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Scottish Court of Session Decisions |
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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> McGruther v. Blin [2003] ScotCS 329 (23 December 2003) URL: http://www.bailii.org/scot/cases/ScotCS/2003/329.html Cite as: 2004 SCLR 328, [2003] ScotCS 329 |
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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord Hamilton Lord McCluskey Lord Weir
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P310/01 OPINION OF THE COURT delivered by LORD HAMILTON in RECLAIMING MOTION by Second Respondents in Note by DUNCAN DONALD McGRUTHER, Liquidator of Apollo Engineering Limited (in liquidation) Noter; and
(FIRST) FRANK BLIN, former Liquidator of Apollo Engineering Limited (in liquidation) First Respondent; and (SECOND) JAMES SCOTT LIMITED Second Respondents;
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Act: Sandison; Boyds (Noter and Respondent)
Alt: Sellar Q.C.; MacRoberts (Second Respondents and Reclaimers)
23 December 2003
[2] By interlocutor of this court dated 25 September 1991 the Company was ordered to be wound up. The first respondent ("Mr Blin") was appointed as provisional liquidator of the Company. Mr Blin was subsequently appointed interim liquidator; he was thereafter chosen as liquidator of the Company. An action was raised by Scott against Mr Blin as liquidator. Mr Blin counter-claimed. The action and the counter-claim were then sisted for arbitration. In 1996 a joint deed was entered into between Scott on the one hand and the Company (in liquidation) and Mr Blin as its liquidator on the other by which the disputes between the parties arising out of the sub-contract were referred to the decision as arbiter of a Mr Ford, a professional arbiter. In terms of that reference it was agreed that the arbitration should be conducted in accordance with certain articles of the Scottish Arbitration Rules (1990 Edition) promulgated by the Chartered Institute of Arbitrators (Arbiters), Scottish Branch. These articles included Article 7 which empowered the arbiter to give certain directions and to make certain orders in relation to deposits and security. In the pleadings in that arbitration, which is currently sisted, the Company and its liquidator stated against Scott claims exceeding in total £2.66 million; Scott counter-claimed for sums which in total exceeded £1 million. [3] Mr Blin held office as liquidator until 8 May 1998 when, by resolution of a meeting of the creditors of the Company, he was removed. The background to that removal was a difference of view between the creditors of the Company and Mr Blin as to the acceptability of an offer and in settlement which had been made by Scott. Prior to his removal Mr Blin had progressed the liquidation by ingathering and administering the Company's realisable assets. He retains in his own hands a sum of about £39,000 with certain interest which he holds to meet any liability in respect of the expenses of the arbitration that he is ultimately found to have. [4] After the removal of Mr Blin there was for a time no liquidator in office. In July 1999 a Mr Hunter was appointed as liquidator of the Company but, when it proved impossible to reach agreement on an indemnity to protect him against liability for the costs and expenses of the arbitration, he resigned office on 8 January 2001. On the same day the Noter, a qualified insolvency practitioner, was appointed as liquidator. Following his appointment the Noter made a proposal under Part I of the Insolvency Act 1986 that the Company and its creditors enter into a voluntary arrangement. The basis of the proposal was the Noter's belief that a voluntary arrangement would be to the benefit of the unsecured creditors of the Company because (1) in light of professional advice available to him the current offer from Scott seemed to be unreasonably low, (2) the costs of the arbitration were to be met by a third party but the proceeds of a successful outcome would, subject to certain deductions, be paid to the Company and (3) the Company did not have any assets to fund the continued pursuit of the arbitration. The third party referred to was Adquest Holdings Limited ("Adquest") which was both a creditor of the Company and a member of it. Adquest had agreed with the Noter, subject to certain conditions contained in a Loan Agreement, to provide certain funds to the Company to allow the Noter, as Supervisor of the arrangement, to pay a dividend to the preferential creditors of 100p in the £1, to apply for a sist in the liquidation and to allow the Company to pursue the arbitration. At meetings of creditors and of members of the Company held on 31 January 2001 the proposed voluntary arrangement ("the CVA") was approved. Notwithstanding its counter-claim, Scott had at no stage lodged a claim in the liquidation. It was accordingly not entitled to receive and did not receive notice of the creditors' meeting. It was accordingly not among the consenting creditors. [5] The CVA included the following terms:-"2.5 In the event of the application to sist the Liquidation being granted by the Court then the following provisions shall apply:
2.5.1. Adquest shall provide the Company with sufficient funds to pursue the Arbitration to a conclusion in terms of the Loan Agreement.
2.5.2. Upon the successful outcome of the Arbitration and after all the costs attendant thereto have been paid, the Supervisor shall next apply the funds in his hands to make a payment to the ordinary creditors of a dividend of up to 100p in the £1 in respect of their adjudicated claims.
