Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 51
P163/12	OPINION OF LORD HODGE in the cause BRYAN JACKSON, OFFICIAL LIQUIDATOR OF WEIR CONSTRUCTION (CONTRACTS) LIMITED Noter; ­­­­­­­­­­­­­­­­­________________

Noter: Mrs Delibegović-Broome; Biggart Baillie LLP

20 March 2012

[1] This is an application by the official liquidator of Weir Construction (Contracts) Limited ("WCC") for (i) sanction to pay its creditors in full and (ii) directions on the rate of interest applicable to its creditors' claims.

[2] This is an unusual case. The winding up has taken twenty eight years. Lord Stott pronounced the first order on 6 April 1984 and the winding up order was made on 2 May 1984. The explanation for the passage of time is that WCC's principal asset was land which required to be decontaminated before it could be advantageously sold. I was not informed why it has taken so long to clean up the land but that is not relevant to the application. The liquidator now holds funds of £1,073,342.64. The amount due to the creditors of WCC before interest is £43,202.29.

The statutory provisions

(a) in relation to the payment of creditors

[3] The winding up commenced under the Companies Act 1948 and is governed by Part XX of the Companies Act 1985. See section 436 of and paragraph 4 of Schedule 11 to the Insolvency Act 1986 ("the 1986 Act"). Accordingly the liquidator is required by section 539(1) of the Companies Act 1985 to obtain the authorisation of the court to pay any class of creditors in full.

(b) in relation to the payment of interest on creditors' claims.

[4] Paragraph 9 of Part II of Schedule 9 to the Insolvency Act 1985 provided that in relation to a winding up which had commenced before the new provisions of that Act entered into force, the former law, which included section 613 of the Companies Act 1985 and thereby section 48 of the Bankruptcy (Scotland) Act 1913 ("the 1913 Act"), was to continue to apply. Paragraph 4 of Schedule 11 to the 1986 Act preserved the former law. Accordingly, the entitlement of the creditors of WCC to interest on their claims is derived from section 48 of the 1913 Act. That section, so far as relevant, provides:

"... if there be any residue of the estate after discharging the debts ranked, [a creditor] shall be entitled to claim out of such residue the full amount of the interest on his debt in terms of law."

The liquidator's application for directions

[5] Mrs Delibegović-Broome on behalf of the liquidator addressed the two issues on which the liquidator sought directions. They were (i) what rate of interest was the liquidator to pay as "the full amount of the interest ... in terms of law", and (ii) whether there should be one rate of interest for the whole period from the making of the winding up order until payment or should the interest rate vary over time. I am grateful to her for her succinct and helpful submissions. I refer to the authorities which she placed before the court in my discussion below.

Discussion

[6] There is no doubt that it is appropriate for the court to sanction the payment of WCC's creditors in full. The only issue which requires more detailed consideration is the appropriate rate or rates of interest which the liquidator should pay on their claims.

[7] The creditors' entitlement to interest does not rest on a common law ground of mora or wrongful withholding, which Lord Reed discussed in Wilson v Dunbar Bank plc 2008 SC 457. It has been created by statute. Originally section 49 of the Payment of Creditors (Scotland) Act 1814 conferred an entitlement to interest in the event of a surplus in a bankruptcy and subsequent enactments have preserved that right. Thus the issue is a question of statutory interpretation.

[8] Had the question arisen in 1914, it is likely that the court would have held that "the full amount of interest" which was due "in terms of law" was, in the absence of a contractual rate, interest at five per cent a year. For a long time before 1913, the courts had treated the "standard rate" or "legal rate" of interest on debt to be five per cent. See, for example, Dunn & Co Anderston Foundry Co Ltd (1894) 21 R 880, Wilson's Trustees v Watson & Co (1900) 2 F 761, and Mason's Trustees, Petitioners 1902 9 SLT 464. Thus the contemporary texts on the law of bankruptcy interpreted section 48 of the 1913 Act as authorising interest at five per cent on the surplus of the bankrupt's estate. See Goudy on Bankruptcy (4^th ed. 1914) p. 180, Wallace "The Law of Bankruptcy in Scotland" (2^nd ed. 1914) p. 287. As late as 1971 the Working Party of the Scottish Law Commission recorded in its "Memorandum on Insolvency, Bankruptcy and Liquidation in Scotland" (at pp. 66-67) that the rate of interest under section 48 of the 1913 Act was five per cent.

[9] But doubts had crept into the judicial mind long before then. There was a move away from the view that there was a "legal rate" and a recognition that the concept of legal rate had emerged from a statute of Queen Anne, the Usury Act 1713, which had fixed the maximum rate at 5%. Although that Act did not fix any standard rate and had been repealed by the Usury Laws Repeal Act 1854, the courts had become used to awarding interest at that rate. This may have been because it corresponded roughly with commercial rates. Yet it was a rate set by practice and unquestioning custom rather than by statute. It came to be challenged. In Inglis' Trustees v Breen (1891) 18 R 487 the court held that a legatee could not claim interest on a legacy at a higher rate than that which the trustees had earned where there had been no delay and that there was no general rule entitling a legatee to five per cent. Thereafter, in Ross v Ross (1896) 23 R 802, a case concerning interest on legitim, Lord McLaren, with whom the Lord President and Lord Kinnear concurred, pointed out that there was no statutory rate of legal interest and that five per cent had been only a maximum rate. Finally, in Kearon v Thomson's Trustees 1949 SC 287, which again was a case concerning interest on legitim, the Lord President (Lord Cooper) exposed the hollowness of the concept of "legal interest" stating:

"... the only justification that can today be alleged for the supposed 'general rule' of 5 per cent is the dying echo of the last relic of the laws against usury, prolonged, long after it should have been silenced, by that blind adherence to old tradition which is one of the less admirable characteristics of certain aspects of the common law."

