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OUTER HOUSE, COURT OF SESSION
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A182/07
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[2007] CSOH 106
OPINION OF LORD BRODIE
in the cause
(FIRST) ALBYN
REALISATIONS (FESTIVAL CARS) LIMITED (in Members Voluntary Liquidation); and
(SECOND) IAN DOUGLAS STEVENSON, The Liquidator thereof
Pursuers;
against
(FIRST) LEVENFLEET
LIMITED; and (SECOND) CHARLES McKINLAY
Defenders:
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Parties
participating at this hearing
Pursuers: Mrs Sarah P L Wolffe; Semple Fraser LLP, Solicitors
First
Defenders: Barne; Burness, Solicitors
Non
participating party
Second
Defender: Beveridge & Kellas
20 June
2007
Introduction
[1] This
is a motion at the instance of the pursuers in this action for payment of the
price of the taxi business formerly carried on by the first pursuer and sold by
it to the first defender. The motion is
to ordain the first defender to lodge caution for expenses in the sum of
£50,000 as a condition precedent of proceeding with its defence to the action. As Mrs Wolffe, who appeared for the pursuers,
explained, it is presented at common law.
It is opposed by the first defender on the ground that there are no
special circumstances in the case that justify departure from the normal rule
that a defender is not required to find caution. The second defender is called as the alleged
cautioner of the obligations of the first defender. He has entered appearance but he did not
participate in the hearing of the motion.
Submissions
[2] Mrs
Wolffe began by bringing to my attention, in précis, the background
circumstances. As appeared from the
pleadings, the first pursuer had sold its business to the first defender. There had been a transfer of the assets in
October 2005. Payment had originally
been due on 31 December 2005 but it was subsequently
agreed that the outstanding consideration of £600,000 would be paid in six
monthly instalments of £100,000 between February and July 2006. None of these instalments has been paid. The sum of £600,000 is therefore outstanding. It is the sum sued for in the action. In its defences the first defender raises
issues of breach of warranty. However it
appears that the first defender has sold on the business with completion on 24
or 25 May 2007. The
consideration for this re-sale is understood to be of the order of £1 million.
[3] Mrs
Wolffe turned to enunciate the legal principles relevant to an application of
this kind. She cited authority for each
principle and when Mr Barne came to address me on behalf of the first defender
he did not dispute any of them. The
principles were as follows: (1) the
ordering of caution for expenses is a matter for the discretion of the court: Thom v Andrew (1888) 15 R 780; (2) the court will exercise its discretion as
the interests of justice require: Thom v Andrew supra; (3) it is competent to make an order for
caution against a company defender at common law, the power to do so being
independent of the statutory power conferred by section 726(2) of the Companies
Act 1985 to order a limited company which is a pursuer to lodge caution: Balfour Beatty Ltd v Brinmoor Ltd 1997
SLT 888; (4) while it is highly unusual
to do so, the court will order a defender to find caution where there are
special circumstances justifying that course of action: Taylor
v Fairlie's Trs (1853) 6 W & S 301, Lamont & Co's Tr v Lamont (1889) 17R 282, Matheson v Marsh 1996 SC 25, Balfour
Beatty Ltd v Brinmoor Ltd supra; and
(5) in determining whether there are special circumstances, while each case
must be considered on its own facts, inability to meet an adverse award of
expenses, a history of misconduct on the part of the defender in the course of
the litigation and the defence being devoid of apparent merit are all relevant
considerations: Matheson v Marsh supra, Finklestone v Smellie (1916) 32 Sh Ct
Rep 244.
[4] Mrs
Wolffe accepted therefore, that for the first pursuer's motion to succeed, it
had to demonstrate special circumstances justifying the order sought. She relied on, first, the financial position
of the first defender, second, the position (or lack of it) taken by the first
defender in its pleadings, and, third, some additional factors, these being the
"clandestine" nature of the re-sale of the business and the late introduction
of an un-quantified allegation of breach of warranty by way of defence to the
claim for payment.
[5] As far
as the financial position of the first defender was concerned, as appeared from
such statutory returns as had been made to the Registrar of Companies, it had
only one director and no company secretary (a breach of section 283(1) of the
Companies Act 1985). It had a share
capital of £100, divided into 100 £1 shares.
It was listed as a dormant company.
Its last accounts lodged with the Registrar had been made up to 30 June 2005. Accounts for
the subsequent accounting period were overdue.
The assets of the first defender were subject to two floating
charges. It had factored the debts owing
to it.
[6] It was
Mrs Wolffe's submission that the pleadings on behalf of the first defender were
inconsistent and lacking in candour.