...
2.7 In the event that the Court refuses the application of the Supervisor to sist the Liquidation, then the following provisions shall apply:
2.7.1. Adquest shall provide the Liquidator with sufficient indemnity against the costs of the Arbitration as he shall reasonably require to pursue the Arbitration to a conclusion.
2.7.2. Upon the successful outcome of the Arbitration, and after all the costs attendant thereto have been paid, the Supervisor shall next apply the funds in his hands to make a payment to the ordinary creditors of a dividend of up to 100p in the pound in respect of their adjudicated claims."
"The Lord Ordinary having resumed consideration of the Note and Answers and having received a written undertaking from Apollo Engineering Limited not to trade during the period of sist, sists the Liquidation from this date until the final decree in the arbitration."
Against that interlocutor Scott has reclaimed.
The submissions of parties
[7] Mr Sellar for Scott submitted that the Lord Ordinary's interlocutor should be recalled and the application for a sist refused. He emphasised that Scott's objection was not to a sist as such but to its being granted without there being afforded to Scott protection reasonably equivalent to that which, prior to the interlocutor, it had enjoyed. What was now section 147 of the 1986 Act had had its origins in section 89 of the Companies Act 1862; with the exception of the introduction in 1985 of the words "or sisted", the statutory language, frequently re-enacted, had been the same. In this context the expression "sist" had the same meaning as the English expression "stay", namely, "putting an effective end to". Mr Sellar advanced two principal submissions which remain live for consideration - (1) that the Lord Ordinary had not properly exercised her discretion in respect that she had failed to apply the settled judicial approach that a sist (permanent or temporary) of a liquidation should not be granted unless the parties interested in it were given equivalent protection to what they had while the Company was in liquidation and (2) that the Lord Ordinary had made and proceeded on findings for which there was no reasonable basis. (A further principal submission, concerned with the interpretation of section 5(3)(a) of the 1986 Act, ceased in the course of the discussion to be a live issue.) In elaboration of submission (1), Mr Sellar submitted that the statutory discretion under section 147 was not unfettered. It required to be exercised on well established judicial principles (Re Lowston [1991] BCLC 570, per Harman J. at p. 572h-i; In re Calgary & Edmonton Land Co. Ltd [1975] 1 W.L.R. 355, per Megarry J. at p. 358H; In re Telescriptor Syndicate Ltd [1903] 2 Ch 174). Reference was also made to Buckley on the Companies Acts (14th Ed.) Vol. I, p. 618, McPherson's Law of Company Liquidation (1st Ed. in England and Wales) paras. 17.07 and 17.10, Palmer's Company Precedents (17th Ed.) Part 2 at pp. 96-7, Boyle & Marshall - Practice and Procedure of the Companies Court paras. 9.172 to 9.175 and Lightman & Moss - The Law of Receivers and Administrators paras. 2.058 to 2.061. An application for a sist or stay required to meet a heavy onus (In re Calgary & Edmonton Land Co. at p. 358H and 359A; Re Lowston at p. 572; McPherson op. cit. at para. 17.07; Boyle & Marshall op. cit. at para. 9.172). The discretion required to be exercised so as to give to those members and creditors of the Company who had not consented to the sist, and to the liquidator, equivalent protection to that which the liquidation gave them. Protection for the liquidator included fully safeguarding him in relation to his expenses; that protection also extended to third parties who had rights or claims against the liquidator (In re Calgary & Edmonton Land Co at pp. 360 and 363; Boyle & Marshall op. cit. at para. 9.173; Pennington's Corporate Insolvency Law (2nd Ed.) at p. 77). The protection should also apply to a former liquidator and liabilities which he had incurred and which were "expenses in the liquidation". A liquidation should not be sisted so as to allow an insolvent company to incur liabilities which it would not have the assets to meet. This was especially so where a voluntary arrangement had been entered into and the practical effect of a sist would be to force a third party into a contractual relationship with a company which had no assets. Reference was made to Re NT Gallagher & Son Ltd [2002] 2 BCLC 133, per Peter Gibson L.J. at para. [49]. Reference was also made to the Australian cases Krextile Holdings Pty Ltd v Widdows [1974] V.R. 689, per Gillard J. at pp. 693-4 and Austral Brick Co. Pty Ltd v Falgat Constructions Pty Ltd [1990] ACSR 766, per Young J. at pp. 768-9 and to the Malaysian case B.S.N. Commercial Bank (M) Bhd v River View Properties Sdn Bhd [1996] 1 M.L.J. 872, per Abdul Malik Ishak J. at p. 880. The Lord Ordinary had erred in not applying these principles. She had wrongly approached the exercise of her discretion as a balancing exercise, when what was required was protection for Scott's interest. Although it was not maintained that Scott was a creditor in the liquidation, Scott had an interest in being protected against its being unable to recover any award of expenses made in its favour in the arbitration. Such expenses were potentially very substantial. Mr Blin had at one stage estimated them at £150,000-£180,000. The Company had no assets to satisfy any such award. The CSA made no provision for meeting such a liability. The practical effect of a sist