13 November 2009
by OBG LTD and Others
against the United Kingdom
lodged on 30 October 2007
STATEMENT OF FACTS
The first applicant, OBG Limited, is a limited company registered in England. The second applicant, OBG (Plant and Transport Hire) Limited, is also a limited company registered in England. The third applicant, Ronald Robinson, is a British national who was born in 1946 and lives in Manchester. The fourth applicant, Ric Traynor, is a British national who was born in 1959 and lives in Manchester. The third and fourth applicants were appointed as liquidators of the first and second applicants in 1992. The four applicants are represented before the Court by Mr J Alderton, a lawyer practising in Leeds.
A. The circumstances of the case
The facts of the case, as submitted by the applicants, may be summarised as follows.
The first and second applicants, which were owned and controlled by two of their directors, Mr Owen Gallagher and Mr Patrick O’Brien, conducted a major utilities construction business in the early 1990s. The first applicant conducted the business and the second applicant owned the plant and equipment used. Their major customer was North West Water Limited (“NWW”), which accounted for at least 75% of their turnover.
On 6 March 1991, the first and second applicants mortgaged their assets and undertaking in favour of the Royal Bank of Scotland PLC (“RBS”), by means of debentures. The debentures were intended to provide security for RBS’ contingent liabilities under a bank guarantee in favour of one of the first applicant’s customers. No sum was actually due under the debentures.
In March 1992, a dispute arose between the first applicant and NWW, as a result of which NWW suspended payments to the first applicant. Being therefore unable to meet its obligations to its sub-contractors, suppliers and other creditors, the first applicant entered into negotiations with one of its major sub-contractors and creditors, Centriline Limited (“Centriline”) for a secured loan. No loan agreement was concluded. However, Centriline’s solicitors, Penningtons, drew up documentation arranging for the transfer of the first applicant’s mortgage in favour of RBS to Centriline. The documents were only executed by RBS.
Centriline claimed the rights of RBS under the debentures by assignment and on 8 June 1992 enforced their claimed security by appointing administrative receivers over all the assets and undertaking of the first and second applicants. The applicants maintain that Centriline had no lawful authority to take over the rights of RBS and thus to appoint receivers.
The receivers took legal advice from Penningtons, to the effect that their appointments were valid, and on 9 June 1992, took possession of all the assets and business of the first and second applicants. The receivers negotiated with NWW for the release of funds owed by NWW to the first applicant, in order to fund future activity. These negotiations were unsuccessful, however, and the receivers instructed the staff and contractors of the first applicant to cease all work due under the contracts between NWW and the first applicant on 12 June 1992. On the same date, the receivers also terminated the majority of the first applicant’s contracts with its staff and contractors.
The receivers then realised the assets of the first and second applicants by selling their land, plant and equipment; negotiating the settlement of the first applicant’s claims under its contracts with NWW; completing, assigning or abandoning the first applicant’s contracts with other customers; collecting the first applicant’s book debts and taking the credit balance in the first applicant’s bank account. In so doing, they realised a total amount of GBP 1,087,000. The negotiations with NWW resulted in an agreement that NWW would pay to the first and second applicants GBP 400,000 in full and final settlement of all claims under the contracts. This agreement was finally signed by NWW and by the receivers on behalf of the first and second applicants, with the concurrence of the third and fourth applicants, in August 1997. The entire sum realised by the receivers was put towards repaying the first and second applicants’ debt to Centriline and to the fees and expenses of the receivers.
Having no further assets with which to pay their remaining creditors, the directors of the first and second applicants called a meeting with their creditors on 29 July 1992, at which resolutions were passed to wind up the first and second applicants and to appoint liquidators. On that date, it is estimated that the first and second applicants owed their creditors, excluding Centriline, approximately GBP 4,000,000. The sole remaining asset of the first and second applicants was a claim against Centriline and the receivers for the purportedly unlawful appointment of the receivers and their realisation of the first and second applicant’s assets.
Consequently, and with their creditors’ approval, the first and second applicants commenced proceedings on 19 October 1995 against Centriline and the receivers, claiming that the appointment of the receivers had been unlawful and seeking damages. Centriline was, by this date, neither solvent nor trading, and went into liquidation on 24 April 1996. It did not, therefore, take an active part in the proceedings commenced by the applicants.
Prior to the first hearing, Penningtons admitted that their advice to the receivers, namely that their appointment had been valid, had been negligent and that Penningtons were accordingly liable to the receivers for any loss resulting from their advice.
By order dated 31 January 2001, the High Court declared that the appointment of the receivers was invalid and ordered the receivers to pay damages to be assessed at a later date. The reasons for this decision were set out in a judgment dated 27 April 2001 and can be summarised as follows.
The judge found that the “points of objection” against the receivers’ appointments were “numerous and formidable.” Chief amongst these points were the facts that the monies due by the first and second applicants to Centriline were not and could not be included under the charges under which the receivers had been appointed; that the transfer of the charges from RBS to Centriline had not been executed by all parties; and that at no point were any monies due under the charges or the counter-indemnity in favour of RBS and there was therefore never anything for which a demand could be made. There was therefore no authority under which receivers could be appointed. He was satisfied that their appointments were invalid, and ordered the receivers to pay damages to be assessed.
In a written judgment dated 18 February 2004, which followed a five-week trial in 2003, the same judge concluded that the liquidation or insolvency of the first and second applicants would have occurred even if the receivers had not been appointed, but that liquidators would have realised a larger sum than the receivers did. He assessed the damages due to the first and second applicants as being GBP 1,854,000 plus interest in the sum of GBP 1,180,579. The damages as assessed included both tangible property and contractual rights. The amount of liquidators’ costs and expenses caused by the receivers’ invalid appointment was to be quantified at a later hearing.
