Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 85
	OPINION OF LORD BRODIE in the cause DOUGLAS HUGH COWAN Pursuer; against THE ROYAL BANK OF SCOTLAND PLC Defender: ­­­­­­­­­­­­­­­­­________________

Pursuer: Bell; Balfour + Manson LLP

Defender: MacCall; DLA Piper Scotland

17 May 2011

[1] On 27 April 2011 I heard motions before calling of the summonses in two separate but related actions in respect of which a caveat had been lodged on behalf of the defender. The application to which this opinion relates was made by the pursuer in the action at the instance of Douglas Hugh Cowan. The other application was made by the pursuer in the action at the instance of Robert Robertson Holden. The defender in both actions is the Royal Bank of Scotland Plc. In both actions the pursuers seek to avoid liability under a guarantee in favour of the defender and sequestration consequential on the guarantee being called up. Each pursuer was represented by Mr Bell, Advocate. Mr MacCall, Advocate, appeared for the defender. In very large part the respective arguments presented by counsel related to both pursuers' applications.

[2] In this action the pursuer concludes:

"(1) For production and reduction of the guarantee granted by the pursuer in favour of the defender in respect of the debtors Small Burn Developments Limited dated 20 November 2008;

(2) For reduction of the pretended charge served on the pursuer by the defender for payment of debt dated 22 November 2010;

(3) For interim suspension of the said pretended charge dated 22 November 2010;

(4) For interdict against the defender from applying for or obtaining an award of sequestration against the pursuer on the grounds of any debt due under the said guarantee; and

(5) For interdict ad interim".

The motion for the pursuer was for interim suspension of the charge dated 22 November 2010 as second concluded for, and for interdict from applying for or obtaining an award of sequestration on the ground of any debt under the guarantee in terms of the fourth conclusion.

[3] The averments of fact in support of the application for interim suspension and interim interdict were as follows:

"2. The pursuer is a director of the company Small Burn Developments Limited (Small Burn). The said company had an on going relationship with the defenders in respect of providing business financing by way of providing loan facilities to Small Burn with the directors providing personal guarantees and standard securities in respect of such facilities. Over the period of the companies' business relationship the pursuer executed various guarantees in respect of such facilities and granted a standard security over an area of land known as Legaston in favour of the defenders specifically as security for any facilities provided to Small Burn. This land is valued at approximately £1,000,000. All negotiations and the provision of such facilities were dealt with by Mr. Bruce Davidson an employee of the defenders. During the negotiations that preceded the execution of the said guarantees, Mr. Davidson specifically stated to the pursuer that the personal guarantee would only be called up if the defenders were unable to recover any debts due thereunder from Small Burn after the defenders had taken all steps to recover the money from Small Burn, including the company being put into administration or liquidation and the defenders having received payment as creditors in respect of such administration or liquidation. Mr. Davidson also advised the pursuer that the only asset owned by him that might be affected by the calling up of the guarantee was the land at Legaston. In or about November 2008, the pursuer and Robert Robertson Holden residing at Stoneywood, Small Burn Farm, Greystone, Arbroath approached the defenders requesting that they provide further funding for Small Burn. Mr. Davidson advised the pursuer that the defenders would require a joint and several guarantee to be executed by the pursuer and Mr. Holden for debts up to a level of £400,000. The said guarantee was to replace any prior guarantee's provided by the pursuer and Mr. Holden. Mr. Davidson did not indicate that the position he had stated with regard to when the pursuer would be required to make payment in respect of this new guarantee had varied or that any of his assets other than the land at Legaston would be at risk under the guarantee. The pursuer therefore understood that he would not be required to make payment under the said guarantee until all steps had been taken to obtain repayment from Small Burn, including obtaining payment as a creditor were Small Burn to be put into administration or liquidation at the conclusion of such administration or liquidation. The pursuer and Mr. Holden were advised that they required to execute the said guarantee and attached waiver immediately if they wished the financing to be provided. They did so on the basis of the prior assertions made by Mr. Davidson as to when the guarantee previously executed by the pursuer and Mr. Holden might be called up."

