Scottish Sheriff Court Decisions

SHERIFFDOM OF NORTH STRATHCLYDE AT DUMBARTON

 

JUDGMENT

of

Sheriff MUNGO BOVEY QC

 

in the cause

 

MALCOLM INSULATION SUPPLIES LIMITED

noters

Against

 

FRASER JAMES GRAY

respondent

 

COURT REF NO L18/07

Act: Howlin QC instructed by MacRoberts, Solicitors, Glasgow

Alt: MacKenzie, Shepherd and Wedderburn LLP, Solicitors, Edinburgh

 

Dumbarton, December 2012

 

The Sheriff, having resumed consideration of the cause appoints the cause to a procedural hearing on a date to be afterwards fixed.

 

(1)   The respondent is the liquidator of IGL Limited ("the company"). The noters have lodged two notes by way of appeal against decisions of the respondent to admit a total of five claims in the liquidation. Two records have been made up and on 18 October 2012 I heard a debate on the respondent's pleas in law which are, for practical purposes, in identical terms in the two processes before me.

(2)   Two notes have been lodged. As they do not have differentiating process numbers, we agreed at the start of proceedings to identify them as notes A and B. Answers have been lodged and records made up.

(3)   Note A challenges claims by HM Revenue and Customs in the sum of £74,236, Archibald McCorquodale & Sons ("AMS") in the sum of £989 and Interact Interiors ("Interact") in the sum of £3,527.

(4)   Note B challenges claims by BPB United Kingdom Limited ("BPB") in the sum of £949,926.05 and the Trustees for Rockspring Hanover Property Unit Trust ("RHPUT") in the sum of £133,907.24.

(5)   At the beginning of proceedings, Mr Howlin tendered a minute of amendment removing the challenge to the decision relating to the HMRC claim and a record implementing the minute of amendment. As Mr MacKenzie wanted an opportunity to consider the minute of amendment and, perhaps, to answer it, I declined to grant Mr Howlin's motion to amend in terms of the minute but allowed it to be received. It was, however, a matter of agreement that the HMRC claim has been reduced to nil. It is, therefore, no longer substantively in contention and discussion of it was limited to its significance for the remaining claims.

(6)   Although he declined my suggestion that we conjoin the two notes, Mr MacKenzie addressed his pleas in law in both processes together.

1 Competency

(7)   The respondent's first plea in law in answer to note A is

"Appealing against three claims within the Note being incompetent, the application should be dismissed." His first plea in respect of note B is in the same terms with the substitution of "two" for "three".

(8)   Section 49 of the Bankruptcy (Scotland) Act 1985[1] has been applied to liquidations by rule 4.16 of the Insolvency (Scotland) Rules 1986[2] with the modifications set out in paragraph (2) of that rule. Duly modified, subsection (6) provides:

"...any member or contributory of the company (subject to sub-section (6A) below may, if dissatisfied with the acceptance or rejection of any claim (or in relation to such acceptance or rejection, with a decision in respect or any matter requiring to be specified under sub-section 5(a) or (b) above), appeal therefrom to the Court."

 

(9)   The matters requiring to be specified under sub-section 5(a) or (b) are the amount of the claim accepted by the liquidator and the category of debt and the value of any security as decided by the liquidator.

(10)                  Rule 25 of the Sheriff Court Company Insolvency Rules 1986[3] provides:

"(1) An appeal under section 49(6) of the Bankruptcy (Scotland) Act 1985, as applied by rule 4.16 of the Insolvency Rules, by a creditor or contributory of the company against a decision of the liquidator shall be made by note in the process of the petition."

 

(11)                  In paragraph 1.1 of each note, the noters narrate that they are members of the company. Although rule 25 does not expressly apply to appeals by "members" as section 49(6) does, both parties before me proceeded on the basis that it did, no doubt because the definition of contributory extends even to fully paid members[4].

1.1 The respondent's argument on competency

(12)                  The respondent's argument on competency was that each of the notes contained more than one appeal. This is not permitted by rule 25 which is all in the singular. Mr MacKenzie referred to section 6(c) of the Interpretation Act[5] but accepted that the reference to the "contrary intention" meant the issue turned on the practicalities of competing interpretations. He relied on Floor v Davis[6]  for the proposition that if a construction of a provision was "unworkable, or if not workable [leads] to a result that Parliament could not have intended, then it can be concluded that an intention contrary to the application of the Interpretation Act appears".

