EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Wheatley Lord Carloway Lord Hardie	[2009] CSIH 16 A902/08 OPINION OF THE COURT delivered by LORD CARLOWAY in the cause JOHN DUFFY McCORMACK, . Pursuer and Reclaimer against HAMILTON ACADEMICAL FOOTBALL CLUB LIMITED Defenders and Respondents _______

Act: Brodie; Wilson Terris & Co, S.S.C.

Alt: Upton; Drummond Miller

4 March 2009

Statutory Background

[1] Part 6 of the Bankruptcy and Diligence etc. (Scotland) Act 2007 (asp 3) introduced, into the Debtors (Scotland) Act 1987 (c 18), an elaborate statutory regime regulating the grant of warrants for diligence on the dependence. This followed concerns about the compliance of the common law, which authorised diligence on the basis of the royal signet, with Article 1 of the First Protocol to the European Convention on Human Rights and Fundamental Freedoms (Karl Construction v Palisade Properties 2002 SC 270). In terms of the regime, a pursuer may apply for, and be granted, a warrant in advance of service of the summons. However, at the same time as the grant, the court is required to fix a hearing under section 15K of the Act. That section provides, inter alia, that:

"(2) The debtor ... may apply to the court for an order -

(a) recalling the warrant;

(b) restricting the warrant;

(c) if an arrestment or inhibition has been executed in pursuance of the warrant -

(i) recalling; or

(ii) restricting

that arrestment or inhibition;

(d) determining any question relating to the validity, effect or operation of the warrant; or

(e) ancillary to any order mentioned in paragraphs (a) to (d) above.

...

(5) Where the court is satisfied that the warrant is invalid it -

(a) shall make an order -

(i) recalling the warrant; and

(ii) if an arrestment or inhibition has been executed in pursuance of the warrant, recalling that arrestment or inhibition; and

(b) may make an order ancillary to any order mentioned in paragraph (a) above.

...

(7) Subject to subsection (8) below, where the court is satisfied that the warrant is valid but that -

...

(b) it is reasonable in all the circumstances ... to do so,

the court may make any order such as is mentioned in subsection (2) above.

(8) If no longer satisfied as to the matters mentioned in subsection (9) below, the court -

(a) shall make an order such as is mentioned in subsection 5(a) above; and

(b may make an order such as is mentioned in subsection 5(b) above.

(9) The matters referred to in subsection (8) above are -

(a) that the creditor has a prima facie case on the merits of the action;

(b) that there is a real and substantial risk enforcement of any decree in the action in favour of the creditor would be defeated or prejudiced by reason of -

(i) the debtor being insolvent or verging on insolvency; or

(ii) the likelihood of the debtor removing, disposing of, burdening, concealing or otherwise dealing with all or some of the debtor's assets; and

(c) that it is reasonable in all the circumstances ... for the warrant, or, as the case may be, any arrestment or inhibition executed in pursuance of it to continue to have effect.

(10) The onus shall be on the creditor to satisfy the court that no order under subsection (5), ... (7) or (8) should be made".

Accordingly, at the hearing, if the court is not satisfied on the matters in sub-section (9), it must recall the warrant and any diligence executed in pursuance of it. But, in any event and in terms of sub-section (7), it may recall or restrict the warrant or any executed diligence, if it is reasonable to do so.

Pleadings and Productions

[2] The defenders concede that the pursuer has averred a prima facie case against them on the merits. The pursuer sues the defenders for breach of his contract of employment with them. He seeks payment of £93,334. He avers that he had been engaged as the defenders' assistant manager on a two year contract, for football seasons 2008-09 and 2009-10, at a gross salary of £40,000 per annum plus a £10,000 bonus, should the defenders remain in the Premier League. Although the defenders dispute the level of salary, pointing to the fact that the pursuer was in fact paid £2,500 gross per month, it is agreed that the defenders summarily dismissed him on 1 September 2008 for what they allege to have been gross misconduct. The defenders dispute that the contract had been for more than one season and, at the bar, stated that the pursuer had obtained some alternative employment as a scout for a First Division club.