[4] The first feature of these averments to which I would draw attention is that Mr Davidson is averred to have said that the guarantees "would only be called up" after the defender had taken "all steps" to recover the sums due by the company. On the face of it that is a statement of intention relating to the future. However, when he came to make the application on behalf of the pursuer, Mr Bell explained that what these averments were meant to mean was that Mr Davidson had said that the guarantees in question could only be called up in the event that all steps had been taken to make recovery from the companies. That is a statement about the present in the sense that it is a statement as to how documents are properly to be construed or, put slightly differently, what is their legal effect. This provides an explanation as to why in the pleadings what Mr Davidson is said to have said about the effect of the guarantees is described as a "representation" (as opposed to a promise or undertaking). The second feature to which I would draw attention is that it is not averred that Mr Davidson's representation was made in respect of the specific guarantee which it is sought to reduce. Rather the complaint is that Mr Davidson having made representations in respect of previous guarantees, did not say anything different in relation to the new guarantee. The way it is put is:

"Mr Davidson did not indicate that the position he had stated with regard to when the pursuer would be required to make payment in respect of this new guarantee had varied".

[5] The legal theory upon which the pursuers in each action proceed is that they were induced to execute the guarantees as a result of Mr Davidson's false representations. It is further said that Mr Davidson knew the representations were false or, if he did not know they were false, he made them negligently. It is said that the pursuers are accordingly entitled to seek reduction of the guarantee.

[6] Mr Bell's position on behalf of the pursuer was put quite shortly. He accepted that it might appear somewhat extraordinary that experienced businessmen such as the pursuers had conducted their affairs in this way but for the present purposes the averments had to be treated pro veritate. Mr Bell referred me to McBryde The Law of Contract in Scotland (3^rd Edition) at para 15-67 but otherwise did not elaborate the legal basis of his case.

[7] Mr MacColl, on behalf of the defender, moved me to refuse the application broadly on two grounds; first that no prima facie case had been made and second that the balance of convenience did not favour the exercise of discretion in the pursuers' favour. He began his submissions by providing certain factual background. The actions arose from a history in which the defender had extended loans to two companies, Small Burn Developments Limited and H & I Homes Limited. Mr Holden and Mr Cowan were both directors of Small Burn Developments Limited. Mr Holden was the sole director of H & I Homes Limited. The monies had been advanced in terms of a facility dated 30 October and 20 November 2008, as varied on 20 April 2009. On 20 November 2008 a joint and several guarantee had been executed by the pursuers in favour of the defender in respect of a loan of £400,000. Mr Holden had also executed a guarantee, dated 15 August 2008, in respect of the sum of £203,000. The guarantees had been sought as a condition of extending the loan finance. Demands for repayment of loans had been made on 17 May 2010. In the absence of repayment both companies had been placed in administration on 24 May 2010. Both Mr Holden and Mr Cowan were called on to make payment in terms of their guarantees. They having failed to do so, a charge of repayment was served on Mr Holden on 27 September 2010. No charge was served on Mr Cowan at that stage because he represented to the defender that he intended to raise capital by selling properties with a view to making payment to the defender. However no money was received by the defender and a charge was served on Mr Cowan on 22 November 2010. The charge for payment which was served on Mr Cowan was limited to the sum of £400,000 under the relevant guarantee. However the charge for payment served on Mr Holden included other sums and totalled £707,769.72.

[8] The days of the respective charges expired without payment and the defender petitioned for the pursuers' sequestration. Following difficulty in effecting service, a first hearing was fixed in the respective sequestration processes for 17 January 2011. Both Mr Holden and Mr Cowan were represented at that hearing, albeit not by counsel. The solicitors acting for the pursuer advised that the guarantees were "to be challenged". The sheriff allowed answers to the petitions for sequestration to be lodged within 14 days and fixed a proof for 1 April 2011, apparently on the issue as to whether cause had been shown why sequestration could not competently be awarded as provided by section 12(3A)(a) of the Bankruptcy (Scotland) Act 1985. The defender sought leave to appeal that interlocutor. Leave was granted by the sheriff on 31 January 2011. On 19 April 2011 the Sheriff Principal allowed the appeal, the pursuer not having sought to support the sheriff's interlocutor on the grounds that had been originally advanced to him. There was to be a further hearing before the sheriff on 28 April 2011 when it was anticipated that awards of sequestration would be made. Notwithstanding this history it was only on 26 April 2011 that the summonses in the actions were signetted.