(13)                  In support of his argument that the combination of appeals rendered the system unworkable, Mr MacKenzie cited the example of the minute of amendment that had just been lodged deleting the challenge to the HMRC decision and, therefore, abandoning one of three appeals in note A. How was the Court to deal with the expenses of the matter in this context? He also canvassed the issue of an appeal in respect of one of a multiplicity of appeals contained in a single note. There are no particular appeal provisions from decisions of the Sheriff under section 49 and so the matter is governed by sections 27 and 28 of the Sheriff Court Act 1907. On appeal, the Sheriff Clerk is required to send the process to the appellate court and the Sheriff could not, in purely practical terms, proceed with the other appeals in the note.

1.2 The noter'sarguments on competency

(14)                  Mr Howlin said that the purpose of rule 25 is simply to identify the form of process to be used in this form of appeal - a motion would not do, for example.

(15)                  Because the liquidation could not come to an end while any claim remained unresolved, the practical issues anticipated by Mr MacKenzie did not arise. He pointed out that the Sheriff Principal in the Shiprow case had dealt with one note embracing two claims.

1.3 Decision on competency

(16)                  As Mr MacKenzie acknowledged, rule 25 is not in fact clearly in the singular; it does not provide for "a note" but for appeal made "by note". In my view the rule is silent as to the number of notes to be used in multiple appeals. The submission for the respondent fails on this basis.

(17)                  Even if I were wrong on this, I do not consider that the combination of more than one appeal in a single note renders the procedure unworkable. Rather, I consider that the flexibility in the wording of the rule allows an appropriate number of notes to be lodged. Were there a very large number of claims each raising the same point, a single note would appear to be desirable. Conversely, a single claim raising a discrete issue is sensibly lodged in its own note. The noters have lodged one note (B) for claims raising a particular issue on title to sue and another for claims which raises only the general issue. This seems entirely sensible and I should be slow to find that it was not competent.

 

2 Title to sue

(18)                  Duly modified, section 49(6A) of the 1985 Act provides:

"The company or any member or contributory of the company may appeal under sub-section 6 above if, and only if, they satisfy the Court that they have or are likely to have, a pecuniary interest in the outcome of the appeal."

 

2.1 The respondent's arguments on title to sue

(19)                  Mr MacKenzie narrated a background to the present appeals which did not appear to be in contention. The respondent raised an action in the Court of Session against the noters and the former directors of the company. He sought to recover about £1 million paid by the company to the noters by way of dividend. In settlement of that action the noters and the former directors agreed to make a payment equal to the amounts adjudicated by the respondent in respect of the BPB and RHPUT claims. This is a joint and several liability.

(20)                  Mr MacKenzie began by noting the words "...if and only if.." which, he maintained, demonstrated that the requirement of pecuniary interest ought to be strictly construed.

(21)                  In relation to Note B, Mr MacKenzie had two propositions: firstly, that the pecuniary interest of the appellant required to be in the same capacity as the capacity in which he appealed and, secondly, that the noters' interest in the Note B appeals was not as members but as parties to the agreement settling the Court of Session litigation against them.

(22)                  Mr MacKenzie accepted that his first proposition relied upon reading into section 49(6A) the words "in that capacity". He cited authority for that proposition beginning with BLV Realty Organization Ltd & Another v Batten & Ors[7], where Norris J held it

"...well established in other company and insolvency contexts that where an application may be made as "a creditor" then it must be made by that creditor in his capacity as such (and not in any other capacity).[8]"

 

(23)                  Having cited case-law in support of this proposition, Norris J went on to observe:

"The relief sought exemplifies the point: BLV seeks, by one means or another, to be restored as development manager until the conclusion of the development (or earlier expiry of the Agreement). It is not its interest as creditor that is thereby served."

 

(24)                  In Brown v Scottish Border Springs Ltd Lord McEwan, sitting in the Outer House, refused to allow an amendment to an unfair prejudice petition:

"[27] In my opinion this amendment raises issues which are not appropriate to sec. 459. It raises a pure question of construction of a document entered into between two private citizens (the vendors) and the Company. The fact that the vendors were also shareholders is nothing to the point. The rent they are recovering as landlords is as private individuals, not as shareholders, and their more general complaints in the Petition are in a capacity other than that where they benefit as landlords."

