England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MR. JUSTICE BRISTOW)

		Royal Courts of Justice,
		11th December 1981

LORD BRANDON:

1. This appeal arises in an action in which Roberts Petroleum Ltd. ("Roberts") are plaintiffs and Bernard Kenny Ltd. ("Kenny"), now in liquidation, are defendants, Roberts are and were at all material times wholesale suppliers of petroleum products. Kenny, at all material times before they went into liquidation, were retailers of such products, and as such were the owners of two filling stations in North Yorkshire. The first of these was known as the Malton Road Filling Station, Pickering ("Malton"). The second was known as the Marklands Garage, Langthorpe, Boroughbridge ("Marklands").
2. Kenny bought the petroleum products which they sold to the public from a number of different wholesalers. These included Roberts, Cawoods Fuel Oils Ltd. ("Cawoods"), National Benzole Company Ltd. ("National Benzole") and Nafta (G.B.) Ltd. ("Nafta").
3. By October or November 1978 Kenny had run into serious financial difficulties in that they owed large sums of money to their various wholesalers which they were unable to pay as and when payment became due. The creditors to whom Kenny owed the largest debt were Roberts.
4. In this situation negotiations were entered into between two firms of solicitors acting for Roberts and Kenny respectively. The aim of these negotiations was that, in consideration of Kenny being given extended credit by Roberts, Kenny would give Roberts a first legal charge on Marklands to secure their indebtedness to the latter. The negotiations proceeded a long way and nearly reached fruition. In the end, however, Kenny failed to execute the instrument of charge which had been prepared, and on or about 27th February 1979 the negotiations came to an abrupt end.
5. Meanwhile, on 24th January 1979, Cawoods had issued a specially endorsed writ against Kenny, in which they claimed £22,500 for petrol sold and delivered* That writ had been served on Kenny on 7th February 1979, but no appearance had been entered by Kenny to it.
6. On 8th February 1979, following the breakdown of the negotiations between Roberts and Kenny through their respective solicitors to which I referred above, Roberts issued a specially endorsed writ against Kenny in which they claimed £74,001.02 for petrol sold and delivered. That writ was served on Kenny by post forthwith. Again, as in the case of Cawoods' writ, no appearance was entered by Kenny.
7. Shortly afterwards, on 9th or 12th March 1979? Cawoods entered judgment in default of appearance against Kenny for the amount of their claim (less certain small sums which it was agreed that Kenny were entitled to set off) and costs.
8. Before and after Cawoods obtained that judgment, correspondence took place between Cawoods' solicitors and the solicitors acting for Kenny in relation to Cawoods' claim, in which Cawoods' solicitors pressed Kenny's solicitors to get the directors of Kenny to guarantee personally the indebtedness of Kenny to Cawoods. This correspondence began on 26th February 1979 and continued until 6th March 1979? when Kenny's solicitors rejected the proposal. Cawoods' solicitors then put forward an alternative proposal for ensuring payment for any petrol sold by them to Kenny, which Kenny's solicitors by letter dated 8th March 1979 also rejected Cawoods' solicitors then threatened, on behalf of their clients, to enforce the judgment which they had earlier obtained against Kenny unless Kenny agreed to make certain specified instalment payments. Kenny did not so agree, but in fact Cawoods' solicitors took no steps to enforce the judgment concerned.
9. On 12th March 1979 there was a meeting of Kenny's directors attended by Mr. Ward, a partner in the firm of solicitors acting for Kenny in relation to Cawoods' claim. Mr. Ward had originally supposed that Cawoods were Kenny's only creditors, but had later learnt from Kenny's auditors that there were other creditors also, and that these auditors had recommended to Kenny that they should sell their two filling stations, Malton and Marklands, as going concerns, in order to meet the claims of their creditors.
10. At the meeting on 12th March 1979 Mr, Ward advised Kenny's directors that the company ought not to delay any further in putting its affairs before all its creditors. He further asked for, and obtained, instructions from the directors to engage an independent firm of insolvency accountants, Messrs. Poppleton & Appleby of Sheffield ("Poppletons"), to prepare a Statement of Affairs as a matter of urgency.
11. On 16th March 1979 Poppletons sent out letters, all in the same terms, to each of Kenny's creditors, including Roberts* In those letters Poppletons gave notice of a meeting (since described as an "informal meeting") of all Kenny's creditors to be held at the offices of Kenny's solicitors in Leeds on 26th March 1979. They invited all creditors to attend the meeting and asked them meanwhile not to begin or continue any legal proceedings against Kenny. They further requested the creditors to inform them of the amounts owing to them and of any securities in respect of such indebtedness held by them.
12. On 23rd March 1979 Roberts entered judgment against Kenny in default of appearance for £74,001.02 and £54.55 costs. They then on the same day sought and obtained from the Scunthorpe District Registrar a charging order nisi under which Kenny's two filling stations, Malton and Marklands, were charged with payment of the judgment debt. The order further provided that Mr. Panter, an accountant employed by Roberts, should be appointed as receiver for the purposes of the charging order, and fixed 4th April 1979 as the date on which cause could be shown why the charging order nisi should not be made absolute.
13. The informal meeting of creditors arranged by Poppletons took place as planned on 26th March 1979. Roberts were represented by Mr. Armitage, an accountant, and twelve other creditors of Kenny, having claims amounting to about £95,000 in all, were either present or represented. It was estimated that the claims of Roberts and the other twelve creditors present or represented constituted about 95% of the total trade claims against Kenny. Mr* Ward informed the meeting of the charging order nisi obtained by Roberts, and made available to the creditors the Statement of Affairs prepared by Poppletons* The latters' report of the meeting showed that the principal creditors were National Benzole for £57,922, Cawoods for £22, 141, Nafta for £24,520 and Roberts for £74,055. The Statement of Affairs showed that Kenny were insolvent, with an overall deficit of the order of £106,000.
14. The conclusion reached by the meeting was expressed by Poppletons in the penultimate paragraph of their report as follows:

