[1982] 1 All ER 249

A receiving order was made against the bankrupt on 23 March 1979 and was effectively gazetted on 4 April 1979. On 5 April the bankrupt instructed her bank to transfer a sum of £19,500 standing to her credit at the bank to her mother's account at another bank. The bank, in good faith and without knowledge of the receiving order or the purpose for which the mother required the money, transferred that sum to the mother's account. The mother used £12,356 of it to pay off some of the bankrupt's creditors, the balance of £7,144 being paid over by the mother to the bankrupt's trustee in bankruptcy. Since the bank had transferred the bankrupt's money to the mother after the receiving order was gazetted and only £7,144 of it had been recovered, the trustee called on the bank to pay to him for the benefit of the bankrupt's estate the unrecovered balance of £12,356. The bank paid that sum to the trustee and subsequently lodged a proof of debt in the bankruptcy for that amount, on the ground that it was entitled to be treated as an unpaid creditor of the bankrupt because (i) ethically it would be unfair for the general body of creditors to benefit from the enrichment of the bankrupt's estate resulting from the bank's payment of the £12,356 into the estate when that same amount originally paid to the mother had been used for the benefit of the bankrupt's creditors, or (ii) alternatively, the bank was entitled to be subrogated to the rights of the creditors that had been paid off by the mother and to lodge the proof of debt which they could have put in if they had not been paid off. The trustee rejected the proof because he was not satisfied that it was valid in law. The bank moved to have the trustee's decision reversed.

Held - The motion would be dismissed for the following reasons-
   (1) There was nothing offensive either to commercial or general morality in the general body of creditors of the bankrupt's estate receiving the benefit of the £12,356 249paid by the bank to the trustee when the liabilities of the bankrupt's estate had already been reduced by the same amount because of the payments made by the mother from the sum inadvertently paid to her thus making the payment to the trustee a windfall for the estate, and accordingly the principle that a trustee in bankruptcy would not be allowed to take unfair advantage of a mistake did not apply (see p 252 f g and p256 f, post); Re Condon, ex p James [1874-80] All ER Rep 388 distinguished.
   (2) The bank was not entitled in law or in equity to stand in the shoes of the creditors paid off by the mother, because by s 4a of the Bankruptcy (Amendment) Act 1926 the protection against a claim by a trustee in bankruptcy afforded to persons, such as banks, who paid over a bankrupt's money to another person after the date of a receiving order but without notice of the order was restricted to cases where the money was paid over before the receiving order had been gazetted, and furthermore equity and good conscience did not require that further relief, beyond that afforded by s 4, should be given to a bank which paid over the bankrupt's money to another person after the receiving order had been gazetted even though the payment was made in ignorance of the order and the money had in fact been used to pay some of the creditors (see p 256 d e, post); dicta of Lord Sterndale MR and of Younger LJ in Re Wigzell, ex p Hart [1921] 2 KB at 853-854, 864-865 distinguished; Re Hall, ex p Official Receiver [1907] 1 KB 875 considered.

Notes
For the principle that a trustee in bankruptcy should act fairly, see 3 Halsbury's Laws (4th edn) para 524, and for cases on the subject, see 4 Digest (Reissue) 231-234, 2026-2045.
   For rejection of a proof of debt, see 3 Halsbury's Laws (4th edn) para 814.
   For the Bankruptcy (Amendment) Act 1926, s 4, see 3 Halsbury's Statutes (3rd edn) 171.

Motion
By a notice of motion dated 8 April 1981 Hill Samuel & Co Ltd (the bank), as a creditor in the bankruptcy of Kathleen Elaine Byfield, moved for an order that the decision of her trustee in bankruptcy, Raymond Hocking, to reject the bank's proof in the bankruptcy250 for the sum of £12,355á68 be reversed and that the proof be admitted in full. The facts are set out in the judgment.