 

(25)                  Mr MacKenzie accepted that the dividends the respondent had sued the noters for repayment of had been paid to the noters as members. But he maintained that he had sued the noters as wrongdoers who had received the dividends that the respondent wanted back.

(26)                  In relation to both notes, Mr MacKenzie argued that members such as the noters who challenge acceptance of a claim do so in hope of a distribution of assets by the liquidator. If there is to be no distribution, the members have no pecuniary interest and therefore no title to appeal. The noters' averments in each case are:

"The noters have a pecuniary interest in the outcome of the appeal against the respondent's adjudication of the claims...should there be any surplus of assets over liabilities in the liquidation, the noters will stand to benefit."

 

(27)                  Mr MacKenzie relied upon his averments at answers 3.8 to each note in which he averred that there would be no surplus of assets over liabilities in the liquidation even if no sums were due to the creditors in question. In each case, the respondent averred:

"...the respondent's report to creditors dated 3 November 2011 ... shows a balance in the liquidation account of £739. The respondent has incurred expenses in excess of this amount since the report to creditors was prepared."

 

(28)                  In elaboration of this, Mr MacKenzie told me that there was an irrecoverable deficit of legal expenses which had reached £100,000.

(29)                  As regards whether this issue is a matter for debate, Mr MacKenzie pointed to what he said was the failure of the noters to reply to his averments.

2.2 The noters' arguments on title to sue

(30)                  In relation to the argument on note B, Mr Howlin argued that the action by the respondent is in relation to dividends paid to the noters as members and that that is the capacity in which they were sued and in which they have agreed to make payment.

(31)                  In relation to the general point, Mr Howlin argued that all the reports by the liquidator of what will be discovered and realised and what his expenses will be were treated by the respondent in his submissions as cast in stone whereas in fact they all required to be approved by the Court. He submitted that it was impossible to know what the final situation would be.

2.3 Decision on title to sue

(32)                  I do not accept the respondent's argument in relation to note B that the noters are appealing in a different category;

1.     The noters received dividends as members of the company;

2.     The respondent as liquidator of the company sued the noters for repayment of the dividends;

3.     The noters compromised the action by agreeing to pay the adjudicated claims by BPB and RHPUT;

4.     The liability of the noters in terms of that agreement is not qualitatively different from liability that they would have sustained under a decree of the Court of Session;

5.     The liability of the noters in terms of the agreement exactly reflects the amount of the BPB and RHPUT claims. Every penny by which the admitted claims is reduced by the Sheriff is a penny saved by the noters.

(33)                  The fact that the respondent could sue other recipients of the assets of the company does not in my view affect the fact that when he sued the noters for return of dividends which they had received as members, he sued them in that capacity.

(34)                  In these circumstances, I proceed on the basis that the pecuniary interest of the appellant requires to be in the same capacity as the capacity in which he appeals but reject the submission that the noters are not proceeding in the same capacity. In particular, I reject the proposition that the noters' interest in the Note B appeals is not as members but as parties to the agreement settling the Court of Session litigation against them. In my view, the interest of the noters in the note B claims is sufficiently related to the interest as members in which they have brought these appeals.

(35)                  I may add that, standing the terms of the settlement of the Court of Session action which anticipated that the liability of the noters in terms of that settlement agreement would effectively be determined by the Sheriff in an appeal under section 49[9], I am surprised to see this competency point taken.

 

(36)                  It is not clear that the general issue in fact applies to the note B claims: whatever their amount, these claims fall to be funded by the noters and former directors in terms of the settlement agreement. They will not affect the amount available for distribution.

(37)                  As regards the general issue, it seems to me that, in principle, the noters' averment that "..should there be any surplus of assets over liabilities in the liquidation, the noters will stand to benefit." is enough to demonstrate that they have a pecuniary interest in challenging the acceptance of what must at this stage be assumed to be unmeritorious claims. Standing this averment, and given that he has the control of the liquidation and, therefore, the relevant sources of information, it is reasonable to expect the respondent to satisfy the Court that the member has no interest. In this case, this would be by showing that the finances of the company are such that the appeals are an empty exercise.

