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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Jackson v. Clkydesdale Bank Plc & Ors [2002] ScotCS 308 (03 December 2002)
URL: http://www.bailii.org/scot/cases/ScotCS/2002/308.html
Cite as: [2002] ScotCS 308

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Jackson v. Clkydesdale Bank Plc & Ors [2002] ScotCS 308 (03 December 2002)

OUTER HOUSE, COURT OF SESSION

CA11/02

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD EASSIE

in the cause

DOUGLAS BROWN JACKSON

Pursuer;

against

(FIRST) CLYDESDALE BANK PLC and (SECOND) ANDERSENS

Defenders:

 

________________

 

 

Pursuer: Cullen, Q.C., E Robertson, McClure Naismith;

First Defenders: Connal, Q.C., Solicitor Advocate, McGrigor Donald;

Second Defenders: Howlin, Shepherd & Wedderburn, W.S.

3 December 2002

Introduction

  • The pursuer in this action is the liquidator of Smith & Ritchie (1986) Limited - "the Company" - the winding up of which was ordered by the Court on 11 February 1999. The first defenders are the Clydesdale Bank which had previously provided finance to the Company and held a floating charge over the whole assets and undertaking of the Company. On 2 April 1996 the Bank, to whom the Company was then indebted in a sum exceeding £5,000,000, exercised its power under the floating charge to appoint receivers, namely a Mr Watters and a Mr Farish - "the Receivers" - who were partners in the second defenders, an accountancy firm. Following their appointment the Receivers entered into certain transactions. In the course of those transactions they disposed of the assets of the Company. In this action the pursuer contends that in disposing of the assets of the Company the Receivers were in breach of their duty to take reasonable care to obtain the best price obtainable for the assets and the summons concludes for payment of a sum in excess of £2,000,000 as damages for breach of duty.

  • The defenders dispute the contention that the sale by the Receivers of the assets of the Company was at an undervalue or involved any breach of duty on their part. They also plead that any claim by the pursuer as liquidator for damages for the breach of duty averred in this action has been extinguished by the operation of the quinquennial prescription under section 6 of the Prescription and Limitation (Scotland) Act 1973. The action was appointed to a debate on the question of prescription alone. It is accepted by all parties that the vicarious obligation of the defenders to make reparation for any breach of duty on the part of the Receivers which might otherwise be established is subject to that five year prescription. The essential issue raised in regard to that negative prescription is the starting date from which time begins to run, on the assumption (disputed by the defenders) that the assets had indeed been sold at an undervalue.

  • In so far as bearing upon the single issue of prescription, there is little material dispute regarding the facts evident from the averments and admissions in the pleadings and the productions lodged in the case, and despite an earlier suggestion in the pursuer's note of proposals for further procedure that a proof before answer might be required on issues of prescription, Mr Cullen, for the pursuer, departed from that suggestion at the outset of his submissions.

    • The background to the transactions

  • The Bank's appointment of the Receivers occurred against a background of earlier events which are the subject of averment by the pursuer and which may be shortly summarised by saying that in December 1995 the Company were seeking capital for the expansion of its business and for that purpose approached the Bank, which appointed the second defenders to review the Company's business. The second defenders reported to the Bank with certain options, one of which was eventual insolvency, under which option "a pre-arranged sale to a Newco could take place as soon as possible following insolvency with Newco being structured as desired with funds being circulated back to the Bank .... this has the added benefit that the Bank is not seen to be 'controlling' the company whilst still retaining an element of control via its security package". (Summons, Art 4 of Condescendence in fine). There then follow averments to the effect that the second defenders approached third parties with a view to interesting them in managing or investing in the business of the Company; that representatives of the second defenders, including Mr Watters, had further discussions with the Bank; and that on 7 March 1996 the second defenders wrote to the Bank with further details regarding the reconstruction of the Company, Version 3 of those proposals referring to the financial consequences of insolvency being "used as a tool to effect the reconstruction, with a pre-arranged sale of the trade and assets of [the Company] to Newco, funded by [the first defenders] and the management team". It is further averred that on 13 March 1996 at a meeting of its Credit Control Committee the Bank approved in principle the "Version 3 route with the Bank subscribing £2M in preference shares redeemable at a premium with an option to convert to a minimum of 75% of the entire share capital in the event of disposal".

  • Thereafter, as already mentioned, on 2 April 1996 the Bank exercised its power to appoint the receivers. By that time a company incorporated under the name of Comlaw (401) Limited through the agency of the Bank's solicitors had changed its name, by resolution dated 12 March 1996, to "S & R Gravure Limited" and was reincorporated under that name on 19 March 1996, the same solicitors acting throughout.

