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Scottish Sheriff Court Decisions |
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You are here: BAILII >> Databases >> Scottish Sheriff Court Decisions >> Hadden Construction Ltd v. Midway Services Limited [2007] ScotSC 58 (17 October 2007) URL: http://www.bailii.org/scot/cases/ScotSC/2007/58.html Cite as: [2007] ScotSC 58 |
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(L16/06)
JUDGMENT OF
in the petition
of
HADDEN
CONSTRUCTION LIMITED
For an
order to wind up
MIDWAY
SERVICES LIMITED
Act: Malone, Solicitor, Bell & Scott
Alt: McColl, Advocate, instructed by
McRoberts
EDINBURGH, 17 October
2007
The Sheriff
Principal, having resumed consideration of the cause, refuses the appeal and adheres
to the Sheriff's interlocutor dated 18 April 2007; finds the appellants liable to the petitioners
in the expenses of the appeal and remits the account thereof when lodged to the
Auditor of Court to tax and to report thereon;
remits to the Sheriff to proceed as accords.
(signed) EFB
NOTE:
1. In
this case the petitioners (who are respondents in the appeal) brought a
petition for an order to wind up the appellants, (who were formerly Brown Homes
Ltd) founding in particular on section 122(1)(f) of the Insolvency Act
1986. By interlocutor dated
18 April 2007 the Sheriff dismissed the petition, finding the appellants
liable to the petitioners in expenses.
The present appeal is directed only to the Sheriff's award of
expenses. I am satisfied that a question
of principle arises and that accordingly the appeal ought to be entertained.
2. In
2001 the parties entered into a contract for the construction of a housing
development at Callendar. The appellants
were the employers and the petitioners were the main contractors. The contract is in the SBCC Scottish Building
Contract with quantities (January 2000) form.
It is not disputed that before any monies can become due for payment
under the contract a payment certificate must be issued by the named architect.
3. Title
to bring a petition for the winding up of a company is conferred by section 124(1)
of the 1986 Act. It provides that "...an
application to the court for the winding up of a company shall be by petition
presented either by the company, or the directors, or by any creditor or
creditors (including any contingent or prospective creditor or creditors),...". In the petition the petitioners aver that
they are contingent creditors of the appellants "in that no final account has
been agreed in respect of the building contract between the petitioners and the
respondents and no final certificate has been issued by the architect". This appeal raises the question of whether
the petitioners are correct in contending that they are "contingent creditors"
of the appellants.
4. From
the terms of the pleadings and the submissions made on behalf of parties at the
appeal it appears that the petitioners have maintained for some time that they
are due certain additional sums in relation to the works carried out under the
contract, notwithstanding that these have not been the subject of
certification. On 21 September 2005
the petitioners served a Notice of Adjudication, seeking that the Adjudicator
make an order for payment to them of the sum of £111,006.56. This adjudication was met by a letter from
the appellants' solicitor dated 13 December 2005. The terms of that letter were the subject of
some discussion both before the Sheriff and in the course of the appeal. They are as follows:
"Brown
Homes Limited Hadden Construction Limited. I refer to the above matter and can confirm
that I have now obtained my clients' instructions. You have already been provided with a copy of
Brown Homes latest accounts for the year ended 31 March 2005. The position has not improved since that
time. Accordingly the directors could
place the company in liquidation. For PR
reasons they are reluctant to do so. In
these circumstances they have been making sufficient funds available to meet
the company's debts as they fall due. In
relation to your client's claim my clients are of the view that it is entirely
unfounded and will fail as did your clients' previous claim. Accordingly, my clients deny that your
clients are a creditor of Brown Homes and any attempt to pursue the claim will
be defended. In the unlikely event that
any award is obtained against Brown Homes in respect of that claim, I am
advised that the company will be unable to meet the award and, at that stage,
liquidation will become inevitable".
5. It is
accepted that following this letter the petitioners did not proceed further
with the adjudication but raised the present petition. Following sundry procedure, the matter called
for debate, for the second time, (the first diet having fallen due to lack of court
time) on 18 January 2007. By this stage
the appellants had produced accounts for the period to 31 December 2005 which
showed that they were not balance sheet insolvent. In the light of that the petitioners did not
seek to proceed with the petition, which was dismissed. They sought, however, an award of expenses on
the basis that they had been justified in bringing the petition. The appellants resisted the request for
expenses on the basis that the petition had been misconceived, in particular
because the petitioners did not have title to present it.