Whereas in Answer 5 the first defender denied the transfer to it of the
assets of the first pursuer, in Answer 15, after a general denial which
comprehended the first pursuer's averment that no payment had been made by the
first defender, the first defender refers to warranty provisions in relation to
the condition of assets and alleges breach.
How, asked Mrs Wolffe rhetorically, can the first defender at one and the
same time deny transfer of assets and found on warranties relating to these
very same assets. In Article 16 of
Condescendence the first pursuer quotes from a letter from the first defender's
agents (number 6/1 of process) making reference to an offer made by the first
defender to settle the "the outstanding consideration". Again, there is an averment that the first
defender has refused to make payment.
These averments are met with a simple denial without any further
explanation.
[7] What
led Mrs Wolffe to describe the circumstances of the re-sale of the business as
"clandestine" was that, concerned that the first defender was negotiating the
re-sale of the business and that, in consequence, it would divest itself of its
assets, the first pursuer's solicitors inquired of Messrs Burness, the solicitors
acting for the first defender in relation to its defence to the action (but not
in relation to any sale of the business), by faxes dated 4, 9 and 16 May 2007
as to what was the position. Messrs
Burness replied on 17 May 2007 by stating that "our
instructions are that there are no discussions ongoing in relation to the sale
of the business." Notwithstanding that reply a re-sale was completed on or
about 24 May 2007. The inference
was that the first defender was not being frank with its litigation
solicitors. Mrs Wolffe also referred to
the fact that the allegation of breach of warranty was only made in the course
of 2006, whereas the assets had been transferred in October 2005. Reverting to the pleadings, she pointed to
the absence of a counter-claim and, beyond references to the alleged cost of
replacing a taxi control system in the sum of £129,000 and the refurbishment of
a building at a cost "in the region of £80,000", the absence of an attempt to
quantify what was alleged to be the first defender's loss or damage as a result
of any breach of warranty. If the first
defender's position was that it was retaining the price against a claim for
damages (something that was not apparent from consideration of the pleadings),
then, although formally a defender, it fell to be regarded as in substance a
pursuer, with the consequence that the court should be readier to make an order
for caution. Mrs Wolffe referred in this
connection to Lamont & Co's Tr v
Lamont supra at 285 and 286, and Robertson
v McCaw 1911 SC 650.
[8] Mr
Barne appeared for the first defender.
He explained that this was not his case and he pretended no knowledge of
it beyond what appeared from the face of the pleadings and the productions
which had been referred to by Mrs Wolffe.
As I have already indicated, he took no issue with the law as it had
been stated by Mrs Wolffe, although he observed that it should be borne in mind
that many of the authorities cited had been decided at a time when the
procedure for summary decree, now provided for by chapter 21 of the Rules of
the Court of Session, was not available.
It was Mr Barne's position that special circumstances that would
justify the exceptional step of ordering a defender to lodge caution as a
condition for being allowed to insist in its defence to the action had not been
demonstrated. Mr Barne emphasised that
the Open Record was dated 8 May 2007 and that there had, as yet,
been no adjustment. He reminded me that
this was not a motion for summary decree, although it was the case that the
pursuer had enrolled such a motion, with the requisite notice period of 14
days, and that this motion would come before the court within the next two
weeks or so. At that point, if the first
defender had not taken the opportunity to adjust in the interim, it might be
that some of Mrs Wolffe's animadversions on state of the pleadings would have
more force. However, turning to what Mrs
Wolffe had said about the pleadings, Mr Barne drew my attention to what the
pursuers averred at Article 4 of Condescendence: that in October 2005 "Heads of
Terms" had been agreed between the first pursuer and three named individuals
"as promoters in relation to the first defender", that a new company (referred
to in the Heads of Terms as "Newco") would be set up by the purchasers as a
vehicle for the purchase of the assets and business of the first pursuer, that
it was agreed that "the purchasers" would take over certain assets and act as
managing agents of the first pursuer "until certain administrative steps
necessary to effect the transfer of the business to the first defenders were
completed." That was the context in
which the pursuers went on to aver in Article 5 that the first pursuer had
implemented all its obligations "under the Heads of Terms", including transfer
of the physical assets to the first defender.