  • Following their appointment the Receivers instructed certain valuations of plant and machinery and other assets owned by the Company. The scope and soundness of those valuations is in dispute. But, in any event, furnished with those valuations the Receivers then entered into the transaction or transactions around which the prescription debate revolves.

    • The transactions

  • On 10 May 1996 the company, acting through the Receivers, and the Receivers in their capacity as such, executed a "Sale and Purchase Agreement" (No.6/1 of process) otherwise referred to in the pleadings as the "hive down agreement". The other party to that contract was S & R Gravure Limited -the "Newco". The pursuer avers in Condescendence 12 of his summons that in terms of that agreement the business and all the assets of the Company were sold to S & R Gravure Limited.

  • Turning to the detail of that agreement, Clause 2.1 is in these terms:-

    • "Subject to the terms and conditions of this Agreement, the Seller shall sell and the Purchaser shall purchase with effect from the Completion Date whatever right, title and interest the Seller may have in and to the Assets and all references hereinafter to the Assets shall, save where the context otherwise requires, be references only to such right, title and interest".

    The "Completion Date" is defined in the interpretation clause (Cl. 1) as meaning "10 May 1996 or such other date as the parties may agree". The consideration payable by S & R Gravure Limited is treated in Clause 3.1 of the Sale and Purchase Agreement. For certain items a figure, sometimes a nominal figure, is stipulated. The consideration payable for the plant and equipment and for the stock are defined as being the amounts determined in accordance with Clauses 18 and 17 of the contract. Clause 18 provides that for the purposes of Clause 3.1 the part of the consideration to be allocated to the plant and equipment "shall be the aggregate value of the Plant and Equipment as determined after the Completion Date by a valuer to be nominated by the Receivers". Clause 17 provides essentially for a mutual stocktaking by the purchaser and seller and for reference to the binding decision of an expert in the event of dispute. The Sale and Purchase Agreement did not envisage immediate payment by direct transfer of funds on the completion date. Instead, Clause 3.2 stipulated as follows:-

    "The component elements of the Consideration (when ascertained as the case may be) and any other sums due by the Purchaser hereunder shall be entered on inter company loan account due by the Purchaser to the Seller to be payable by the Purchaser to the Seller on demand by the Seller acting through the Receivers. No interest will be payable in respect of the inter company loan until demand for repayment has been made ....".

    It is not suggested by either party that there is any term in the Sale and Purchase Agreement making the sale of the assets suspensive or resolute upon the occurring of other events. Nor is it averred that there was any express agreement that the completion date under the Sale and Purchase Agreement be other than 10 May 1996 or that valuations were sought or obtained after that date. On the date at which the Sale and Purchase Agreement was executed, S & R Gravure Limited was a subsidiary of the Company in the respect that the single issued share in S & R Gravure Limited was held by Mr Watters on behalf of the Receivers jointly. Hence, no doubt, the provision in Clause 3.2 that the consideration payable by the subsidiary be entered in the companies' books as an inter-company loan.

  • On 18 June 1996 the Receivers entered into a further contract (No.6/2 of process) whereby they, as owners of the single issued share in S & R Gravure Limited, sold that share to a Mr Lounsbach for the sum of £1 (exclusive of VAT). Subsequently, but on the same date, following a subscription agreement (No.7/5 of process) S & R Gravure Limited issued ordinary shares to the Bank and to Mr Lounsbach and other individuals and further issued 1,125,000 71/2% convertible redeemable preference shares of £1 each to AA Nominees (406) Limited, those preference shares being convertible at will into ordinary shares. The funding of £1,125,000 to enable AA Nominees (406) Limited to purchase those preference shares was provided by the Bank. Clause 4 of the subscription agreement contains an undertaking by S & R Gravure Limited to apply those subscription monies in and towards payment of the consideration due to the Company by S & R Gravure Limited pursuant to the terms of the Sale and Purchase Agreement.