6. The
Sheriff's decision to award expenses to the petitioners was based on the following considerations. First, she rejected, in emphatic terms, a
suggestion that the petitioners ought to have known from a perusal of the
appellants' management accounts for the period for nine months to 31 December
2005 that there was no basis for the suggestion that the appellants were unable
to pay their debts. She observed that
these accounts were not introduced into the appellants' averments until 20
September 2006. She said: "In my opinion
it was reasonable for the petitioners to rely upon the clear and unambiguous
representations made by the respondents' agents in December 2005 that the
respondents were insolvent. It was only
on the eve of this debate that accounts upon which third parties might rely
were produced in which a different picture was painted. In these circumstances it would seem
equitable that the respondents meet the expenses incurred to date".
7. The
Sheriff then dealt with the submission presented to her that the petitioners
were not "contingent creditors" of the appellants within the meaning of section
124 of the 1986 Act. In this respect she
made the following observations in terms of numbered paragraphs of her
Note. These are:
"15. Whatever
may be the view of the respondents, whether any further sums are due to the
petitioners under the contract is a question to be determined by architects who
have been appointed for the purpose.
Until a final certificate is issued by them it remains possible that
further sums may be certified as due to the petitioner.
16. It was
accepted that a contingent debt is a debt which will become enforceable only on
the occurrence of an event which may or may not happen. The respondents maintain that there is no
underlying obligation between the parties and accordingly there can be no contingent
liability. However it seems to me that
the circumstances of the contract between the parties particularly where no
final certificate has been issued mean that there are continuing obligations
between the parties and the potential for further liabilities.
17. In the
case of Costain Building and Civil
Engineering Limited v Scottish Rugby Union PLC 1993 SC 650 to which I
was referred parties had entered into a building contract in terms of which
payment to the contractors was dependent upon certification by engineers
appointed by the employers. No
certificate had been issued and accordingly there was no immediate liability
for payment. The sum claimed was
conditional upon being certified as being due by the engineers. Arrestment in security in these circumstances
was incompetent.
18. In my
opinion there is a striking similarity with the circumstances of the present
case. The parties entered into a
building contract in terms of which payment to the contractors is dependent
upon certification by architects employed appointed by the employers. The contractors have submitted a claim for
payment. The architects have not yet
issued a final certificate. If the
architects certify that further sums are due to the contractors the employer
will be under an obligation to make payment.
I consider that counsel for the respondents is wrong in suggesting, as
he did, that there would be no underlying obligation upon the respondents
unless and until the claim was certified by the architects. Once the architects have certified that a sum
is due to the contractors the debt is certain and enforceable. Until that stage the debt is future and
contingent."
The
Sheriff went on to say that following the reasoning in Costain it appeared to her that the petitioners were
contingent creditors of the appellants.
8. In
broad outline the appellants contend that the Sheriff erred in law in holding
that the petitioners were contingent creditors of the respondents for the
purposes of section 124 of the 1986 Act, and further had erred in holding that
there was a "clear and unambiguous" representation of insolvency in the letter
of 13 December 2005.
9. In
relation to the first of these matters counsel contended that a contingent
creditor was someone to whom a contingent debt is owed. For a contingent debt to exist, there must be
an existing obligation between the creditor and debtor, which will only become
enforceable on the occurrence of an event which may or may not happen (Gloag
on Contract 2nd Ed page 272; Bell Principles 10th
Ed paragraph 47; Bell Commentaries (7th Ed) Vol 1 page 332). If, however, there is no underlying
obligation there can be no contingent liability.
10. Counsel
founded on the case of Walter L Jacob
& Co v The Financial Intermediaries Managers and Brokers Recoglatory
Association 1988 SCLR 184. In
that case a petition was brought under section 122 of the 1986 Act, the right
to petition being based on an assertion that the petitioners had raised an
action in the High Court in
11. A
petition for winding up is intended to be a summary procedure and it was well
recognised that it is not a suitable opportunity in which to assess competing
versions of facts. Thus in Stonegate Securities v Gregory
1981 Ch 576 Lord Justice Buckley (at page 587C) said: "The whole doctrine
of this part of the law is based upon the view that winding up proceedings are
not suitable proceedings in which to determine a genuine dispute about whether
the company does or does not owe the sum in question; and equally I think it must be true that
winding up proceedings are not suitable proceedings in which to determine whether
that liability is an immediate liability or only a perspective of contingent
liability". If a petition for
liquidation was not the appropriate form
of proceedings in which to determine whether a present debt was truly
due or not, it followed a fortiori
that it was not appropriate for determining whether a contingent debt existed
or not. The petitioner had accepted, in
a Note of Argument for debate, that they may ultimately be due no further
payment from the appellants. There was
plainly a dispute between the parties and in these circumstances it could not
be said that the petitioners were contingent creditors for the purposes of
section 124 of the 1986 Act.