would be to force Scott to have (in the arbitration) a continuing legal relationship with the Company without the protection it would have had if the Company had remained in liquidation (where the liquidator would be personally liable for any award of expenses in Scott's favour). No reasonable and responsible liquidator would pursue an arbitration unless he was in funds to meet an award of expenses made against the Company. The power of the arbiter to order the Company to find security was discretionary. It could not be assumed that he would make such an order; there had been no indication that the Company would not oppose the making of such an order. A sist also prejudiced Scott's position as against Mr Blin who had, in a letter now purportedly withdrawn, accepted personal liability for the expenses of the arbitration; if the liquidation was brought to an end, Mr Blin's contention that he had no liability for any expenses incurred thereafter would be strengthened. The Lord Ordinary had also inappropriately addressed the protection of Mr Blin personally. [8] Even if, contrary to the first principal submission, the Lord Ordinary had been entitled to adopt a "balancing" approach, she had, Mr Sellar submitted, erred in making, and taking into account, findings which were not justified on the material before her. There was no basis for her conclusion that the granting of the sist was the only way in which further procedure in the arbitration could be assured. There was no reason why the Noter and the third party funder should not agree in terms of paragraph 2.7.1. of the CVA on sufficient indemnity for the Noter against the costs of the arbitration. There was also no basis for the Lord Ordinary's observation at paragraph [26] that it "would not be at all surprising if a party in Scott's position viewed inaction as being the ideal strategy". The continuation of a dormant arbitration was unsatisfactory to Scott. The Lord Ordinary had also misconstrued Scott's attitude to the undertaking given by Mr Blin. The reclaiming motion should be allowed and the sist refused or alternatively a remit made to the Lord Ordinary for determination of what sum would amount to reasonable equivalent protection for Scott. Mr Sellar also referred to The Liquidators of the Insurances Trust and Agency Ltd v Foulis (1893) 1 S.L.T. 592 and to certain recent unopposed and unreported decisions in the Outer House under section 147 (Brian McGregor & Son Ltd (2000); S. A. S. Fazal & Sons Ltd (1997)). [9] Mr Sandison for the Noter submitted that the power vested in the court under section 147 was, as conceded by Mr Sellar, discretionary. In these circumstances, unless the Lord Ordinary's conclusion was beyond the broad range open to her, that conclusion should not be disturbed on appeal. In the context of a statutory discretion, the court should not interfere unless (a) the exercise of the discretion had not complied with the conditions provided by the statute for the exercise of the discretionary power or (b) the power had not been exercised judicially (Ross & Coulter v Inland Revenue 1948 S.C. (H.L.) 1, per Lord Thankerton at p. 16). There was no suggestion here that (a) had occurred; interference would be justified only if the Lord Ordinary had acted capriciously or her decision could not be explained on any other basis. Lord Thankerton had deprecated the giving of general directions or the laying down of general rules for the exercise of a statutory power. While the decisions of other judges exercising at first instance the power under section 147 ( or equivalent statutory provisions) might be helpful guides, they were not masters. Reference was made to Galloway v Galloway [1956] A.C. 299, per Lord Radcliffe at pp. 319-20. The discretion conferred on the Lord Ordinary was "unfettered" and fell to be exercised on an unrestricted basis in relation to the particular facts of the individual case (Forsyth v A. F. Stoddart & Co. Ltd 1985 S.L.T. 51, per Lord Justice-Clerk Wheatley at p. 53 and Lord Hunter at p. 55). It was accepted that it was for the Noter, as applicant, to satisfy the Lord Ordinary that she should exercise her power in favour of granting the sist. But the exercise of the power did involve a balancing of all interests; any other approach would be illegitimate. The Lord Ordinary had been correct to say that there was "no very heavy onus". She simply required to be satisfied that she should grant the sist; if she was so satisfied, that implicitly meant that any doubts the Court had entertained had been resolved. There were no hard-and-fast rules (McPherson - op. cit. para. 17.07). There was no basis in law for a requirement of "equivalent protection". The text in Lightman & Moss - op. cit. at para. 2-060 (insofar as it suggested that the jurisdiction to stay was "to be exercised with the utmost caution and cogent reasons need to be demonstrated") went beyond the authority cited for it; in any event, the authors were speaking of a permanent stay (or rescission) of the liquidation proceedings, not a temporary stay (or sist), as in the present case. The cases cited by Mr Sellar had all been in the context of permanent stays. Judicial glosses (and a fortiori textbook glosses) were incapable of narrowing the statutory discretion. The Lord Ordinary had considered Scott's interest and, acting judicially, had concluded that it was reasonably protected by the power vested in the arbiter to order security for costs. The possibility of Scott's obtaining an award of expenses in the arbitration did not render it a "contingent