[9] Having set out that background Mr McCall turned to his submission that the pursuers had not made out prima facie cases. The pursuers were seeking the wrong remedy. If it was their position that they bound themselves by a guarantee which would only be enforced in certain circumstances but that the written document does not reflect that, they should either seek rectification of the guarantee or declarator that the guarantee was subject to collateral agreements which precluded it being called up until all steps had been taken to recover from the companies. However, taking the pursuers' cases as they were presented, there was no offer in their averments to prove that Mr Davidson had made a representation in respect of the guarantee executed on 15 August 2008 or the guarantee executed on 20 November 2008. The pursuers sought reduction but they did not offer restitutio in integrum. It was not the case that the court had to take the pursuers' averments at face value. They had to be judged on a reasonable basis. The pursuers were businessmen. They had been asked for guarantees. They had quite deliberately chosen not to take advice. They had given guarantees. They claim not to have understood what the effect of these guarantees was. However, their averments were unsupported by affidavits or other material. The pursuers had not put forward a prima facie case as that concept was to be understood by reference to Gillespie v Toondale Limited 2006 SC 304.

[10] Mr McCall moved on to his argument on balance of convenience. This application was brought far too late in the day. Not only had no attempt been made to reduce the charges after they were served but the sequestration process had been allowed to proceed

[11] I was not satisfied that it was appropriate to make the order sought in either case. As far as the present action was concerned I did not consider that the pursuer had advanced a prima facie case as that expression falls to be understood in the light of Gillespie v Toondale Limited supra. That case was concerned with what was required for a grant of warrant to inhibit on the dependence but I agree with Mr MacColl that what was said there about a prima facie case is applicable to applications for interim suspension and interim interdict. What the court will look for before being satisfied that it is presented with a prima facie case will depend on circumstances. An important circumstance will be the time that has been available to legal representatives to put together the case both by way of pleading and supporting material. An averment may have to be regarded pro veritate for the purpose of testing relevancy. It does not follow that every averment will be taken at its highest for the purpose of determining whether it is appropriate to grant interim protective orders. [12] Here the pursuers have had some months to consider precisely what is their case and how it should be averred. What has been averred is at best bold. It is averred that Mr Davidson knew that the representations he made (about other guarantees)were false or that he if he did not know they were false they were made negligently. No attempt is made to support the allegation that Mr Davidson knew the representations were false by way of circumstantial averments and no attempt is made to set out the basis of any duty of care which is an essential component in any case based on negligence. That does not suggest that the pleader has had very full precognitions to work with. The pursuers' respective cases appear to relate to induced error, the error in question being as to the meaning of what, unless reduced, would be binding legal documents. Error as to the meaning of a formal document would appear to me to introduce particular difficulties, especially when regard is had to the pursuers' position that they knew that they were entering into enforceable guarantees it being only in respect of the precise circumstances in which the guarantees would become enforceable that they were in error. However, at all events, reduction being an equitable remedy, it would be my expectation, and this was supported by the passage from McBryde to which I was referred, that any award of reduction would be dependent on restitutio in integrum being possible. Here that would involve repayment to the defender of the sum or sums advanced to the companies by the defender. I simply do not accept Mr Bell's assertion that this was a matter solely between the companies and the defender and nothing to do with the position of the pursuers. Money was advanced on the faith of the guarantees. In the absence of averments indicating that restitutio in integrum would be possible, I consider the pursuers' cases to be irrelevant. To put it no higher, what I would see as an additional complication in the pursuer's case lies in his acceptance that he understood that he was giving a guarantee in respect of Small Burn's indebtedness up to the limit of £400,000. Where he says he was in error was at the stage he could be called on to honour the guarantee. It might be that he could satisfy the court that this error was material. Nevertheless it would appear to be somewhat disproportionate to reduce the guarantee thereby relieving the pursuer from all liability under an obligation that he had accepted (albeit subject to the condition of the defender having first taken all available steps against Small Burn).

[13] A clearly irrelevant case cannot be a prima facie case but even were I to be wrong on the issue of relevancy, or wrong in coming to a view on relevancy at this early stage, I would not regard what was put forward in either action as amounting to a prima facie case. Mr Bell acknowledged that it did seem somewhat extraordinary that experienced businessmen should rely on what the defender's employee had said about other guarantees for their understanding of the effect of more recent guarantees. If that is indeed the pursuer's position, to amount to a prima facie case I would require it to be supported by affidavits and clearer and much more circumstantial averments than there are here.