13 July 1981. The following judgment was delivered.

GOULDING J. This is an appeal in the bankruptcy of Kathleen Elaine Byfield (or Austin) against the rejection by the trustee in bankruptcy of a proof of debt by a banking company, Hill Samuel & Co Ltd (the bank), in the sum of £12,355á68. The trustee rejected the proof because he was not satisfied of the bank's claim in law, not because of any doubt as to the facts on which it was founded. The question raised is indeed one of law, to my mind one of some difficulty, and I am somewhat surprised that it should not have been already decided in principle in the reported cases.
   The undisputed facts are these. The receiving order was made against the bankrupt on 23 March 1979. It was gazetted in the London Gazette dated 29 March 1979. Whether that number of the London Gazette was published on the date that it bears, or not until somewhat later, does not clearly appear, but it is common ground that the London Gazette was in effective publication at the latest on 4 April. The day after that, 5 April 1979, the bankrupt instructed the bank to transfer a sum of £19,500 standing to her credit in a deposit account to the account of her mother at another bank. That instruction was on the same day carried out. It is agreed by the trustee that the bank, in paying the money over on the bankrupt's order, had no knowledge of the receiving order and acted in good faith. The payee of the £19,500, namely the bankrupt's mother, used the greater part, £12,355á68, to pay off the debts due to a number of creditors of the bankrupt. Later on, the balance of the sum in the mother's hands, £7,144á32, was properly paid over by her to the trustee in bankruptcy. The payment by the bank having been made after the receiving order was gazetted, the trustee called on the bank to pay to him so much of the £19,500 as was not recovered from the bankrupt's mother and accordingly the bank did, on 14 July 1980, pay to the trustee £12,355á68, the equivalent of what the mother had used to satisfy creditors. In the meantime the bankrupt had been so adjudicated, namely on 27 July 1979.
   Having made the payment demanded by the trustee, the bank then submitted a proof of debt in that sum, claiming to compete with the unpaid creditors of the bankrupt in the same way as the creditors paid by her mother might have done, were their debts still outstanding. The way that the proof puts the claim is that in the premises the bank is entitled to be subrogated to such rights as the creditors who have been paid would have had against the bankrupt in respect of their debts. As I have said, the trustee rejected the proof because he was not satisfied as to its legal basis; and that is the matter that I now have to consider.
   The decision will make a considerable difference to the position not only of the bank but of the unpaid creditors: it appears that if the bank's proof is upheld a dividend of approximately 50p in the pound may be expected, whereas without the bank's claim there is likely to be a substantial surplus.
   Counsel for the bank made alternative approaches to the problem. One was to invoke the principle of bankruptcy administration well known by the name of a leading case, Ex p James, re Condon (1874) LR 9 Ch App 609, [1874-80] All ER Rep 388. The alternative was to put forward a case, as adumbrated in the proof itself, or subrogation. The principle of Ex p James was concisely stated by Scrutton LJ in Re Wigzell, ex p Hart [1921] 2 KB 835 at 858 (a case to which I shall have to refer for other purposes) in the following terms:

   I can deal shortly with the submissions of counsel for the bank in that branch of his address. It appears to me that the present case is essentially different from those in which the principle of Ex p James has been applied. In general, though not without special exceptions, it has been applied to cases where the point in question was intimately linked with some voluntary conduct of the trustee in bankruptcy himself. Younger LJ said in Re Wigzell (at 869-870):

   That language is not altogether applicable to the present case, but it is true to say that the problem has arisen through a payment made inadvertently by the bank on the instructions of the bankrupt and not one initiated by the trustee. To my mind there is nothing offensive either to commercial or to general morality in the general body of creditors receiving a benefit, a windfall, if you will, from the bank's unfortunate payment in the present case, if there is no principle of statute law or of equity to restrain them. Accordingly, I do not think that the ethical additions to the ordinary rules allowed by the principle of Ex p James can properly have any application in the present case.
   I turn now to the alternative submission, that there is indeed a specific equitable right or remedy available to the bank in the present case, conveniently referred to as 'subrogation', whether correctly so described or not. What is said is this. The creditors paid by the bankrupt's mother have had a bonus. Nothing can undo that: they have been paid in full. The other creditors ought not to suffer for that, and no one has ever suggested that they should suffer. But equally it is said that it is quite unfair that they should gain at the expense of the bank which made a perfectly honest mistake in good faith. The bank therefore, it is submitted, should stand in the shoes of the creditors who were paid off and put in the proof which they could have put in were they still unpaid. There are passages in authority, though only by way of dictum, that are said to show, or at least to justify me in asserting, the existence of such a right and remedy.
   Before I come to them I would like to deal with some objections that have been urged by counsel for the trustee representing (as it was his duty to do) the interests of the general body of creditors. He says that whatever may have been said in other cases on other facts, on those of the present case there is no room for any kind of subrogation. 252When the bankrupt's mother paid off creditors whom she or her daughter wished to favour, I know not which, their debts were extinguished. There is no surviving chose in action and, so far as the evidence goes, there is no security that any of those creditors had to which the bank could be subrogated. The necessary substrata, submits counsel, is just not there. Nor are there any circumstances which would justify the court in compelling those creditors to allow their names to be used by the bank; certainly no express or implied agreement can be said to bind them in that way. If the bank makes a proof in its own name, then, it is submitted, it is not within the language of s 30(3) of the Bankruptcy Act 1914 which defines provable debts as-