"In conclusion, therefore, the creditors present unanimously agreed to the aforesaid recommendation of a 56 day Moratorium subject to the withdrawal of proceedings by Roberts and subject to the company being able to trade for cash, which it has done for practical purposes for the whole of March, without suffering any substantial loss in trading. It was also therefore agreed that Messrs. Poppleton & Appleby set up a weekly cash account system so that the largest creditors could have a weekly Receipts and Payments Account and in the meantime the company to incur no further credit and pay no further payments to creditors".

15. According to Mr. Ward, when the meeting closed, it was left that Roberts would inform him of their decision within 48 hours.
16. In fact, again according to Mr. Ward, it proved impossible to obtain from Roberts, who did not agree with the plan, any decision either way on the matter. As a result an Extraordinary Meeting of Kenny was held at Mr. Ward's offices at 12.00 noon on 2nd April 1979, at which Extraordinary Resolutions were passed that Kenny be wound up and that Mr. Priestley of Poppletons should be appointed liquidator.
17. Two days later, on 4th April 1979, there took place before the District Registrar the hearing of the question whether or not good cause had been shown why the charging order nisi obtained by Roberts on 23rd March 1979 should not be made absolute. The District Registrar, being aware from the affidavits put in on either side of the history of the matter as I have described it, came to the conclusion that the charging order nisi should be made absolute, and made an order to that effect.
18. Kenny desired to appeal from that decision and the view of the solicitors on both sides was that an appeal from a District Registrar against an order making absolute a charging order nisi lay directly to this court. Later, after a great deal of unnecessary effort and money had been expended for the purpose of an appeal to this court, it became apparent that, under the Rules of the Supreme Court then in force, such an appeal lay to a judge in chambers and not directly to this court.
19. As a result of these misapprehensions about the proper procedure for appealing from the District Registrar, a great deal of time was also lost, so much so that the appeal did not come before a judge in chambers, Mr. Justice Bristow, until 13th October 1980. That appeal was clearly a long way out of time, but, since there had been a common mistake by the solicitors on either side, no point was taken about that.
20. By order dated 13th October 1979 Mr. Justice Bristow allowed Kenny's appeal and set aside the order of the District Registrar dated 4th April 1979. We had placed before us what was described as an agreed note of the reasons given for his decision by Mr. Justice Bristow. It appears, however, that the agreed note was never submitted to the learned judge for his approval as it ought to have been. We must, however, do the best we can on the material before us.
21. The learned judge expressly found that, once the Resolutions of 2nd April 1979 were passed, although no further steps towards winding up had been taken, there was no prospect of a finding of solvency, and Kenny were on the road towards liquidation from which there was no turning back for them.
22. He went on to deal with the principles of law applicable in deciding whether or not, in circumstances of the kind before him, a charging order nisi should be made absolute* In this connection he said:

"It is certain that if a creditor who has secured the advantage of the charging order nisi has done so by means of doing something amounting to a 'dirty trick¹ - for instance has given the appearance of going along with a scheme of arrangement and then gone behind the other creditors and taken advantage of special knowledge, or anything which a fair-minded person would stigmatise as not being fair play -the court will stigmatise that as inequitable and will not confirm the order.