The receivers and Penningtons appealed to the Court of Appeal, arguing inter alia that although the receivers were liable to the first and second applicants in tort for their tangible property, the law did not allow damages in respect of contractual rights where receivers had been invalidly appointed. The Court of Appeal held on 9 February 2005 by a majority of two to one, and “with regret”, that the appellants’ argument was correct and allowed their appeal in part. By order dated 21 February 2005, the Court of Appeal reduced the amount of damages owed to the applicants to GBP 244,000 plus interest. The difference between the damages as assessed by the High Court and those as assessed by the Court of Appeal is explained by the Court of Appeal’s finding that the law did not provide for damages to the applicants in respect of their bank account, sums due under contracts, or other debts.
The first and second applicants appealed to the House of Lords against the judgment of the Court of Appeal. They argued that the receivers were liable in tort for unlawful interference with the applicants’ contractual relations, or alternatively, liable in conversion (the misappropriation of property). By judgment dated 3 June 2007 and by a majority of three to two, the House of Lords upheld the Court of Appeal’s decision and dismissed the appeal. As to the applicants’ claim based on the interference with contractual relations, Lord Hoffmann, who gave the leading speech for the majority, held that there were only two possible causes of action: procuring a breach of contract which creates accessory liability or causing loss by unlawful means. It was plain and obvious that the requirements for liability under either of these torts were not satisfied. There was no breach or non-performance of any contract and therefore no wrong to which accessory liability could attach; and the receivers neither employed unlawful means nor intended to cause the applicants any loss.
As to the applicants’ claim in conversion, Lord Hoffmann noted that conversion was historically a tort against a person’s interest in a chattel and, consistently with its ancient origin, was a tort of strict liability. It was a commonplace that the law had always been very wary of imposing any kind of liability for purely economic loss. The economic torts which had previously been discussed were highly restricted in their application by the requirement of an intention to procure a breach of contract or to cause loss by unlawful means. Against this background, it would be an extraordinary step suddenly to extend the old tort of conversion to impose strict liability for pure economic loss on receivers who were appointed and acted in good faith.
Lord Hoffmann disagreed with the Court of Appeal’s expression of regret that the applicants did not have a remedy in law for the acts of the wrongfully appointed receivers. He noted that it was not a case in which a wrongful appointment of receivers had caused damage to a solvent company; the trial judge had found that the first and second applicants were inevitably headed for insolvent liquidation in any event. The receivers had acted in good faith, believing their appointment to be valid. Furthermore, the liquidators of the first and second applicants had concurred in the agreement reached with NWW for the full and final settlement of all claims arising under the first applicant’s contracts with that company.
Lord Nicholls of Birkenhead, who together with Baroness Hale of Richmond formed the minority in the House of Lords, would have allowed the appeal on the basis of conversion. He argued that conversion had been extended in the past to cover not only chattels but also rights of action which were embodied or recorded in a document. He saw no reason why it could not be extended still further to encompass rights of action which were not so documented, viewing this as a “modest but principled extension” of the doctrine.
B. Relevant domestic law
An administrative receiver is an individual appointed in respect of a company by a person holding a charge over that company. The power to appoint a receiver and the circumstances under which a receiver may be appointed should be set out in the document which creates the charge. The receiver is appointed to take possession of the company’s property for its protection or realisation, on behalf of the charge-holder. Part III of the Insolvency Act 1986 deals with receivership. An “administrative receiver” is defined at section 29(2)(a) as being,
“a receiver or manager of the whole (or substantially the whole) of a company’s property appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities.”
Section 34 of the same Act provides that,
“Where the appointment of a person as the receiver or manager of a company’s property under powers contained in an instrument is discovered to be invalid (whether by virtue of the invalidity of the instrument or otherwise), the court may order the person by whom or on whose behalf the appointment was made to indemnify the person appointed against any liability which arises solely by reason of the invalidity of the appointment.”
Section 44 provides that,
“(1) The administrative receiver of a company –
is deemed to be the company’s agent, unless and until the company goes into liquidation;
is personally liable on any contract entered into by him in the carrying out of his functions (except in so far as the contract otherwise provides) and on any contract of employment adopted by him in the carrying out of those functions; and
is entitled in respect of that liability to an indemnity out of the assets of the company.
(2) For the purposes of subsection (1) (b) the administrative receiver is not to be taken to have adopted a contract of employment by reason of anything done or omitted to be done within 14 days after his appointment.
(3) This section does not limit any right to indemnity which the administrative receiver would have apart from it, nor limit his liability on contracts entered into or adopted without authority, nor confer any right to indemnity in respect of that liability.”
The applicants complain under Article 1 of Protocol 1 to the Convention both that there has been an interference with their peaceful enjoyment of their possessions and that they have been deprived of their possessions. They argue that the United Kingdom is in breach of its positive obligation under Article 1, to protect the applicants’ contractual rights through its legal system, from unlawful interference of the kind perpetrated by the receivers, by entitling the applicants to recover just compensation for the losses suffered from such interference and deprivation. They also complain that they did not have available to them an effective domestic remedy as required by Article 13 of the Convention.
QUESTION TO THE PARTIES
Has there been an interference with the applicants’ peaceful enjoyment of their possessions, within the meaning of Article 1 of Protocol No. 1? If so, has there been compliance with the States’ positive obligation to secure through its domestic legal system the applicants’ rights under Article 1? The parties are asked in this regard to comment on the doctrine of pure economic loss as applied to the facts of this case.