No such debt belongs to the bank and the former creditors who have been paid off never authorised the bank to use their name.
   In support of submissions of that kind, reference was made by counsel for the trustee to the extensive judgment of the Court of Appeal in Re Diplock's Estate [1948] 2 All ER 318, [1948] Ch 465, particularly the passage which deals with points affecting the Heritage Craft Schools and the Leaf Homoeopathic Hostel (see [1948] 2 All ER 318 at 361-362, [1948] Ch 465 at 548-549). Reference was also made to a case about a bond and a surety decided by Lord Brougham LC and reported as Hodgson v Shaw (1834) 3 My & K 183, 40 ER 70. I have not found those technical and logical objections persuasive. If counsel for the bank's case is otherwise well founded, then it seems to me that the bankruptcy court, having the duty, within the rules laid down by statute, to make an equitable distribution of the assets in the bankrupt's estate among her creditors, can perfectly well enable the bank to enjoy the same advantages of proof as other persons would have enjoyed but for the bank's mistake, that is if, as I say, the claim of subrogation is otherwise well founded. If necessary, I would call it by some other name than subrogation were that shown to be technically inappropriate to the bank's remedy, and, if necessary, I would describe it as a right or remedy that defeats classification except as an empirical remedy to prevent a particular kind of unjust enrighment: see Orakpo v Manson Investments Ltd [1977] 3 All ER 1 at 7, [1978] AC 95 at 104 per Lord Diplock. And as regards s 30 of the 1914 Act the creditors who have been paid certainly did have debts to which the debtor was subject at the date of the receiving order, and were it necessary to make the required equitable distribution I see no reason why the court should not allow the bank to assert them.
   However, in disposing of those objections, which I thought it convenient to deal with at once, I have left unconsidered the logically anterior question: is there any doctrine of law or equity which entitles the bank to stand in the shoes of the creditors, not whom the bank paid (for it did not itself pay them) but who were paid with money which it is not disputed the bank paid out on the bankrupt's order? The basis of the claim is really a dictum by Younger LJ in Re Wigzell [1921] 2 KB 835 at 869-870 which I have already cited. That was a case where the Court of Appeal clearly had a good deal of sympathy for the bank involved, as anyone must have, I think, on the facts. It was Barclays Bank and the material events occurred in 1919. What happened was that the debtor obtained a stay of advertisement of the receiving order and of all proceedings under the receiving order pending an appeal therefrom. That appeal was unsuccessful and the bankruptcy went ahead. But meanwhile, after the making of the receiving order and pending the hearing of the appeal, the bankrupt paid into the bank £165 and drew out a larger sum. The bank acted throughout in good faith without knowing that a receiving order had been made. Under the law as it then stood the Divisional Court and the Court of Appeal were constrained to hold that there was nothing in the statutes that protected the bank, and the trustee was at libery to enforce the rights given to him by the statute; there was nothing unconscionable that required the doctrine of Ex p James to be invoked, even253 though the bank could never have known by public advertisement, at any rate, of the receiving order. As I say, the court naturally was sympathetic. There was no evidence as to what had happened to the money (if I understand the report correctly) and the court did not know where it had gone after it was withdrawn. Lord Sterndale MR said (at 853-854):