[3] The pursuer avers that he is reasonably apprehensive that, if he is successful in this action, he will be unable to recover the amount of any decree to follow hereon from the defenders. The reason for this is that:

"The defenders' abbreviated balance sheet which is attached to abbreviated accounts for the year ending 30^th June 2007 and lodged with Companies House show that the net liabilities of the company have risen to £1,540,030. This is an increase of around £295,000 on the previous year. Since then the defenders are likely to have further increased their liabilities both through trading losses and requiring to replace their artificial pitch with a grass pitch... In recent years ... Premier League clubs such as Motherwell, Livingston and Dundee (sic) have all gone into administration. Airdrieonians, Clydebank and Gretna have gone into liquidation. With the exception of the Old Firm, most football clubs in Scotland are trading under precarious financial positions. The defenders are no exception and are in fact insolvent".

The accounts produced reveal that the defenders have very little by way of assets. Their stadium is owned by another company, which leases it to the defenders. The accounts contain the following docquet:

"The company is dependent on the continuing support of its creditors all of whom have intimated their willingness to provide such. Should any of its creditors fail to provide this continuing support it is unlikely that the company could continue as a going concern".

[4] The defenders accept that their accounts disclose net liabilities, which have increased to £1,540,030. However, they deny that they are insolvent or verging on insolvency. They explain that they:

"have traded successfully with net current liabilities for the last three years. ... [T]heir current net liabilities of some £1.5 million consist principally of a personal loan of £950,000 by their chairman, Mr McDonald. Mr McDonald owns more than 90% of the shares ... He has no intention of demanding payment so as to prejudice the club that he owns. ... The defenders enjoy healthy revenues which have been very materially increased by their promotion to the Premier League. They have an annual turnover of about £2.5 million".

The defenders seek to incorporate into their pleadings an affidavit from their accountant together with a provisional budget. The budget reveals that, contrary to their averments, the defenders pay £60,000 per annum as rent for the stadium. The affidavit deals with the defenders' creditors as follows:

"The Creditors ... are £1,639,463. These comprise mainly directors/affiliate loans totalling some £1,100,000 which are not expected to be repaid in the foreseeable future ... and a historical debt of some £275,000 due to HM Revenue & Customs. An Agreement has been reached with HM Revenue & Customs that provided interest is paid on this debt quarterly they will look favourably at writing off a substantial portion of it in 2009 ...".

In relation to liabilities, the accountant depones:

"... the company currently pays all its agreed debts including PAYE/NIC and VAT debts as they fall due. ... As of 4 November 2008 the company current account with Royal Bank of Scotland had a credit balance of £58,342.54 and the company had £200,000 in Treasury Reserve with Royal Bank of Scotland".

The Lord Ordinary's Decision

[5] On 20 October 2008, on the summons being presented for signeting, the pursuer obtained from the Lord Ordinary a warrant for arrestment on the dependence, subject to a hearing being fixed, under section 15K of the 1987 Act, for 6 November 2008. The pursuer used the warrant to arrest the defenders' share of the gate money from their unsuccessful CIS Cup quarter final tie against Rangers at Ibrox on 28 October. This share exceeded £100,000. The Lord Ordinary narrates [para 2] that, at the hearing on 6 November, the pursuer had maintained that enforcement of any decree would be prejudiced by both insolvency and the likelihood of the defenders disposing of their assets, but it was accepted that it was only the former that had been advanced. However, the Lord Ordinary observed that, in relation to insolvency, the pursuer did not specify in his submission whether he was referring to "absolute" or "practical" insolvency. The Lord Ordinary records (para [8]) that, as part of their submissions, the defenders had said that they played Premier League away fixtures throughout the year and that each fixture generated revenue payable to them in the hands of the home club, which might be arrested were the defenders' financial position to be seen as deteriorating.

