator's case was that no cash was paid to the company either at the time of execution of the charge or there after in consideration for the charge. The facts (as set out above) are clearly stated in the judgment of Plowman J. [1963] Ch. 528; [1962] 3 WLR. 900 ; [1962] 3 All. ER. 400; [1963] 32 Comp. Cas. 76, and I shall repeat only such of them as are necessary to make what follows intelligible. This was a family business with a capital of rather over GBP40,000 which had throughout its career banked with the respondents, having a No. 1 account, and a No. 2 account fed from it and of no importance in this case. When the relevant events happened the company was evidently already in financial straits, having an overdraft on its No. 1 account of about GBP65,000, guaranteed in part by the directors but otherwise unsecured. In February, 1957, at the instance of the bank, the company opened two further accounts with a view to giving the bank by subrogation the statutory preference existing under se....
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....959, the appellant was appointed liquidator. As things stand at present, not enough has been realised to satisfy the secured creditors, and unsecured creditors for over GBP94,000 will get nothing. It is in these circumstances that this attack is being made on the bank's floating security. Turning back to section 322, the only question which arises is whether there was cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge. It was admittedly created within 12 months of the winding up at a time when the company was insolvent. It is further agreed that so far as the overdraft was incurred before the date of the floating charge, the charge would not be a valid security for it. The liquidator's claim is a simple one, namely, that as neither cash nor a covenant to pay cash was made at the time of the execution of the document, there was no consideration for it in the legal sense of that term except the bank's immediate forbearance. This seemed to me, I confess, an attractive argument, and it appeared to receive some support from the well-known pronouncement of Parker J. in In re Orleans Motor Co. Ltd., [1911] 2 Ch. 41, where He....
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....ason : It is true that the bank had not entered into any binding agreement with the company to make further advances, but when a cheque of the company is presented to the bank for payment, I think it must be taken that the banker goes through the following process of thought or reasoning : ' I am under no obligation to make this payment; I will, how ever, make the payment because you have given me this debenture. That is assented to by the company. The company ask the bank to make the payment because they have given the debenture and the bank makes the payment because the debenture has been given. I think that that, if not technically payment in consideration of the debenture, is a payment in consideration for the charge, as that phrase is used in the section. " That decision, if right, is enough to cover the present question, and Plowman J. [1963] Ch. 528 ; [1963] 33 Comp. Cas.76 so held in these words Ibid. 337 : "In my judgment that case is authority for the proposition that the words of exception in section 322 arc capable of applying to a floating charge given by a company to secure its current account with its bankers, even though the bank is under no obligation to make an....
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....any from its trading receipts, with the. result that no substantial sum would be due on the charge. It was, however, held by Romer J. in In re Thomas Mortimer, Ltd. Reported infera that Clayton's case (supra) applied with the result stated, and I can see no escape from it, nor in spite of frequent pressing by the court did the appellant's counsel put forward any alternative. He did indeed argue that the fact that there were three accounts and not one made some difference, but he was quite unable to explain to my satisfaction what it was. For myself I should be content to ignore the No. 3 and No. 4 accounts, which were created only for book-keeping purposes. It is true that moneys transferred from the No. 1 account were not immediate payments of cash to the company, but they were in fact advances by the bank measured by the drawings of the company 18 weeks before in respect of each payment, so that the whole of the debits to the No. 1 account were in effect cash advances by the bank either to pay the company's trading outgoings, or the wages and salaries of its staff. This, however, was not the way in which the matter was dealt with by Plowman J., who excepted the transfers fr....
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....pany but the sums from time to time advanced and paid by the bank on behalf of the company in cash after the date of the debenture then, of course, this GBP41,000 would have been applied in reduction of that amount and as repayment of that amount, but this seems to me a case of payment by a debtor to his creditor to whom either two debts are owing or to whom one debt is owing, part of which is secured and part of which is unsecured. Now that being so, as I understand the general law, it is open to the creditor to appropriate the payment made by his debtor to any part of the debt he likes, or to whichever of two debts, if there were two debts, that he prefers if the debtor himself in making the payment has not directed an appropriation ; furthermore, as I understand the law, in cases between bankers and customers, or where there is a current account between parties into which moneys are from time to time paid, and from which moneys are from time to time withdrawn, in the absence of any express appropriation the creditor is presumed to appropriate payments into the accounts made by his customer in discharge of the earliest entries on the other side of the account." A further argum....
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....rted from. During this period payments in exceeded the amount of the overdraft existing at the date of the creation of the floaltfng charge. Later, the bank appointed a receiver and manager under the charge and floating charge who proceeded to realisation for the purpose of paying off the bank, including realisation of property subject only to the floating charge. Just within a year from the creation of the floating charge a petition was presented to wind up the company. It is not contended that the company was, immediately prior to the creation of the floating charge, solvent : clearly, it was not then able to pay its debts as they fell due. Accordingly, in the winding up the floating charge is, by section 322 of the Companies Act, 1948, invalid as such "except to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge." The first question is whether the bank establishes that any drawings on the company's overdrawn account after the floating charge was created fall within the quoted exception. The bank contends that all such drawings were within the exception. Further (and this is the second aspect of th....