    • The prescription dispute

  • The summons in this action was signetted on 13 June 2001 and was served on the defenders on 14 June 2001. As already indicated, the matter in dispute concerns the starting date for the running of the quinquennium. The competing dates lie shortly before and very shortly after the date five years prior to the date upon which these proceedings were commenced, namely 14 June 2001. The starting date for which the defenders contend is 10 May 1996 being the date of execution of the Sale and Purchase Agreement whereby the Receivers sold the assets of the Company to the Newco, S & R Gravure Limited. On the view (which for the purposes of the debate is to be assumed as correct) that by that contract the assets were sold at an undervalue, the defenders contend that the Company then suffered a loss coinciding with the alleged breach of duty on the part of the Receivers. For his part the pursuer - the liquidator - contends that the appropriate terminus for the running of time is 18 June 1996, being the date upon which the scheme to effect a reconstruction with a pre-arranged sale of the Company's assets to a Newco funded principally by the Bank achieved its final completion. The response pled by the pursuer respecting the prescription plea is summarised in these averments in the final article of condescendence in the summons:-

    • "Explained and averred that the scheme devised between the first and second defenders involved arrangements for the (1) receivership; (2) incorporation and hive down to S & R Gravure Limited ('Newco'); (3) allotment of shares in Newco. These were all steps in one composite transaction. There was a preplanned strategy which culminated in the allotments of shares on 18 June 1996. Completion of the scheme was not perfected until 18 June 1996. Until the transfer was effected on 18 June 1996, the Receivers controlled both the Purchaser and Seller in the hive down. The Receivers controlled the Assets. Until sums were injected into S & R Gravure Limited in terms of the subscription agreement, no consideration could be paid by the Purchaser for the Assets. Until 18 June 1996 and the transfer, the Receivers could have resolved that the scheme should not proceed further. The scheme was accordingly revocable at the behest of the Receivers until that date. Until 18 June 1996 and their execution of the subscription agreement, the first defenders could have determined that the scheme should proceed no further. Until 18 June 1996, the hive down could have been reversed without legal consequence or penalty. The Receivers could have held the hive down to be of no effect. They could have revalued the assets. They could have proceeded to negotiate with other prospective purchasers and to conclude agreements for disposal of the assets to other parties. In these circumstances, until 18 June 1996, the Company sustained no material loss".
  • It may be added that this article of condescendence contains, in fine, two sentences referring to section 11 of the Act and continuing to the effect that the obligations incumbent upon the first and second defenders were "continuing obligations". Counsel for the pursuer made no submission in support of that contention and departed from it, stating that, having considered the matter, he did not regard the present case as being a section 11(2) case at all. Accordingly, although attention did not focus on the particular statutory wording it was at least implicitly accepted by all parties that the provisions of the Prescription and Limitation (Scotland) Act 1973 pertinent to this dispute were those in section 11(1) of the Act which provides -

    • "... any obligation (whether arising from any enactment, or from any rule of law or from, or by reason of any breach of, a contract or promise) to make reparation for loss, injury or damage caused by an act, neglect or default shall be regarded for the purposes of section 6 of this Act as having become enforceable on the date when the loss, injury or damage occurred".

    Submissions

  • In opening the debate and moving that the second defenders' plea, directed to the prescription, be upheld, Mr Howlin, for the second defenders, observed that it was clear from the pursuer's pleadings that the liquidator's contention was that the Receivers sold the assets of the Company at an undervalue and that the contract whereby that sale at an undervalue was concluded was the Sale and Purchase Agreement of 10 May 1996, referred to in the pursuer's pleadings as "the hive down". In Article 12 of the summons the pursuer averred that in terms of that agreement "the business and all the assets of the Company were sold to S & R Gravure Limited". Article 13 narrated the consideration paid under that contract. Article 19 of the condescendence annexed to the summons, dealing with the Receivers' breach of duty, narrated inter alia that:

    • "In disposing of the assets of the Company in the hive-down [the Receivers] failed to obtain a valuation of all the assets of which they sought to dispose. In disposing of the assets of the Company in the hive down, they failed to obtain the value that they might be expected to realise. They failed to obtain full value for those assets".

    Article 20 of the condescendence went on to aver that:

    "As a result of the breaches of duty by the Receivers ... the Company has suffered loss. The assets of the Company have been alienated for a consideration that was less than their true value. The amount by which the consideration fell short of the values is reasonably estimated to be £2,287,984. The value of the Company in May 1996 is reasonably estimated to be in excess of £7,900,000, not taking into account the value of the tax losses".

    While, in response to the defenders' pleading prescription, the pursuer thereafter contended that the "hive down" contract of 10 May 1996 was but one step in a "composite transaction", none of the other steps was averred to give rise to any liability or to be in any way unlawful. The only act of the Receivers founded upon as giving rise to liability was the "hive down" of 10 May 1996. The fact that the consequences of the disposal of the Company's assets to S & R Gravure Limited on 10 May 1996 might have been reversed prior to 18 June 1996, when S & R Gravure ceased to be a subsidiary, by renegotiation or agreed cancellation of the hive down contract did not affect the fact that the hive down contract constituted the contract of sale averred by the liquidator to be the disposal at an undervalue.