(38)                  Looking simply at the respondent's pleadings, the key averments are rather bald and certainly lacking in detail. I reject the submission that they are sufficiently coherent to call for a detailed response. Although it was asserted at the Bar that substantial legal expenses had been accrued, these were not detailed and are no doubt subject to the approval of the Court. Given the fluidity of liquidation proceedings, I would not be prepared to uphold the respondent's plea to title to sue by reason of lack of pecuniary interest at this stage.

 

3 Relevancy and specification

3.1 The approach to be taken to appeals under section 49

(39)                  In Shiprow Development Company v. Liquidator of Craiglair Property Company Ltd[10] Sheriff Principal Sir Stephen Young said:

"... the sheriff in my view will not be confined in dealing with the appeal to a consideration of the documents which were available at the meeting on 17th October 2002. Thus, apart from anything else, a sheriff in a case of this kind may hear evidence about the claim which is the subject of the appeal, which the liquidator may not (see Japan Leasing (Europe) plc v Weir's Trustee (No 2) 1998 SC 543) - and indeed it seems to me that an important aspect of an appeal to the sheriff under section 49(6) is that he should be able to look at the matter afresh and in light, if appropriate, of material that may not have been available at the creditors' meeting."

 

I proceed on this basis.

 

3.2 BPB[11]

(40)                  BPB were granted decree in absence on 10 June 2008 in a sum in excess of £1 million with interest and expenses. Their claim has been admitted to the extent of £949,926.05. The noters make extensive averments as to why this sum is more than the company owes BPB.

(41)                  Mr MacKenzie's point is simply that, in the face of a decree, these averments are nothing to the point as the liquidator was bound to recognise a decree. More precisely, his written submission[12] was:

"The respondent was aware that an action was raised by BPB and contacted the former directors to ask whether they were willing to fund a defence of the action. The directors declined to so so. The respondent was therefore bound to recognise BPB's claim for the amount of the decree."

 

(42)                  He then cites McBryde Bankruptcy[13] and Miller v McIntosh[14]. On the basis of that case, Professor McBryde observes:

"If there is a court action against the debtor and the trustee fails to take an opportunity to sist himself or defend the action, the trustee may be bound to rank the claimant for the amount of any decree including expenses before and since the date of the sequestration."

 

(43)                  The issue in Miller was whether where a decree in a case raised against the debtor before he was sequestrated was granted after sequestration, the expenses were also to be regarded as a debt owing at the date of sequestration. On appointment, the trustee had declined to become involved in the litigation and the debtor defended the action and succeeded in reducing a claim for £3,000 to £20.

(44)                  At page 732, Lord President Inglis said:

"I cannot help thinking that the trustee in simply declining to sist himself or to have anything to do with the action was acting rashly, because if ...[the pursuer had] ...obtained decree by default...I do not see what answer the trustee could have made to him. That would have been very unfortunate. I rather think the proper course to be followed by the trustee and creditors would be that they should make up their minds what is the probable amount which would be awarded to the pursuer, and having done so, that they should, either in the action or in the sequestration, make a tender of that amount... simply to pass the matter by, and not to recognise the action at all, seems to me to be a very dangerous course, and might lead to very serious consequences."

 

(45)                  Lord Shand endorsed the Lord President's view as to the proper course to be followed.

(46)                  Mr Howlin sought to withdraw the admission at page 10 of note B that the noters were provided with an opportunity to fund the defence of the BPB proceedings and decided not to do so.

(47)                  While accepting that a decree was binding on a liquidator, he submitted that the nature of the jurisdiction of the Court in this appeal was to re-open the matter.

Discussion

(48)                  The amount of the claim admitted is not the same as the decree in favour of BPB but I was told that the final award reflected additional claims by BPB and abatements submitted by the former directors. Neither party made anything of the fact that the sum admitted by the liquidator has been adjusted in this way.

(49)                  In Dow v Pennell's Trustees[15] Lord Pitman said

"The ratio of the decision in Miller's case is, I think, this, that the trustee was certiorated of the position of matters and was given an opportunity by the Court to appear and defend, and having failed to avail himself of that opportunity he cannot ask the same Court to disregard its own decree."

 

(50)                  Applying Lord Pitman's explication of the decision in Miller, the liquidator was given an opportunity by the Court to appear and defend the action by BPB, and having failed to avail himself of that opportunity, he could not ask this Court to disregard the resultant decree.