   It seems to me that if one takes that passage literally it would result in an exoneration of the bank in that case, which would have left the unpaid creditors at a disadvantage. However that may be, Scrutton LJ, so far as the passages cited by counsel go, did not deal with any such speculative point about evidence that was not before him; but Younger LJ approached the problem in a different way (at 864-865):

   Then Younger LJ continued by explaining why he did not thin Ex p James was applicable, a passage from which part of his judgment I have already cited.
   Lord Sterndale MR, having heard the other judges, said at the very end of the report (at 872):

   There is one later case in which the matter has been dealt with, but to understand it it is necessary to refer to an earlier case, that of Re Hall, ex p Official Receiver [1907] 1 KB 875. There, a mortgagee had paid a number of unsecured creditors in the belief that the money so expended would be added to the security. The security was then realised by the mortgagee and the mortgage debt was discharged, but the mortgagee had to pay over to the Official Receiver the balance, without being allowed to deduct what had been paid to unsecured creditors. The matter went to the Court of Appeal. Vaughan Williams LJ said (at 878):

Farwell LJ did not, I think, speculate on that matter at all. He did say that the trustee or Official Receiver had nothing whatever to do with the payments which had been made or with the ignorance of bankruptcy law of the people who had made them (see at 879). Buckley LJ (at 880) pointed out that it could not possibly be that such sums could be added to the mortgagee's security, and he, like the other members of the court, did not see any facts that would bring Ex p James into play; but he, like Farwell LJ, said nothing about the possibility of some kind of proof being put in by the mortgagee, to which Vaughan Williams LJ had referred, as it were anticipating what was more fully said by Younger LJ in Re Wigzell. The recent case which referred to Re Hall was Re Clark (a bankrupt) [1975] 1 All ER 453, [1975] 1 WLR 559 where Walton J, in applying to the facts before him the principle of Ex p James, was at pains to distinguish Re Hall where the Court of Appeal had declined to apply that principle; and having pointed out what he considered to be the essential reason why Ex p James could not be applied in Re Hall he added ([1975] 1 All ER 453 at 460, [1975] 1 WLR 559 at 565):

   I say of that only, with great respect, that for myself I cannot find in the report of Re Hall anything to suggest that the whole court thought there was any subrogation. I am doubtful whether even Vaughan Williams LJ did, though he would have been happy were it so. Although he referred to Re Wigzell, Walton J did not, I think, deal with this aspect of the latter case.
   So there is the somewhat slender judicial basis of the subrogation claim. I myself255 consider that this is not a case in which equitable principle demands that any subrogation or similar right or remedy should be provided. The facts are very different from those in Re Wigzell. There, there had been no publication of the receiving order and the bank was helpless to avoid a mistake. Here, the receiving order had been gazetted. The bank nonetheless, in perfectly good faith, made the payment. Now after the date of Re Wigzell there was a statute passed for the protection, among other persons, of banks, and it delineated a legal boundary to their protection. The Bankruptcy (Amendment) Act 1926, s 4, provides:

   Well, there is the legal protection strictly bounded by the date at which notice is gazetted in accordance with the bankruptcy rules. I cannot see that good conscience and equity demand that a further relief should be given beyond that which the statute has so marked out. I do not think that if the bank, by carelessness or misfortune, pays after the gazetting of the receiving order, there is anything in the mere fact that through some consequence of the mistaken payment unpaid creditors benefit which requires an equitable remedy. I would point out that this is not a case in which the bank made a payment for the express purpose of paying creditors; the money was the bankrupt's own money, a credit balance, and was paid at her order to her mother. It is not disputed that the mother went on to pay some creditors, but there was no immediate compelling nexus between those payments and the bank's act; and in many cases it would not be as clear as in this case what happened to money paid out on the bankrupt's order after a receiving order had been gazetted, and inquiries might be necessary that would complicate the administration of bankrupt's estates and add to the costs thereof. In this case, therefore, I must stop my ears to the siren song of unjust enrichment and hold that the appeal against rejection of the proof fails.

Solicitors: Clifford Harris & Co (for the bank); Booth & Blackwell (for the trustee).