  • Counsel further submitted that it was well recognised that an obligation to make reparation became enforceable on the concurrence of iniuria and damnum - Dunlop v McGowans 1980 S.C.(H.L.) 73, particularly per Lord Keith, 80-81. Damage was regarded as having occurred even if it were not readily quantifiable. Mr Howlin then referred to Forster v Outred & Co [1982] 1 W.L.R.86, particularly to the passage in the judgment of Stephenson, L.J. at 94C narrating the submission of counsel, Mr Stuart-Smith - with whom the court agreed (98D-E) - in which Mr Stuart-Smith is recorded as saying that actual damage means -

    • "any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases. They are all illustrations of a kind of loss which is meant by 'actual' damage.....".

    Accordingly, said counsel, the Company suffered actual damage by disposing of its assets at the averred undervalue on entering into the unconditional contract of 10 May 1996. The argument advanced by the liquidator in response to the plea of prescription came to be that the loss incurred by the Company's concluding the contract of 10 May 1996 was only a potential loss in the particular sense of the contract being reversible by reason of the Receivers' shareholding control of the purchaser. At best for the liquidator, the loss could only enter into the category of a "potential loss" that being a concept rejected by Lord Russell of Killowen in Dunlop v McGowans (78-79) as a concept which elided or postponed the concurrence of damnum and iniuria. That approach had been approved in Nykredit Mortgage Bank plc v Edward Erdman Group Limited [1997] 1 W.L.R.1627, 1630. The unreported decision of the Lord Ordinary (Clyde) in Fitzpatrick v Pendreich & Co (19 June 1986) was consistent with the view that the possibility of a loss' being reversed by a subsequent event did not mean that the date of occurrence of the loss was thereby suspended or postponed. Fergus v MacLennan 1991 S.L.T.321 was a further case in which reference had been made to "potential" loss. The case involved a claim against solicitors for failure to secure for the pursuer a title to heritable property bequeathed to her, the property being eventually lost to an adverse possessor by operation of positive prescription. At 324H the Lord Ordinary stated that while there was what might be regarded as potential loss, he was not satisfied that the pursuer incurred actual loss prior to the date when her right to acquire title was irretrievably lost. Counsel submitted that in so far as the Lord Ordinary might be taken as laying down a rule that any potential loss was insufficient to amount to damnum for the purposes of section 11(1), the Lord Ordinary was mistaken. However, in the event, and in light of the peculiar facts of the case, the Lord Ordinary allowed a proof before answer essentially reserving his opinion.

  • Counsel for the second defenders went on to submit that the pursuer's contention that the Company suffered no actual loss until 18 June 1996 but only a potential loss was simply a thin disguise of the existence of a loss on 10 May 1996 which might have been undone or reversed. The pursuer's contention was that by the contract of sale of 10 May 1996 the Company's assets were sold to the "Newco" (i.e. S & R Gravure Limited) but the assets were worth much more than the price stipulated. If the pursuer were correct in saying that S & R Gravure Limited acquired assets worth £2,000,000 more than they were obliged to pay, logic indicated that S & R Gravure Limited was worth £2,000,000 and, if it were correct that no loss was suffered by the Company until the possibility of undoing that transaction were excluded, the real breach of duty by the Receivers would not be the sale of the plant, equipment and other such assets of the Company but the sale of its subsidiary to Mr Lounsbach for £1. That however was not the case made by the liquidator in these proceedings.

  • In amplification of his analysis of the nature of the case made by the liquidator in his pleadings, and after having referred to the discussion of the nature of a Receiver's duty in realising the assets caught by the crystallisation of the floating charge under which he is appointed in Standard Chartered Bank v Walker [1982] 1 W.L.R.1410 and Clydesdale Bank plc v Spencers (unreported, Lord Macfadyen, 18 May 2001), counsel for the second defenders pointed to the averments in Article 14 of Condescendence by the liquidator. In those averments the liquidator complained of the absence of any attempt to sell the business prior to the hive down of 10 May 1996; the absence of any prior advertisement of the availability for purchase of the assets and the business; and the absence of any prior attempt to value the engravings owned by the Company. The alleged failures in duty to take reasonable care to obtain the best price thus, correctly, ante-dated the disposal by S & R Gravure Limited on 10 May 1996. However, the position now adopted by the liquidator in response to the plea to prescription was that there was some continuing duty or responsibility to take steps to obtain the best price for something which the Receivers had already sold. Anticipating possible reliance by the pursuer on Midland Bank Trust v Hett Stubbs & Kemp [1979] Ch.384 counsel observed that the case vouched the proposition that where a solicitor undertook to secure a right which required registration for its effectiveness, there was a continuing, concomitant obligation to ensure registration. However, in the present case, the concomitant continuing obligation which the liquidator appeared to envisage was that, having executed the contract of sale of 10 May 1996, there was a continuing obligation on the Receivers to procure its reversal or undoing. The pursuer's attempt to postpone the concurrence of iniuria and damnum to 18 June 1996 was therefore misconceived.