(51)                  It is, however, the case that the Miller and Dow cases do not deal with the situations of members. In these cases, it appears that the bankrupt was aware of the litigation, the "...only difference..." being that the bankrupt in the former case defended it and in the latter did not. His position was not the point at issue in these cases. They do not answer the question of whether the members of the company are barred from their statutory right of appeal by the failure of the liquidator to defend the action.

(52)                  The issue raises the purpose of the proceedings before me. It seems to be to provide independent scrutiny both that the liquidator does not pay more than the company is due and that the appellants are fairly treated by the liquidation process in which they otherwise have a restricted role. In many cases, including the present one, the members of the company will be the parties who have an interest in the claim. It might be said that the provision of the right of appeal is to ameliorate the "very serious consequences" of the "very dangerous course" taken by a liquidator not to recognise an action.

(53)                  On the other hand, no court will lightly look behind a decree competently pronounced. The proper forum for a dispute between a claimant and his debtor is one where both can be heard. The claimant is not a party before the Sheriff in this appeal. It is clear from the approach of the Court in Miller that the correct forum for determination of the liability of the company to the claimant is the one in which he competently pursues his claim.

(54)                  While it seems to me that the liquidator has a duty to members to whom it may make a difference a duty to afford them an adequate opportunity to defend an action against the company, it does not follow that a breach of this duty can be relied upon in proceedings such as these so as to look behind a decree against the company. My principal reason for coming to the view that it cannot is the unfairness to the claimant (who has obtained the permission of the Court to bring his action) in having the merits of a decree in his favour re-litigated in his absence. The members must look elsewhere.

(55)                  This conclusion is enough for me to refuse the appeal. But, even if I were of the view that a member who was not given the opportunity to present the defence to a claim can reopen the resultant decree in an appeal of the kind before me, the result would be the same in the present case:

(56)                  In this case, the noters propose to withdraw the admission that they were given the chance to fund the defence to the action. The remaining admissions, are[16] that noters were aware of the proceedings that BPB commenced against the company in May 2008...that a copy of the summons was emailed by the respondent's office to William Malcolm on 29 May 2009....that on 4 June 2008 William Malcolm had a telephone conversation with a member of staff in the respondent's office to enquire as to the date when the summons was served and that he informed the respondent's office that the directors of the company did not wish to fund a defence of the action commenced by the summons dated 9 May 2008.

(57)                  In fact, the averments to which these are answers refer not to William Malcolm but to "the first noter" which appears to be a hangover from the original notes which ran in the names of Mr Malcolm and two other men of the same surname. In the original note and the respondent's answers thereto, the three are said to be members of the company. In the summons in the name of the company against the noters and the Malcolms, they are described as "the three directors and three shareholders" of the company. It is this action that gave rise to the liability of the noters for the BPB and RHPUT debts.

(58)                  The liquidator produces and incorporates in his pleadings an email from his office on 29 May 2008 to William Malcolm enclosing the BPB writ and pointing out that "...should they have decree granted, this will change the creditor position of the [company]. As you are aware, we do not have sufficient funds to defend this." The response of the noters is simply to refer to the email for its terms.

(59)                  In my view, nothing very much turns on the fact that the noters were aware of the proceedings that BPB commenced against the company in May 2008. Such members might, in the absence of further information, be entitled to assume that the liquidator was taking appropriate steps to deal with it.

(60)                  However, that is not the situation here. William Malcolm is a principal of the noters. The detailed averments on both sides in relation to his conduct call for an explanation from the noters. There is nothing in the current pleadings to indicate why, when he indicated that the directors of the company did not wish to fund a defence of the action at the instance of BPB, William Malcolm should not be taken to be speaking for the current noters.

(61)                  In the absence of such an averment by the noters, it seems to me that they could not succeed in showing that they did not have adequate opportunity to defend the action by BPB. For this reason also, I propose to refuse this appeal.

3.3 RHPUT[17]

(62)                  This claim by the landlords of the company's place of business has been admitted to the extent of £131,250.

(63)                  Mr MacKenzie referred proceedings pending between RHPUT and the company in the Court of Session in which RHPUT are the pursuers. Although current, it is not in fact being progressed. The liquidator has not given the noters the opportunity to fund the defence to the action. His complaint was that the noters had simply referred to the record[18] which was not a satisfactory way of challenging the decision to admit.