[6] Having found it established that the pursuer had a prima facie case, the operative part of the Lord Ordinary's reasoning is as follows (para [9]):

"The next test which I am required to apply is whether or not the defenders' financial position discloses a real risk of any claim by the pursuer being defeated. In relation to that issue the pursuer's position amounts to no more than a claim that the defenders were insolvent, without detailed explanation of how that was the case. On the information available to me, whilst I readily accept that the defenders have net current liabilities in the order of £1.5 million, the practical position appears to be that there is no imminent danger of the vast majority of that debt being called upon. I had no reason to doubt the position of the chairman. Equally on the basis of the affidavit of [the accountant] the explanations tendered by the defenders in relation to the debts due to ... the Revenue appeared satisfactory. I also noted, and accepted, [the accountant's] position that the club was able to meet its current liabilities as they fell due. In these circumstances I am not satisfied that the pursuers have established that the defenders are insolvent. The last consideration is essentially a fair and equitable position. In relation to that matter is seemed to me that, perhaps unusually, the defenders are a company where, to the pursuer's knowledge, there will be regular sums due to them in the hands of third parties. I refer of course to their share of the receipts of away fixtures. It accordingly appears to me that if at any stage, at least to the end of the current football season, the defenders' financial position deteriorated or further information emerged suggesting that the defenders were truly insolvent, it would be open to the pursuer to protect his position by seeking a further warrant from the Court to arrest".

The Lord Ordinary concluded that there was no "necessity" for arrestment and he ordered "recall". The interlocutor of 6 November 2008 reads that the Lord Ordinary was:

"no longer satisfied ... that there is a real and substantial risk that enforcement of any decree ... would be defeated or prejudiced by the likelihood of the debtors removing, disposing of, burdening, concealing or otherwise dealing with all or some of the debtors' assets"

and that this was the reason, as the interlocutor continues, for recalling the warrant for arrestment and any arrestment executed in pursuance of it. The reason contained in the interlocutor was not, as mentioned above, one advanced by the defenders. The interlocutor then purports to recall a warrant for inhibition, but there had been no such warrant granted.

Submissions

[7] After outlining the statutory framework, the pursuer submitted that the Lord Ordinary had erred in law in failing to understand the meaning of "insolvent" as it appeared in sub-section 15K. It did not only mean "practical" insolvency but "absolute" (or "balance sheet") insolvency as well (Barry D Trentham v Lawfield Investments 2002 SC 401, Lord Drummond Young at paras [7] and [8]). On the material presented to him, the Lord Ordinary was bound to have held that the defenders were insolvent. Furthermore, the Lord Ordinary had also erred in failing to consider the issue of insolvency at the point in time when a decree was likely to be enforced (MRK 1 v Sara Properties' Trs [2008] CSOH 176, Lord Pentland at para [28]). In these circumstances, this Court required to consider the matter de novo (Gillespie v Toondale 2005 SC 204).

[8] The defenders responded by complaining first that the argument about the meaning of insolvency had not been raised in the grounds of appeal. That matter was not pressed and, in any event, the grounds were wide enough to permit development of the argument. The defenders maintained that the Act did not suggest that a mere surplus of liabilities over assets was sufficient. A large margin of insolvency may be consistent with a sound trading position. The Lord Ordinary had taken a practical approach to the issue. There was no basis for any contention that the defenders were not in a position to pay their debts. In response to enquiries from the Court, the defenders conceded that the defenders did not receive a share of away gates in Premier League matches. However, they did so in Scottish Cup games, so there was a prospect of third party payments from some away gates (the defenders won their fifth round Scottish Cup tie against Dundee United at home on 7 February). There were also further television payments due. The defenders conceded also that the Lord Ordinary's wording, in finding that the pursuer had not established that the defenders were insolvent (part [9] supra), might be open to criticism. But the Lord Ordinary had addressed the correct test, even if he had expressed it in an abbreviated way. He did consider the wider question of substantial risk set out in the sub-section. In relation to the Lord Ordinary's reference to the "imminent" position, as distinct from that which might exist at the point when a decree might be enforced, the defenders maintained that there had been no error. The information presented to the Lord Ordinary related to the present position. Finally, the defenders maintained that the pursuer's claim was exaggerated. He had failed to explain why he had been accepting a salary of £1,950 per month net. At best, to the end of the season, the pursuer's claim was worth about £17,000 net plus £10,000 gross as a bonus if the defenders remained in the Premier League, as the defenders accepted they would. Having regard to the hazards of litigation, a sum of between £10,000 and £20,000 would provide adequate security. Meantime, the defenders were being prejudiced in not having their money from the game against Rangers.