  • The solicitor-advocate for the first defenders, Mr Connal, adopted Mr Howlin's submission subject to the observation that in approaching the English decisions a degree of caution fell to be exercised given the different common law and statutory bases upon which they proceeded. By way of support for the proposition that the possible intervention of other factors might not postpone the starting date for a loss which had otherwise already been incurred, Mr Connal referred firstly to Beard v Beveridge Herd & Sandilands, W.S., 1990 S.L.T.609 in which loss resulting from solicitors' failure to include a rent review clause in a lease was not postponed by the possibility that, at the postulated rent review date, the tenants might yet be persuaded to agree to an increase in the rent. Likewise, J G Martin Plant Hire Ltd v Bannantyne Kirkwood France & Co 1996 S.C.105 demonstrated that once an act had caused damage, the fact that steps might be taken to reverse that loss or damage did not prevent the running of time for the purposes of prescription. Mr Connal also referred to Osborne & Hunter Ltd v Hardie Caldwell 1999 S.L.T.153, and in particular the passage in the Opinion of the Court at 156C-F. Additionally, for completeness, brief reference was made to the decisions in George Porteous (Arts) Limited v Dollar Rae Limited 1979 S.L.T.(Sh.Ct.) 51 and to Cole v Lonie 2001 S.C.610.

  • In his response to the submissions of counsel for the second defenders and the solicitor-advocate for the first defenders Mr Cullen advanced on behalf of the pursuer the contention that no loss had been suffered by the Company until 18 June 1996. It was necessary, said Mr Cullen, to look closely at the particular facts of each case and in the present case those facts extended to not just the Sale and Purchase Agreement of 10 May 1996 but to the agreements relating to the shareholdings in and financing of the purchaser under the Sale and Purchase Agreement, viz, S & R Gravure Limited. Clause 1.1 of the Sale and Purchase Agreement defined its completion date as 10 May 1996 or such other date as may be agreed and in effect the whole transaction was not completed until 18 June 1996 when the Receivers relinquished their control of S & R Gravure Limited and funding to pay for the purchase of the assets of the Company became available in consequence of the implement of the subscription agreement. Until 18 June 1996 the assets of the Company remained under the control of the Receivers through their ownership of the share in S & R Gravure Limited. There was no divestiture, and hence no loss, until the Receivers decided to implement the Sale and Purchase Agreement of 10 May 1996 once funding was available to S & R Gravure Limited. The asset transfer effected by the Sale and Purchase Agreement of 10 May 1996 was thus defeasible at the Receivers' instance until 18 June 1996. Had a better offer for the purchase of the assets been made to the Receivers they could have cancelled the transaction of 10 May 1996 without penalty and accepted that better offer. Put in other terms, until 18 June 1996 there was no sale at an undervalue because the Receivers had not irrevocably parted with control over the assets.

  • Turning to the authorities Mr Cullen observed that there were, broadly speaking, two approaches in this area. One approach fastened on the "transaction date" and its potential but possibly unrealised consequences. The other approach was to focus on what happened afterwards. Reference was made in general terms to the discussion of the topic and the relevant cases in Johnston on Prescription and Limitation, Chapter 4, para.4.33ff. The defenders had taken the extreme approach of fastening upon the transaction date of 10 May 1996 whereas, in counsel's submission, the correct approach was to look to see whether there was an actual loss at that date, given the Receivers' total control of the acquiring company. There was no true loss but only the potentiality of loss if the Receivers were to complete the whole transaction by ceding control of the subsidiary, which only occurred on 18 June 1996. It was wrong to equiparate potential loss with actual loss as Mr Howlin had submitted. The term "potential loss" was found in the speech of Lord Russell of Killowen in Dunlop v McGowan 78, but it was a narration or repetition of the employment of that term by counsel in argument. In rejecting the submission and the terminology Lord Russell was not to be taken as saying that potential loss amounted to actual damage. Counsel for the pursuer then turned to the decision of the High Court of Australia in Wardley Australia Limited and another v The State of Western Australia (1992) 175 C.L.R.514 F.C.92/039; (1992) 109 A.L.R.247, in which the High Court of Australia had conducted a critical review of the English authorities, including the case of Forster v Outred upon which reliance had been placed by counsel for the second defenders. The essential issue in Wardley was whether a party induced by misrepresentation to grant a guarantee of a third party's debts suffered loss, by reason of the misrepresentation, at the point in time at which he executed the guarantee or only later when, the third party having become insolvent, he was called upon to honour the guarantee. Counsel submitted that the High Court of Australia had rejected the "transaction approach" holding that such a contingent loss was not suffered until the contingency actually occurred. Four judges (Mason, C.J., Dawson, Gaudron and McHugh J.J.) in their joint opinion thought that Forster and certain other English authorities were explicable not as cases in which a contingent liability or loss was held to be an actual loss but as cases in which the transaction had produced immediate loss. At para.26 of their joint opinion those judges continued -