(64)                  Mr Howlin said that the essence of the complaint is that the liquidator has agreed the claim without testing it. His clients have never been invited to fund the defence to this claim. If given that opportunity, they would consider doing so.

Discussion

(65)                  This claim raises some of the same issues as the BPB claim. In principle the proper forum for a dispute between a claimant and his debtor is one where both can be heard. The claimant is not a party before me. It would be best for this claim to be litigated in the Court of Session action at the instance of the claimant.

(66)                  The outcome of the proceedings in the Court of Session is likely to be determinative of the claim. Until the action is either dismissed or a decree granted, I do not feel able to decide this appeal. The parties before me require to co-operate to achieve that result. The liquidator must give the noters a chance to defend the action. The noters must decide expeditiously whether to do so or not.

3.4 AMS[19]

(67)                  This is a claim for £989.35 for work described in the invoice as "ATTEND SITE AND REPAIR ROOF. CLEAN OUT GUTTERS." The noters[20] say this relates to a morning's work clearing out leaves. The sum involved is self-evidently excessive. The respondent says that the invoice is adequate vouching of the admitted claim.

(68)                  Mr MacKenzie accepted that an apparently excessive bill could be challenged in these circumstances but disputed the assertion that this one was self evidently so. He relied on the information before the liquidator in reaching his decision.

(69)                  Mr Howlin pointed to the skimpy nature of the information on which the claim had been admitted, without information as to the hours spent or the repairs carried out.

Discussion

(70)                  The noters make averments in relation to this claim on which their assertion that the claim is excessive can be justified. On the approach set out in Shiprow Development above, the fact that this is new material since the respondent decided to admit the claim does not in itself defeat the appeal. In the circumstances, it seems to me that the noters are entitled to their enquiry on this matter.

3.5 Interact [21]

(71)                  This is a claim for £3,526.74 which is a 2.5% retention on a contract between Interact and the Company for "internal fit-out and refurbishment works" at the Company's place of business. The noters[22] principally rely on a continuing failure by Interact to remedy a defective fire door installed by them.

(72)                  Mr MacKenzie pointed out that the noters have acquired the premises and continue to occupy them. Their interest in the un-repaired premises is not shared by the liquidator.

(73)                  Mr Howlin denied that this claim involves a set-off as Mr MacKenzie had argued. The fact that the property has been sold does not affect the issue of deduction from the retention. The issue is whether the sum is due.

Discussion

(74)                  On the basis of the noters' pleadings, the works that Interact contracted to do were never satisfactorily completed. The purpose of the retention was presumably to secure their compliance with the contract. Having not performed their contract, they are not entitled to payment for it. The fact that the party with whom they contracted has sold the property and no longer has an interest in enforcing their performance does not matter unless they are entitled to insist on attending at the premises to carry out the remedial works. I am not told that this is the case. The contract remains between the contractor and the company, now represented by the respondent. The claim was competently made against the respondent. He cannot force the contractor to sue the purchaser of the property. It would be extraordinary if, by selling the property, he had deprived himself of a defence against an unmeritorious claim to be paid. In these circumstances, I have no hesitation in rejecting the respondent's submission in this regard.

 

4 Disposal

(75)                  The parties were agreed that it would be helpful if, rather than grant an interlocutor, I indicate my views and put the matter out for a hearing on the correct disposal in that light and expenses. In that spirit, I now indicate that I propose, in each note, to repel the first and second pleas in law for the respondent; In respect of note A I will allow a proof before answer, reserving the third and fourth pleas in law. In respect of note B, I will allow the motion made at the Bar to amend note B by deleting the admission at page 10 that the noters were provided with an opportunity to fund the defence of the BPB proceedings and decided not to do so; and uphold the third and fourth pleas in law for the respondent in respect of the claim by BPB and refuse that appeal; and, in respect of the claim by RHPUT I will consider what further steps to take in light of up-to-date information as to the progress being made in the Court of Session action at the instance of RHPUT. At the hearing we will also set a timetable for answers and adjustment in relation to the minute of amendment that I allowed to be received.

 

Mungo Bovey QC

Sheriff

December 2012