creditor" in the liquidation. Reference was made to Re Wisepark Ltd [1994] BCC 221. It was, at best, a spes which gave it an interest and thus a title to object to the application for a sist. The only person in a position to make a judgment on the relative strengths and weaknesses of the parties to the arbitration (a factor which might bear on whether an order for security for costs should be made) was the arbiter. In terms of the joint arbitration deed, and incorporated rules, the arbiter had power to secure his own fees and costs and to require one party to secure the costs of another; he had even power to require a party to give security for all or part of any amount in dispute in the arbitration. The creditors and members of the Company had, by acceding to the CVA, indicated their support for an application to sist. The Noter, as liquidator, had presented the application. Mr Blin, although certain representations on his behalf had been made to the Lord Ordinary, had not appeared in this court to support the reclaimer. It was difficult to see how anything that this court could do would adversely affect him. Only Scott opposed the application and its interest had been properly considered by the Lord Ordinary. Scott was not being "forced" into any contractual position. It had, prior to the liquidation of the Company, entered into a sub-contract in which the parties had contractually bound themselves to refer any dispute to arbitration. The joint deed of reference had been executory of that prior obligation. Scott had, whether a sist was granted or not, the same right as any party to a litigation or arbitration facing the fact that its opponent was insolvent. It had the right to apply to the tribunal to make a decision in all the circumstances as to whether an order for security for expenses should be made and, if so, in what amount. Various factors would bear on the exercise of that discretion. If an order for security in some amount was made and it was found, the arbitration would proceed; if it was not found, Scott would be entitled to obtain from the arbiter decree of absolvitor. If for any reason the arbitration did not go ahead, Scott could, after a reasonable time, return to the court and ask that the sist of the liquidation proceedings be recalled. It was accepted that Scott enjoyed certain practical advantages if the liquidation proceedings were not sisted. The liquidator would require to accept personal liability to Scott for any award of expenses in its favour in the arbitration (Dyer v Craiglaw Developments Ltd 1999 S.L.T. 1228). Scott also had the advantage that, by making a modest offer in settlement which included the liquidator's expenses, it could create and exploit a tension between the liquidator and the members of the Company. But the fact that Scott had an interest to retain these practical advantages did not give it a right to insist that those advantages be maintained. The reasoning behind the CVA was that the alternative mechanism (of seeking agreement with a liquidator on a sufficient indemnity) had given rise in the past to practical difficulties. Avoidance of these difficulties gave the best practical opportunity of making progress in the arbitration. [10] As regards Mr Sellar's second principal submission, what was of real importance, Mr Sandison submitted, was to identify the rationale of the Lord Ordinary's decision. Examination of her Opinion disclosed that she had reached and expressed entirely valid conclusions at each stage of her reasoning. Her decision was not only one within the range of decisions open to her; it was in fact correct. The Lord Ordinary's "finding" (that there was a real risk that, if the sist were not granted, the arbitration would not make progress) was, insofar as it was a crucial part of her decision, one she was entitled, having regard to the history, to make. Her conclusion that the granting of a sist was the only way in which further procedure could be assured was well founded. Her observation about Scott's attitude towards inaction was not a criticism of Scott. Her observation about the relationship between Scott and Mr Blin played no part in her decision. In all the circumstances the reclaiming motion should be refused. [11] Mr Sellar in response submitted that it was perfectly proper for courts to lay down principles upon the basis of which statutory discretions should be exercised. Reference was made to Scottish Power Generation Ltd v British Energy Generation (U.K.) Ltd 2002 SC 517 and Stevenson v Midlothian District Council 1983 S.C. (H.L.) 50. While there might be statutory context in which the laying down of such principles was inappropriate, section 147 was not such a case. Scott had a right, albeit a contingent right, which should not be taken away. The Company's going into liquidation made a fundamental change to its status. Scott's rights should be seen in the context of it having entered into a joint deed of reference with a company in that changed state.Discussion and decision
[12] In granting the application by the Noter for a sist of the liquidation proceedings, the Lord Ordinary imposed a condition that the Company should not trade during the period of sist. Mr Sandison accepted before us that a power to sist on terms and conditions was open to the Lord Ordinary only under section 147 of the Insolvency Act 1986, and not under section 5(3). He accordingly sought to support her decision solely on the basis of the exercise of the former power. In these circumstances it became unnecessary to address section 5(3).