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....2. On the first point in this case it is, therefore, quite clear that there is no distinction between the two cases, and it must be considered whether Romer J. was wrong in his conclusion. In my judgment he was right. For the liquidator in the present appeal it was argued that "paid in consideration for the charge" is a technical phrase in the field of contract; that it could not be said that the cash was so paid ; that the only consideration for the charge was the forbearance for the time being to call in the overdraft, and that no cash could be subsequently paid in consideration for the charge unless at the time of creation of the charge the bank had undertaken an obligation thereafter to allow continued drawings, and subsequently fulfilled that obligation. (I observe that it would be sufficient if that obligation had been to allow drawings until further notice, which would have produced exactly the situation which was produced without that being expressly undertaken.) Now the defect in that argument, based on a strictly technical construction of the phrase in a contractual sense, is that even in such a case the payment of cash would not have been in consideration for the c....
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....e of any particular advance it might be that the bank was relying upon an assurance that a substantial payment in would be made in the course of the next few days, and instances of this were brought to our attention. I can see no force at all in this point. The circumstances in which the charge was demanded and created-that without it the bank was not prepared to tolerate continued operation of the account-make it impossible to come to any conclusion other than that in the continued operation the bank was relying on the charge. Nor would any discussion about an expected early credit affect that position: it must be remembered that the bank was operating a ceiling on the overdraft. Finally, it was argued that the liquidator must be right in his argument on construction for the reason that (if he were wrong on the second part of the case) the bank would not in the end have added to the assets of the company but would in effect have changed an overdraft for about GBP67,000 which was not backed by a floating security into an overdraft for about the same sum which was. Such an outcome was, it was said, just the kind of thing at which the section was aimed. The answer to this is twofo....
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....r. In No. 2 account the cash subsequently paid was GBP500, and since there were no credits to that account there was no requital of any. In No. 3 account the process is as follows, applying the ordinary principles (in the absence of contrary indications of. intention) of attribution of credits to earliest debits in analysing an account. GBP Credits (including transfers) after January 24, 1958 ... ... 39,311 Deduct debit balance at January 24, 1958 ... ... 27,660 Leaving unattributed credits after January 24, 1958 ... 11,651 Cash paid to company after January 24, 1958 ... ... 33,025 Deduct as above ... ... 11,651 Leaving unrequited cash subsequently paid ... ... 21,374 In No. 4 account the same process is followed Credits (including transfers) after January 24, 1958 ... ... 4,100 Deduct debit balance at January 24, 1958 2,148 Leaving unattributed credits after January 24, 1058 ... ... 1,952 Cash paid to company after January 24, 1958 ... ... 4,188 Deduct as above ... ....
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.... case in 1929 and again in 1948), the re-enactment must be construed as adopting that judicial construction. It was pointed out in this connection on the one hand that the Mortimer decision Reported infra was not reported except in the professional Journal of the Institute of Bankers, and has never been noticed in Buckley on the Companies Acts or in any other reported case ; on the other hand, that it was referred to by Mr. Registrar Stiebel in the 1929 edition of his well-known work on Company Law Stiebel, A., Company Law and Precedents, 3rd ed [1929], where the effect of the decision was summarised and that that author was a member of the Greene Committee which recommended in May, 1926, an extension of the period of three months in the section of the Act of 1908 corresponding to section 322 of the Act of 1948 and gave evidence before the Cohen Committee which recommended in 1945 a further extension of the period. It is not necessary to rely upon these alternative contentions of the bank, and I do not propose to examine their validity, nor the authorities referred to on them by each side. Willmer L.J. I agree that this appeal must be dismissed. With regard to the first quest....
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....e more than usually slow to do so when Parliament has, since the decision, re-enacted the statute in the same terms." It can hardly be said that the construction of the section here in question has been the subject of any long and consistent current of authority. There has been but the one decision, namely, that in In re Thomas Mortimer Ltd. Reported infra and that is a decision which has been to a large extent wrapped in obscurity. The case was not reported in any recognised law report, nor has it been noted in the most authoritative textbooks on company law. What can, however, be legitimately and fairly said of Romer J.'s decision is that, so far as counsel's researches have gone, nobody has until this day sought to argue the contrary. The point now argued on behalf of the liquidator, if it is a good one, would have provided a short answer in In re Hayman, Christy and Lilly Ltd. [1917] 1 Ch. 283 ; 33 TLR. 167, yet it does not appear to have been taken. Moreover, if the word "consideration" in the section is to be construed in its strict sense as used in the law of contract, it might have been expected that the Court of Appeal in In re Matthew Ellis Lid. [1933] Ch. 458 ; [19....
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....ade under express covenant entered into at the time of the creation of the charge ; (2) it also involves construing the words as though they referred to payments made, not in consideration for the charge, but in consideration for the creation of the charge. Had this been the intention of the legislature, nothing would have been easier than to say so : the words would have read "cash paid to the company at the time of or subsequently to, and in consideration for, the creation of the charge". The fact that the exception was not phrased in this way strikes me as being of vital significance. The fact that the consideration is referable not to the creation of the charge but to the charge itself makes it impossible, in my view, to attribute to the word the technical meaning which it bears in the law of contract. The subsequent payments may be made on the faith of, or in reliance upon, the existence of the charge. But they could not in any circumstances be said to be made in consideration for the charge in the strict sense of the word, for nothing passes from the company in return for the payment which is made. In these circumstances it seems to me that Romer J. in In re Thomas Mortime....