In that case the court rejected the submission that it could not fix the rate of interest and awarded a rate which reflected that which the trustees could have earned at the time through prudent investment.

[10] In this case, there is no question of the liquidator having earned interest on the assets of WCC over many years as it was only recently that he was able to sell the heritable property. Nonetheless, the creditors have a statutory right to interest on the surplus from the date of the winding up and funds are available to pay that entitlement. Like Lord Cooper in Kearon (at p. 295), I see no reason to embark on a detailed investigation of what interest might have been earned in a particular case and prefer the application of a broad general rule which will work substantive justice.

[11] The liquidator wrote to WCC's creditors in July 2011. None has claimed a contractual entitlement to a specific rate of interest. Only one creditor, James S. Pearson Limited ("Pearson"), responded. It pointed out that if the liquidation had been governed by the 1986 Act- namely section 189 of that Act and rule 4.66(2)(b) of the Insolvency (Scotland) Rules 1986 (SI 1986/1915) - the specified rate of interest from the commencement of the winding up would have been fifteen per cent. That rate was four per cent above the base rate when it was introduced in 1986 but that it was now fourteen and a half per cent above that rate. It explained that the weighted average of base rates during the period of the liquidation was 6.81% and that if one allowed 4% above base rate, the weighted average would be 10.81%. Pearson submitted that that rate ought to be the minimum which WCC's creditors received.

[12] The prescribed rate under the 1986 Act reflected the judicial rate when the Insolvency (Scotland) Rules came into force on 29 December 1986. It has not changed over time. By contrast, in personal bankruptcies the initially specified rate of fifteen per cent, which under section 51(7) of the Bankruptcy (Scotland) Act 1985 applied unless a higher rate was applicable to the debt apart from the sequestration, was reduced on 1 April 1993 to eight per cent when the judicial rate under Rule 7.7 of the Rules of the Court of Session was similarly reduced. See regulation 8 of the Bankruptcy (Scotland) Regulations 1985 (SI 1985/1925) as amended by regulation 4 of the Bankruptcy (Scotland) Amendment Regulations 1993 (SI 1993/439). It is anomalous that the rules for corporate insolvencies in Scotland have not been amended to reflect the changes in the judicial rate of interest.

[13] In most cases there is the merit of simplicity in the current statutory provisions which fix a default rate of interest at the date of the winding up or personal bankruptcy because insolvencies lasting decades are fortunately rare. In unusual cases, such as this, it would not achieve substantive justice between the creditors and the shareholders for the court to award the judicial rate of interest which was current in 1984, namely twelve per cent. In my view section 48 of the 1913 Act does not require me to do so. In the absence of any contractual right to interest, I consider that the court should award interest on the creditors' claims at the judicial rate from time to time, which has been used by the courts as a default rate of interest in other circumstances. There are parallels in the court's approach to interest on loans which specify no interest rate (Neilson v Stewart 1991 SC (HL) 22, Lord President Hope at p.35). This would mean that between 2 May 1984 and 15 August 1985, interest would run at twelve per cent on the claims; from 16 August 1985 to 31 March 1993 the rate of interest would be fifteen per cent; and from 1 April 1993 the rate would be eight per cent. Since the financial crisis of 2008 the judicial rate has ceased to be even broadly compensatory: see Farstad Supply AS v Enviroco Limited [2011] CSOH 153. But, in contrast with its power under section 1 of the Interest on Damages (Scotland) Act 1958 as amended, the court has no discretion in fixing the rate of interest to achieve a result which is consistent with the principle that interest is compensatory. In any event, in my opinion the use of the judicial rate as varied from time to time will achieve substantive justice in the context of this twenty-eight-year winding up.

[14] Section 48 of the 1913 Act does not prevent the rate of interest due to creditors from changing over time with the judicial rate set under Rule 7.7 of the Rules of the Court of Session. I am aware that the Scottish Law Commission in its report (no. 68), "Bankruptcy and Related Aspects of Insolvency and Liquidation" (1982) suggested (in paragraph 16.46) that because sequestration fixed the rights of creditors inter se in relation to the bankrupt estate, the creditors' claim was to a species of moratory interest in respect of their lying out of their money during the period of the sequestration. This supported their recommendation, which may have contributed to the thinking behind the statutory provision in the Bankruptcy (Scotland) Act 1985 mentioned above, that there should be a prescribed rate of interest effective from the date of sequestration. But I do not find this a persuasive argument for fixing the interest due on the surplus of the estate under section 48 of the 1913 Act at the judicial rate applicable on the date of the commencement of the winding up. In personal and corporate insolvency there is a pressing need to freeze the transactions of the insolvent and the rights of creditors in the insolvent estate at a specified date at the start of the formal insolvency. By those means the insolvency practitioner is able to rank the rights of the creditors in an estate which is insufficient to meet all their claims. But where, as here, we are concerned with an estate which was initially insolvent but which has produced a surplus, there is no need to treat the rights of creditors as fixed for all time. Rather the creditors should be entitled to interest on their claims as if there was no insolvency. In the absence of a higher contractual rate of interest, there is no reason why that rate should not vary with the changes in the judicial rate.

Conclusion
[15] I have therefore (i) granted an order under section 539 of the Companies Act 1985 authorising the liquidator to pay the creditors of WCC in full and (ii) directed that he is to pay interest on their claims at the judicial rates specified from time to time in Rule 7.7 of the Rules of the Court of Session until payment.