12. Counsel
turned to the case of Costain. He
observed that whilst the contractual arrangements between the parties may have
been similar to the present circumstances the case was in no sense authority
for the proposition that those in the position of the petitioners were
contingent creditors for the purposes of section 124. The case was concerned with the circumstances
in which it was appropriate to allow arrestment on the dependence of an
action. It did not address the
definition of "contingent creditor". The
court had proceeded on the basis that the pursuers' averments required to be
treated pro veritate and that
an existing contractual obligation did exist.
13. That,
maintained counsel was sufficient to enable him to succeed. The petitioners had no title to bring the
present petition and should not have been awarded the expenses of it. Although accepting that it was very much a
subsidiary argument he maintained that the Sheriff was not justified in
observing that the appellants' agents had represented their clients as being
insolvent. All that the letter of 13
December 2005 did was to indicate that they would be unable to pay a disputed
debt if it became due following the occurrence of an uncertain
event. For the purposes of proceeding with
a winding up petition it was necessary to show that the company is
unable to pay its debts.
14. The
solicitor for the petitioners commenced his submissions by indicating that a
much more detailed submission had been presented on behalf of the appellants
than had been advanced on their behalf before the Sheriff. The Court should be slow to entertain the
appeal and in particular should not entertain any arguments which had not been
placed before the Sheriff. There had
been no obvious miscarriage of justice and the decision on expenses was a
matter within the Sheriff's discretion.
15. There
were two essential questions, the first was whether there was a contingent debt
upon which the respondents were entitled to found; the second was whether the appellant company
was insolvent. On the subject of the
existence of a contingent debt the petitioners' solicitor founded on the case
of Costain, in particular on
the remarks of the Lord President at page 582E, and in a passage of the Opinion
of Lord McCluskey at 584A which is in the following terms: "At the present time there is no debt. It may well be that at some stage, following the conclusion of such parts of the
arbitration process as the parties invoke, that a debt will emerge one way or
the other. Undoubtedly, therefore, there
is a contingency: one party or the other may be able to demonstrate to the
Arbitrator that one or more of the engineers' certificates is or are defective,
by reason, for example, of being overgenerous or unduly mean. But, at this stage, any possibility of a net
debt arising out of that must be regarded as contingent". In the present case the contingency depended
on the issue of a certificate by the architect. The architect was in the employment of the
appellants. It was within their power to
have the certificate issued. If their
position, in good faith, was that there was no debt they had it within their
power to put that beyond doubt by arranging for the issue of a final
certificate.
16. On the
question of insolvency the respondents had been entitled to found on the
appellants' agents letter of 13 December 2005.
That said in terms that the company could not meet its debts as they
were being paid by Directors as they fell due.
In these circumstances there could be no question that the petitioners
had title to bring the petition.
DISCUSSION
17. This
case, in my judgment, is distinguishable from Walter M Jacob which was on any view a somewhat extreme
one. The "claim" upon which the
liquidation petition was founded in Jacob
was no more than that - it was a claim for damages, apparently for libel, and
until it was established no obligation of any nature existed. In that situation the Sheriff was able to
hold that the petitioners were not contingent or prospective creditors. He took as the definition of "contingent
creditor" that contained in the case of Re
William Hockley Ltd 1962 1WLR 555 that is: "A person towards whom under an existing
obligation the company may or will become subject to a present liability on the
happening of some future event or at some future date" (PennycuickJ at 585).
18. The
view that a person claiming unliquidated damages who has not obtained judgment
is not a creditor for the purposes of presenting a petition for liquidation
appears to be consistent with certain English authority (see Palmer's Company
Law, paragraph 15.226.1). However, the
note to that paragraph suggests that the subject is not free from controversy. The authors also observe in the paragraph
itself that the term "contingent or prospective" creditor might "possibly"
include persons claiming unliquidated damages.
19. It is
tempting to say that there is no difference between the present case and that
of Jacob in that the prospects
of a debt arising is at best a possibility as it was in Jacob. But the
present dispute arises against a background of work done under an existing
contract, the issue being whether that work and the contractual terms governing
it give rise to an additional entitlement of payment as well as damages. In my view a claim of that nature falls to be
regarded as a contingent claim.