    • "If, contrary to the view which we have just expressed, the English decisions properly understood support the proposition that where, as a result of the defendant's negligent misrepresentation, the plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffers loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred. A deferred liability may stand in a different position but there is no occasion here to discuss that matter".

    Most of the other members of the High Court of Australia delivering individual judgments were in general agreement with that approach. However, Toohey J., at paras.34-36 of his Opinion considered that Forster v Outred was wrongly decided,

    the High Court's decision in Wardley had been noted, without disapproval, by the House of Lords in Nykredit.

  • In the passage from the submission of Mr Stuart Smith, which had been approved first in Forster v Outred and then in Nykredit reference had been made to a contingency "over which the plaintiff had no control". But in the present case the Receivers had indeed control, through their ownership of the single issued share in S & R Gravure Limited, of the very contingency upon which actual loss might be sustained, namely the Receivers' decision to implement the hive down. Until the hive down was put into final effect no actual loss was suffered by the Company.

  • The decision in UBAF Limited v European American Banking Corporation [1984] 1 Q.B.713 was also consistent with the exclusion of a contingent loss as a starting point for the running of time. The case concerned an alleged misrepresentation of the financial standing of a potential commercial lender which induced the plaintiff to lend. It could not be said that the conclusion of the contract of loan in itself involved the occurrence of loss. Whether loss was sustained at that point was a matter for evidence. As regards Forster v Outred, counsel for the pursuer referred to the analysis and criticism of the decision set out by the High Court of Australia in Wardley. It was important also to bear in mind the view of Dunn L.J. at 100A-C in that case that on granting the ill-advised mortgage over an unencumbered property the recipient of that ill-advice effected an immediate reduction in the value of her property. Given its particular averred facts the Opinion of the Court expressed in Osborne & Hunter was consistent with the view that a contingent or potential loss was insufficient for the concurrence of damnum and iniuria. Counsel further submitted that Fitzpatrick v Pendreich did not assist the defenders since it was plain that if a solicitor failed in his instruction to provide a legally binding contract, the client was in a poorer position if dependent solely on the prospect of an amicable agreement. In so far as the Lord Ordinary, in allowing a proof before answer, in Fergus v McLennan expressed views that while satisfied of potential loss, prior to the relevant date, the pursuer had not incurred actual loss his approach was entirely correct. The defenders' pleas to prescription should accordingly be repelled.

    • Discussion

  • On considering the authorities to which I was referred it is evident - as I provisionally observed during the debate - that a number of them have in common the feature that the wrong of which complaint was made consisted in the making of a misrepresentation or the giving of negligent advice, or a negligent omission to give advice, in each case leading to the recipient concluding a transaction with a third party. The question then arising is whether loss is suffered by the fact of entering into that transaction or whether it is necessary to wait to see whether, in future, the transaction itself actually produces a loss or a profit. Thus Wardley, upon which counsel for the liquidator placed much emphasis, concerned misrepresentations leading to the recipient of the misrepresentations granting a guarantee of a third party's obligations which the recipient might, or might not, be called upon to honour. Forster v Outred is a somewhat similar case in that the plaintiff complained of allegedly defective advice by her solicitors, the defendants, which led her to grant security over her property in respect of her son's debts to the grantee of the security. Osborne & Hunter Limited v Hardie Campbell involved allegedly negligent advice by a firm of chartered accountants which, it was said, led to the pursuers lending money to and guaranteeing certain obligations of a third party. Nykredit involved defective advice by surveyors respecting the value of immovable property tendered as security for a loan of money invited from and granted by the plaintiff bank. In these, and similar, cases it is not difficult to appreciate the argument that, in the absence of insolvency of the third party, loss will not be suffered since the third party will be able to meet his obligations and the recipient of the negligent advice or representation will not be called upon to make good his cautionary or secondary responsibilities, or, in the case of direct lending as in Osborne & Hunter, will obtain repayment of the loan. On the other hand the actual circumstances of the third party's financial standing at the time of the transaction may be so parlous that the right to claim repayment of the advance and the interest due upon it would immediately and plainly be judged less valuable than the sum advanced. Hence the need in certain instances, exemplified by UBAF, for close examination of the actual facts.