"But as I read the cases that is not the only situation in which it would be inequitable to let him keep his advantage.

"If, at the time when the court has to decide whether or not to make the order absolute, the company is irretrievably on the road to dissolution, then the consideration of obtaining equal treatment for all the unsecured creditors in order to do equity becomes paramount, and the creditor who, even without any degree of foul play or trickery, has obtained an advantage (which is still provisional) is not to be allowed to keep that advantage. That seems to me to follow from the cases.

"Accordingly the District Registrar was wrong and ought to have discharged the order".

23. Cases like the present one involve a conflict between two well-established principles of law. The first principle is that a judgment creditor is in general entitled to enforce a money judgment which he has lawfully obtained against a judgment debtor by all or any of the means of execution prescribed by the relevant rules of court. Such rules provide, among other things, for the enforcement of a judgment debt by means of a charging order on the judgment debtor's lands or interests in land and the appointment of a receiver. The second principle is that, when a judgment debtor, whether he be a natural person or a corporate body, has become insolvent, all the unsecured creditors should be treated equally, each receiving the same proportionate share of the inadequate fund available as all the others.
24. Various authorities were cited to us, as they were before Mr. Justice Bristow, in which this court decided, on the particular facts of the particular case, whether a garnishee or charging order nisi should be made absolute or not. Those authorities included: Hudson's Concrete Products Ltd. v. D.B. Evans (Bilston) Ltd., (1961) Solicitors' Journal, 281, Bar Library transcript No. 110 of 1961; Wilson (D) Birmingham Ltd. v. Metropolitan Properties Ltd., [1975] 2 All ER 814; Rainbow v. Moorgate Properties Ltd., [1975] 1 WLR 788; Glass (Cardiff) Ltd. v. Jardean Properties Ltd., & Anor., (1976) 120 Solicitors' Journal, 167, Bar Library transcript dated 30th January 1976; and Burston Finance Co.Ltd. v. Godfrey, [1976] 1 WLR 719.
25. I do not propose to examine individually these various authorities cited to us, the outcome of which necessarily depended in the end on the particular facts of each particular case. I shall rather try to distil from those authorities the principles of law which they appear to me collectively to establish. In cases where a charging order being made absolute is not precluded by a winding up order, those principles can, in my view, be summarised as follows:-

(1) The question whether a charging order nisi should be made absolute is one for the discretion of the court.

(2) The burden of showing cause why a charging order nisi should not be made absolute is on the judgment debtor.

(3) For the purpose of the exercise of the court's discretion there is, in general at any rate, no material difference between the making absolute of a charging order nisi on the one hand and a garnishee order nisi on the other.

(4) In exercising its discretion the court has both the right and the duty to take into account all the circumstances of any particular case, whether such circumstances arose before or after the making of the order nisi.

(5) The court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved, that is to say the judgment creditor, the judgment debtor, and all other unsecured creditors.

(6) The following combination of circumstances, if proved to the satisfaction of the court, will generally justify the court in exercising its discretion by refusing to make the order absolute:-

(i) the fact that the judgment debtor is insolvent; and

(ii) the fact that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding.

(7) In the absence of the combination of circumstances referred to in (6) above, the court will generally be justified in exercising its discretion by making the order absolute.

26. In summarising the relevant principles in this way, I have deliberately confined myself to cases like the present one, in which there is no allegation of conduct amounting to trickery on the part of the judgment creditor who has obtained an order nisi.
27. The learned judge, as appears from the passage from the agreed note of his judgment which I quoted earlier, treated the circumstance that Kenny were insolvent and irretrievably on the road to liquidation, as sufficient reason by itself for refusing to make absolute the charging order nisi. He further stated that that was the conclusion to which he was led by the authorities cited to him.
28. With great respect to the learned Judge, I am of opinion that, in approaching the question which he had to decide in this way, he was misdirecting himself in law. The authorities do not, in my view, establish that the insolvency of a company, followed or to be followed inevitably later by a liquidation, is enough of itself to justify the court in exercising its discretion by refusing to make an order nisi absolute. There must, as I indicated earlier when trying to summarise the collective effect of the authorities, be some further factor in the situation, the most common such factor being that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding.
29. In this connection it is, I think, helpful to refer to the judgment of Lord Justice Scarman (as he then was) in Burston Finance Co. Ltd. v. Godfrey, [1976] 1 WLR 719, bearing in mind that it was a case of a natural person going bankrupt between the date of a charging order nisi and the date of the further hearing for consideration of the question whether the order should be made absolute or not. Lord Justice Scarman said at page 734-:-

"I cannot conceive how the mere making of a decree of administration of a debtor's estate without further evidence as to a debtor's estate could be a sufficient cause for refusing to make the order absolute .... Similarly the mere fact of a receiving order, or even an adjudication in bankruptcy, subsequent to the order nisi, would not necessarily suffice: if, however, there were other circumstances, such as a scheme of arrangement, formal or informal, agreed or being negotiated amongst creditors, the court might well think it equitable to refuse the order absolute".