20. I
accept counsel for the appellants' submission that the case of Costain is not direct authority
on the question of what constitutes a contingent claim for the purposes of
liquidation proceedings since the question before the Court was whether the
pursuers' claims were of a nature which gave rise to the right to arrest on the
dependence of the action. It was,
nevertheless, necessary for the Court to categorise the claim and the
petitioners' solicitor was justified, in my view, in founding on the passage in
the Opinion of the Lord President at page 582E where his Lordship
says: "Where a contract provides for
payment for work done on the issuing of a certificate by an engineer or
architect, the issue of a certificate is a condition precedent to the
contractors' right to demand payment. A
claim which is of that kind is a contingent claim because the debt is not due
until the certificate has been issued".
The present petitioners were on that view entitled to assert that they
were contingent creditors.
21. What is
equally clear in law is that a petition for liquidation is not regarded as the
appropriate means by which to resolve a substantial dispute between parties as
to whether a debt is owed or not (see for example, the acceptance of that
position noted by Lady Smith in Baker
Hughes Limited and Baker Hughes Inteq France SA 2005 SCLR 1084 at
1086A). That applies whether the debt is
said to be present or contingent, although in many cases it may well be said to
lie in the latter category.
22. Where I
consider there may be room for confusion is in the introduction of the concept
of "title to sue" into the situation of a creditor petitioning on the basis of
a contingent debt. The argument
presented before me proceeded under the banner of an attack on title, as it did
before the sheriff. It is also to be
noted that in Jacob the
Sheriff said: "I have concluded that the
present petitioners have no title to present the petition as they have not
established that they are properly to be considered contingent or prospective
creditors". Similarly in Baker Hughes (supra) Lady Smith said (at 1087A): "If the debt claimed is
disputed in good faith and on real and substantial grounds, then the
petitioners cannot satisfy the statutory requirement that they be a creditor so
as to have title to sue in a petition for winding up".
23. It is
understandable that the issue should be approached as one of "title" bearing in
mind that section 124(1) of the 1986 Act uses the term "contingent creditor", as
distinct from "person holding a contingent debt". In order to apply the rule that a petition
for liquidation "will not be entertained" if the debt is disputed on
substantial grounds, the courts appear to have taken the approach that where
there is such a dispute the petitioner will not be regarded as qualified as a
creditor for the purposes of section 124(1).
Whether that is to be regarded as undermining his title, or simply
removing a qualification, is open to debate, and it may be, curiously, that as
a matter of law a person who is a "contingent creditor" in the normal sense may
not be a contingent creditor for the purposes of section 124(1).
24. Be that
as it may the real question in any proceedings is whether the debt founded on
is the subject of a substantial dispute;
if it is, the court may conclude that the petitioning creditor cannot be
said to have a qualifying right to insist on the summary remedy of
liquidation. In extreme cases the
petition will be regarded as an abuse of process (eg Baker Hughes); in
other cases it will be dismissed (eg Jacob). There are, however, indications in certain of
the English authorities that the court will at least consider an application to
stay the proceedings whilst the issue over the debt is resolved elsewhere, an
approach which in itself tends to suggest that this is not truly an issue of
title.
25. It
follows that the argument before the Sheriff ought to have focussed on the
nature of the dispute and whether it was genuine and substantial. That issue appears to me to have been
addressed only obliquely. The Sheriff
records that "it was submitted that it was an abuse of process where a claim
was disputed to seek to put a company into liquidation. In an action for debt it would not be
competent to do diligence on the dependence where the debt was a contingent one". There is passing reference to Baker Hughes. The Sheriff's decision is primarily based
upon the view that the petitioners' debt was contingent in the general sense
and does not embrace the question of whether it fell to be regarded as qualifying
the respondents as contingent creditors for the purposes of section
124(1). That, of course, is hardly
surprising given the argument presented to the Sheriff.
26. It is
well recognised that an appellate court will not alter the decision on a
question of expenses on the basis of a point which was not argued at first
instance (Aird v School Board of
Tarbert 1907 SC 22). This cannot
be said to be a case in which the essential issue was not embraced in
the argument before the Sheriff, but the limited focus of the discussion before
her leaves me reluctant to intervene. I
consider, however, that there are further reasons for not allowing this
appeal. It is, I accept, open to debate
whether the letter of
27. In that
situation it could not be said to be an unreasonable exercise of the Sheriff's
discretion to arrive at the conclusion that the present respondents were
justified in bringing the petition and that it was not until late disclosure of
the appellants' financial position that it became clear that the petition could
not proceed. In all these circumstances,
despite an attractive and forceful argument presented by counsel for the
appellants, the situation is not one in which I am prepared to interfere.
(signed) EFB