[14] I would confess that in the discussion before me I rather lost sight of the averment: "Mr. Davidson also advised the pursuer that the only asset owned by him that might be affected by the calling up of the guarantee was the land at Legaston." Again this alleged advice was given in relation to earlier guarantees. I did not ask Mr Bell what was meant by "might be affected" and therefore I do not know what is meant by that or how Mr Davidson's alleged statement influenced the pursuer's decision to enter into the guarantee, given his understanding that the guarantee would only be called up in the event of a failure to recover the debt owed by the companies after all steps had been taken against them. At all events I do not read these averments as advancing the pursuer's case.

[15] Even if I had been persuaded that the pursuers had put forward prima facie cases their quite unexplained delay in seeking protective orders has been such that I would not have been prepared to grant them. In relation to this I would refer to what was said by Lord Hodge at paragraph 5 of his opinion in John Graham Aitken v Isabella McAdam or Aitken, unreported, 4 August 2005:

"As Lord Sutherland pointed out in Mackay v Bank of Scotland (1992 SLT 158 at page 160) interim interdict is an equitable remedy and it is normally far too late for a debtor to seek such a remedy when he has allowed his apparent insolvency to be constituted and a petition for sequestration to be served. If a debtor is seeking to challenge the debt on which a charge proceeds and suspend the charge, he should do so before the expiry of the days of the charge. Other challenges should be mounted before the petition for sequestration is initiated, as in James Finlay Corporation v McCormack 1986 SLT 106."

That a charge has fulfilled its function of demonstrating apparent insolvency is reason not to suspend it, ad interim or otherwise, once its days have expired but as Lord Hodge went on to point out in Aitken, there will be exceptional circumstances where it is equitable for the court even at a very late stage to prevent sequestration taking place in order to allow a challenge to be made to the debt which is the ground of the apparent insolvency and the application for sequestration. However, I do not discern such circumstances here. For whatever reason, the response by the pursuers since the service of the respective charges has been dilatory and inept. Mr Bell drew my attention to the opinion of Lord President Hope (as he then was) in Wright v Tennent Caledonian Breweries Ltd 1991 SLT 823 at 826C. There Lord Hope explains that an application for recall of sequestration, if made timeously, is not to be refused simply because the debtor might have taken action at an earlier stage to prevent his apparent insolvency from being constituted. Mr Bell said that what would happen should I refuse interim interdict and should the pursuer then be sequestrated was that he would simply present a petition for recall with the additional trouble and expense that that would involve. That may be but I do not see it as good reason not to confine myself to dealing with the issue before me. If the pursuer has a basis for recalling his sequestration in the event that he is sequestrated then no doubt he will petition for recall and that application will be dealt with on its merits as they then appear to the court.

[16] I would record that valuations were put before me relating to properties said to be owned by the pursuer. The area of land known as Legaston was valued at £1,000,000 and the pursuer's total assets were stated at £7,905,000. However, Mr Bell could not tell me what was the state of occupation of these properties, all which appear to be agricultural. Nor, in respect of properties other than Legaston, was he able to provide information as to whether they were subject to securities. In the absence of information about possible tenancies or securities I felt unable to place much weight on the valuations which were proffered. I was given no information as to whether the pursuer had debts in addition to his obligation under the guarantee. However if the pursuer's assets are as extensive as it would appear and he has no other debts, it is something of a puzzle to understand why he has not been able to come to some sort of accommodation with the defender. Now, there may be reasons for that and Mr Bell hinted at a background of discord that included a complaint to the Financial Ombudsman Service. Nevertheless, as I have already noted, the pursuer accepts that he granted a guarantee on which he understood he would be liable, the only question being whether the defender was obliged first to take all steps to recover from Small Burn. If his assets indeed amount to some £8,000,000 it might be expected that the pursuer would pay on the guarantee (borrowing on security if necessary to do so) and then recover from Small Burn, assuming Small Burn has assets. If of course Small Burn does not have assets then the pursuer, on his own understanding of the matter, will be liable on the guarantee. Now I can see that things might be more complicated than that but I have not been told about such complications and I cannot speculate. Thus, without much fuller information I was not prepared to attach weight to the assertion that the pursuer's assets are more than sufficient to meet any liability that he may have to the defender.

[17] As I have already indicated, my decision is to refuse the applications by the pursuer. I made an award of expenses in respect of the hearing against the pursuer and in favour of the defender.