  • However, I do not regard the present litigation as being truly within that category of case. The action is not directed against an advisor, or the maker of a representation, the advice or representation inducing the conclusion of a transaction with a third party which might, or might not, prove ultimately to be loss making depending upon whether the third party flourish financially or sink into insolvency. What is claimed in the present case is that by virtue of the Sale and Purchase Agreement of 10 May 1996 the Receivers, as agents for the Company, sold its assets at an undervalue and in breach of their duties to take proper steps to obtain the best price reasonably obtainable. It is not disputed that under that contract the purchaser, S & R Gravure Limited, acquired an unconditional right to acquire the assets of the Company. Since the Company came under a corresponding unconditional obligation to sell the assets by virtue of that contract, it matters not when, technically, property in the goods and assets would pass in consequence of that contract. Indeed, Mr Cullen did not suggest that anything turned upon the precise moment when property in the goods would pass. Taking pro veritate the pursuer's contention that the contract of 10 May 1996 provided for the sale of the assets of the Company at an undervalue it is clear, other things being equal, that the Company suffered loss immediately on conclusion of that contract and I did not understand counsel for the liquidator to question that, had the sale been to a wholly independent purchaser at the outset, the claim would have prescribed.

  • As counsel for the defenders pointed out in the course of his argument, in its essence the contention for the pursuer in response to the plea of prescription is not that the contract of 10 May 1996 did not produce loss in the shape of a sale at undervalue but that, by reason of the Receivers' control of the purchaser, the transaction giving rise to the loss might have been reversed or undone by causing the purchaser to abandon its rights prior to the time at which the Receivers ceded shareholder control of the purchasing company to Mr Lounsbach. As I understand the argument, it is in that sense that the pursuer contends that the loss arising from the contract of 10 May 1996 was conditional, potential or uncertain. However, it appears to me that such conditional or potential nature of the loss should more properly be analysed as raising the question whether, a wrongful act having produced immediate loss in the shape of a contract directly disadvantageous to the party concerned, the effluxion of time for the purposes of prescription is suspended by the existence of the possibility of the wrongful act being reversed or undone by the person who committed it.

  • Arguments touching on that issue have been advanced in two of the cases cited in the debate. In Fitzpatrick v Kenneth Pendreich & Co the pursuer sought damages from his former solicitors in respect of their failure to advise him to have an informal family agreement concerning his deceased mother's estate constituted in a legally enforceable form. The contention was that the solicitors were under a continuing obligation to secure a formal, enforceable agreement. Once the opportunity to perform that duty was lost by reason of the absence of the father's consent and a formal enforceable agreement thus became unobtainable, it was held irrelevant to the question of prescription that until a later date other family members might have been persuadable to give practical effect to the outcome, for the pursuer, of the informal agreement. In Beard v Beveridge Herd & Sandilands W.S. the pursuers sought damages respecting their solicitor's failure to include in a contract of lease an effective clause providing for a rent review. An argument that the date upon which loss occurred was postponed until the date of rent review, because only then did it become apparent whether the tenants would not agree voluntarily to an increased rent, was rejected. I would also add that in J G Martin Plant Hire Limited the Second Division held that the starting point for the running of prescription was the date upon which the defending solicitors raised proceedings against the wrong company. Loss was regarded as having been sustained by the client on that date notwithstanding the ability of the solicitors to have remedied matters at a later date. However, the extent to which it might be said that loss was not sustained at the date of raising the action against the wrong defender, and lodging arrestments against the wrong defender, because the matter was capable of remedy, was not apparently the subject of extensive discussion and the assistance to be derived from J G Martin Plant Hire Ltd in the present case may thus be limited.