Whereas that was denied by the
first defender in Answer 5, something criticised by Mrs Wolffe, regard had to
be had to what the pursuers go on to say in Article 14. It is there averred that the first pursuer
and the first defender also signed a formal business transfer agreement (the
"BTA"). The BTA had been lodged as
number 6/3 of process. Clause 19.1 of
the BTA provides that the BTA sets out the entire agreement and understanding
between the parties in respect of the subject matter of the agreement. This was a term to the effect that the BTA
comprises all the express terms of the contract between the first pursuer and
the first defender and, accordingly, was, in terms of section 1(3) of the
Contract (Scotland) Act 1997, conclusive in
the matter. It was therefore
understandable that the pursuers' averments in Article 5 of Condescendence
apparently instructing additional contract terms or referring to a previous
superseded agreement to which the first defender was not a party, were met with
a denial. In response to my observation
that in the case of a commercial dispute which has been live since at least
August 2006 where parties are represented by very experienced commercial
litigation solicitors, a rather fuller and more coherent statement of position
might have been expected from the first defender even in its unadjusted
defences, Mr Barne reminded me that this was not a commercial action and
therefore not one to which the requirement of pre-action communication imposed
by paragraph 11 of the Practice Note No. 6 of 2004 applied. As far as the re-sale of the business was
concerned, that was something which the first defender was entitled to carry
out in absence of any successful attempt by the first pursuer to prevent
it. There had been no such attempt. On available information, it could not be
said that what had been stated in the fax from Messrs Burness dated 17 May 2007 was inaccurate.
There had not been a full enquiry into the matter. The first defender had granted floating
charges. There was nothing unusual about
that. The first defender had incurred
costs in "doing up the business", as Mr Barne put it. The first charge was in favour of the Bank of
Scotland, with which the first defender had entered into a factoring
agreement. Again, there was nothing
sinister or unusual about debt factoring.
While it may be, as Mrs Wolffe had said, that the first pursuer had been
able to conduct the business without factoring its debts, some of the work done
by individual taxi drivers was contract work and therefore on credit with the
result that the first defender had to pay the drivers before monies due from
contract customers were received by it.
This had to be funded. The
consideration from the re-sale had been paid over to the Bank of Scotland as
was required by the factoring agreement.
The surplus over what was owed by the first defender to the Bank was
available to the first defender. As far
as the letter number 6/1 of process was concerned, its terms were not
unequivocal and, in any event, it had been written without prejudice to the
first defender's whole rights and pleas.
Mr Barne accepted that the addition of the words "without
prejudice" to a letter or other communication will not necessarily prevent an
otherwise unequivocal statement of fact in the communication being founded on
for the purposes of litigation: Daks Simpson Group plc v Kuiper 1994 SLT
689, Richardson v Quercus Ltd 1999 SC 278, Bradford & Bingley plc v Rashid
[2006] 1 WLR 2066. However, he made no
concession in relation to number 6/1 of process and did not waive privilege in
respect of its contents. In summary, he
submitted that this was not a situation of special circumstances in which the
case for caution was made out. If there
was doubt, the motion should be continued until the outcome of the forthcoming
motion for summary decree had been determined.
If the court was against him on each of these submissions, an order for
caution should not be made in a sum exceeding £5,000. The matter could always be revisited after
the motion for summary decree had been heard.
Decision
[9] In the
circumstances here I have some sympathy for the position of the pursuers. Looking at matters broadly rather than at the
precise terms of the pleadings, I did not understand it to be disputed that the
first pursuer has transferred the assets of its business to the first defender
in implement of a contract of sale; that
the price has not been paid in full; that the business has been sold on by the
first defender, apparently at a profit; but that, notwithstanding this, the
first defender not only refuses to pay the price but has failed to articulate
its reason for not doing so. However, in
my opinion that sympathy cannot translate into an order for the first defender
to lodge caution, at least at this stage in the litigation. It is an exceptional step to order a party to
find caution for expenses, particularly when that party is a defender: Matheson
v Marsh supra at 26. Mrs Wolffe
accepted that for the motion to be granted special circumstances had to be
established justifying the order sought.
I would regard the various factors relied on by Mrs Wolffe to be
relevant but, taking them together, bearing in mind the stage of the
litigation, I do not take them to be sufficiently special, or sufficiently
weighty, to persuade me to exercise my discretion in favour of making an
order. In my opinion the most persuasive
factor in favour of the first pursuer's position was the state of the
pleadings. Agreeing with Mrs Wolffe, I
take the view that the first defender has not put forward a coherent
defence. However, I accept that there
was force in Mr Barne's observation that this is more germane to and better
considered at a hearing on a motion for summary decree. Notice has been given by the pursuers that
they intend to enrol a motion for summary decree. Such a motion requires 14 days notice. This will give the first defender time to
adjust what is still an Open Record, if so advised.
[10] I shall
refuse the motion. I shall reserve all
questions of expenses.