30. Further light on this aspect of the matter is thrown by the observations of the members of this court in Glass (Cardiff)Ltd. v. Jardean Properties Ltd. & Anor. (1976) Solicitors' Journal, 167; Bar Library transcript dated 30th January 1976. Lord Denning, Master of the Rolls, distinguished the case then before him from Rainbow v. Moorgate Properties Ltd., (1975) 1 WLR 788, in which this court refused to make absolute a charging order nisi against an insolvent company. He said at page 3 of the Bar Library transcript, referring to the Rainbow case:-

"The important fact there was that the company was in voluntary liquidation, but furthermore there was a well advanced scheme of arrangement. Nearly all the creditors had agreed to it. It had come before the court for approval; and there was every prospect of it being approved".

Lord Justice Lawton, at page 4- of the Bar Library transcript, said:-

"Mr. Nicholls, with his great experience, has told us that he has never known of a creditor being refused this remedy (i.e. that of having a charging order nisi made absolute), except where there is a winding up order or a well advanced scheme of arrangement with every prospect of going through.

"All that we have in this case is a letter from accountants which leaves many things unsaid. It is quite insufficient to hold out any substantial prospect of a scheme of arrangement. I see no reason why the judgment creditors, who have been diligent in pursuing their legal rights, should be held up any longer. The Registrar was quite right to make the charging order absolute ...

"This case is quite outside the Rainbow case. I see no reason why the charging order should not be made absolute".

Lord Justice Bridge (as he then was) agreed with both judgments.

31. On the footing that the learned judge, in exercising his discretion in the present case, misdirected himself in law in the respect which I have indicated, it is both the right and the duty of this court to exercise its own discretion anew.
32. I accept the finding of the learned judge that Kenny were insolvent and irretrievably on the road to liquidation. But I then go on to ask myself whether there is any other significant factor in the case, and in particular whether there was a scheme of arrangement agreed to by other creditors which had a reasonable chance of success.
33. As to this, the evidence shows that most of the other creditors were in agreement on a scheme whereby Kenny would be given a moratorium of 56 days to enable them to dispose of their two filling stations, Malton and Marklands, as going concerns to the better advantage of the general body of creditors. This agreement was, however, subject to two conditions. The first condition was that Roberts should withdraw their charging order proceedings. The second condition was that Kenny would be able to trade for cash without suffering any substantial loss in trading. There was no satisfactory evidence as to what prices the filling stations, if offered for sale as going concerns, would be likely to fetch. There was further no certainty at all that Kenny would, pending sale of the filling stations, be able to trade for cash without suffering any substantial loss in such trading.
34. Finally, and I consider that this is a significant additional factor to bear in mind, the amount of money owed to Roberts, for which they already had a judgment, represented about 45 per cent of the total amount of money owing to all the known trade creditors taken together. This fact makes it difficult to regard those other creditors as being the "main body" of Kenny's creditors.
35. On the evidence in this case, I do not think that it is possible to say that there was in existence at the material time a well advanced scheme of arrangement set up by the main body of creditors which had a reasonable chance of success. There was no more than a tentative plan, agreed to by creditors all of whose claims added up together amounted to only about 55 per cent of Kenny's total trade debts, the balance of about 45 per cent being, as I said above, owed to Roberts. That tentative plan might or might not have had a reasonable chance of success. The evidence went nowhere near to establishing that it did have such a chance.
36. Having regard to these matters, it seems to me that the present case has more in common with the Glass (Cardiff) case, in which this court exercised its discretion by making the charging order nisi absolute, than the Rainbow case in which the court exercised its discretion by refusing to do so.
37. After considering all the circumstances of the present case, I have reached the clear conclusion, for the reasons which I have given, that this court should exercise its discretion by making the charging order absolute.
38. It follows that I would allow the appeal, set aside the order of the learned judge and restore the order of the District Registrar.

LORD JUSTICE CUMMING-BRUCE: I agree.

LORD BRANDON: Dame Elizabeth Lane is unfortunately unable to be here today, but she has authorised me to say that she concurs with my judgment.

(Order; Appeal allowed; order of Bristow J» set aside; leave to appeal to House of Lords refused)