  • The cases of Fitzpatrick and Beard appear to me to exemplify that where a transaction is concluded (or its conclusion is omitted) in circumstances involving negligence or iniuria and productive of immediate loss the possibility of voluntary steps being taken by a third party to remedy, cancel or mitigate the amount of the loss will not on that account delay the starting point for the running of time for the purposes of prescription. I would add that, seen from one perspective, the decision of the court in Forster v Outred is in accordance with that view. As was pointed out by the majority of the judges in the High Court of Australia in Wardley, the court in Forster v Outred considered that by mortgaging her property in security of her son's debts the plaintiff suffered immediate loss on the straightforward view that an unencumbered property was inherently more valuable than one which was encumbered by a security right. The fact that the diminution in value might be removed if the son were to pay off the creditor holding the security right did not therefore suspend the running of time.

  • In the present case, of course, the liquidator's contention would seek to distinguish the present case in the respect that the third party who might remedy or undo matters was not a truly independent party but a wholly dependent subsidiary company whose shareholding was de facto under the control of the Receivers. It was therefore de facto within the Receivers' power to control whether the deleterious bargain in fact proceeded and therefore, so the argument runs, there was no loss until they so decided. Counsel at one point put the matter in metaphorical terms, namely that having committed the Company to the bargain in principle the Receivers nonetheless held control over the switch which would activate the system which they had set up. There was accordingly no loss until the Receivers elected to operate the switch.

  • While the argument has some initial attraction and was expertly presented by Mr Cullen I am ultimately not persuaded of its soundness. The pursuer's contention is underlain by a certain disregard of the principle of separate corporate personality. From the standpoint of the Company - whose claim the liquidator pursues - its loss is suffered by the (for present purposes assumed) deleterious consequences of the contract of 10 May 1996 to which it was committed by virtue of the Receivers' actions. As the seller under the contract, the Company as such had no control over the intentions of the purchaser. The contract for the sale of the assets of the Company was in no way dependent on a change in the shareholder control. Indeed, the subsequent changes in shareholdings in the purchaser are entirely explicable on the basis that the purchaser had previously acquired unconditional rights to the assets of the Company. Separate corporate personality has long been recognised for its ultimate public utility in fostering commerce and while, at a particular level, its existence is sometimes seen as advantageous and at other times seen as irksome and inconvenient, all depending on the circumstances and the standpoint of the individuals involved, the Court must be attentive to and draw and apply the consequences flowing from separate corporate personality irrespective whether those consequences may operate advantageously or irksomely to the parties involved. It was, I think understandably, not suggested in the present case that there were any peculiar circumstances justifying what is sometimes termed the "lifting of the corporate veil". The fact that the sale by the Company to S & R Gravure Limited was a sale to a subsidiary does not therefore alter the fact that it was by that sale that the Company suffered loss in the form of a sale at an alleged undervalue, that gain accruing to the subsidiary.

  • I am accordingly unable to find in the particular relationship of parent company and subsidiary company any good ground for holding that a loss sustained by the one in favour of the other should be regarded as not having occurred simply because there existed the possibility of an exercise of shareholder control leading to the reversal of the initial transaction. (I was not addressed upon the possible wider consequences, for example in revenue law, were such a view to be adopted). That being so, one reverts to the issue whether, loss having been sustained, the point in time for the running of the prescriptive period may be suspended for so long as there is the possibility of the wrongdoer's procuring reversal of the loss. In my opinion the answer to that question must be in the negative. Obviously in the present case any power enjoyed by the Receivers to reverse the loss inflicted on the Company by their concluding the contract of 10 May 1996 was never exercised. It is in principle difficult to see why the concurrence of damnum and iniuria on 10 May 1996 should be suspended by the possibility of the exercise of a power to cause others to withdraw from their contractual entitlement. Further, it may be asked why the Receivers' powers to reverse the loss suffered by the Company by causing the subsidiary to renounce its advantages under the Sale and Purchase Agreement of 10 May 1996 - which might in turn raise questions as to the proper performance of the Receivers' duties as directors of the purchaser - should be seen as the end of their possibility of reversing the loss which they had inflicted on the Company. Put starkly, taking the possibility of the wrongdoer's remedying or undoing a loss already inflicted as a test for the starting point for the effluxion of time, in a case such as this, might be seen as leading ultimately to the logical absurdity that the starting point is never reached, since it is always open to the wrongdoer to remedy the loss by paying compensation.

  • For these reasons I consider that the defenders are correct in their contention that damnum and iniuria coincided on the execution of the Sale and Purchase Agreement of 10 May 1996 and that the quinquennial prescription must run from that date. I must therefore uphold the defenders' plea to the effect that the obligation founded upon has prescribed and grant absolvitor.

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