Decision

[9] At a hearing under section 15K, the Court requires to consider whether it is "no longer satisfied" of the three matters specified in sub-section (9). The first of these (prima facie case) is not an issue in this case. The second is whether there is a real and substantial risk that enforcement of any decree will be defeated or prejudiced by either of the two events specified in the sub-section. Only one is in issue here and that is whether the risk is made out under reference to the defenders' insolvency. "Insolvent" is not defined in the Act. However, having regard to the state of the common law as it existed at the time the Act was passed, it must be taken to mean either "practical" insolvency (the inability to pay debts as they fall due) or "absolute" insolvency (an excess of liabilities over assets) (Barry D Trentham v Lawfield Invesments (supra), Lord Drummond Young at para [7]). In that connection it is perhaps difficult to verge upon "practical" as distinct from "absolute" insolvency.

[10] The Lord Ordinary was in error in apparently confining his consideration to whether the defenders were practically insolvent. They may not be, since they continue to pay their debts as they fall due. But there is no doubt, on the other hand, that the defenders are absolutely insolvent, in the sense that their liabilities well exceed their assets. Their continued existence must depend, as the docquet on the accounts states, on the goodwill of their creditors. Whatever the state of that goodwill may be at present, it is difficult to argue that there is no "risk" that the pursuer's decree, were he to secure one, will be not be prejudiced or defeated in the future by what is admittedly absolute insolvency. Again, in that regard, the Lord Ordinary was in error in apparently confining his consideration to the "imminent" position, rather than to both that position and to the state of affairs at the point in the future when a decree might be secured. In order properly to assess risk, the Court has to consider when the pursuer might secure a decree and what the defenders' position at that time might be. Attention has already been drawn to the error of fact made by the Lord Ordinary, albeit on the basis of submissions made, in relation to away gates, which he considered as important when assessing the third matter referred to in sub-section (9) (reasonableness). Having regard to these errors of both law and fact, the Court must re-assess the situation on the information now provided.

[11] The defenders are absolutely insolvent. It is impossible to predict what their future financial position may be; dependent as it is on the goodwill of not only Mr McDonald but HM Revenue & Customs. In these circumstances, the Court cannot find that it is no longer satisfied that the requisite risk exists. That being so, since the pursuer does have a prima facie case, the Court cannot find that it is no longer satisfied that it is reasonable for the arrestment to continue to have effect. A pursuer with such a case will normally be entitled to have security for his debt against an insolvent defender. In these circumstances, there are no grounds for recalling the arrestment or the warrant under sub-section (8).

[12] There remains for consideration whether the Court should make an order in terms of sub-section (7); that is to say, for example, one restricting the arrestment. There are a number of relevant considerations. First, although the pursuer claims almost £100,000, on the basis of an annual salary of £40,000 and a bonus of £10,000, the figures he quotes are gross and they are inconsistent with the salary actually paid to him without apparent demur. There is accordingly merit in the defenders' contention that the pursuer has a prima facie case only for a potential annual loss of perhaps something less than £30,000. He has been paid two months salary totalling about £4,000. In relation to the current situation and the future, the pursuer may be able to mitigate his loss by securing alternative employment. He seems to have obtained some remunerative work at present, albeit that the level of payment may be low. In addition, should the pursuer require to found upon his arrestment, that will have been because the defenders will have become practically insolvent, in which case it is unlikely that he would have had continuing employment and hence salary. Taking all these factors into account, and applying a broad axe, the pursuer ought to have sufficient security were the arrestment to be restricted to £40,000. That restriction may require revision in due course but, meantime, the Court will order that restriction by: allowing the reclaiming motion; recalling the interlocutor of 6 November 2008; and restricting the arrestment in the hands of Rangers Football Club executed in pursuance of the warrant granted by the interlocutor of 28 October 2008 to £40,000.