England and Wales Court of Appeal (Civil Division) Decisions

Case No: B2/1999/1266

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM HIS HONOUR JUDGE HOLDEN

EPSOM COUNTY COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Thursday 21st December, 2000

LORD JUSTICE MUMMERY:

The Appeal

1. This is an appeal from an order of HHJ Holden, sitting in the Epsom County Court on 15 October 1999. He dismissed an action by Foamcrete (UK) Limited against Thrust Engineering Limited for recovery of the balance of the purchase price (£ 13,519.80 plus interest) due, in respect of the purchase and delivery of certain stock and work in progress, from Thrust Engineering to PTE(UK) Limited (PTE) under an agreement in writing dated 3 June 1994.

2. Foamcrete was not a party to that agreement. It claimed to be the assignee of a charge over the debt due to PTE . The judge rejected the claim on the basis that, by reason of a prohibition on assignment in the Principal Agreement made on 3 June 1994, there was no effective assignment of rights to Foamcrete, which accordingly had no entitlement to sue.

3. Foamcrete appeals with the permission of the judge granted on 3 December 1999.

The Facts

4. PTE carried on the business of producing and selling trench technology duct and pipe laying products designed by an associated company called Innovations Holdings Limited.

5. On 17 June 1992 PTE entered into a debenture granting to the Midland Bank fixed charges over all book debts, goodwill and intellectual property rights and a floating charge over its undertaking and all its property, whatsoever and wheresover, both present and future.

6. On 3 June 1994 PTE and Innovations entered into an agreement with Thrust Engineering relating to the formation of a new company to be called Thrustmole Technologies Limited as a joint venture vehicle to market and sell products. That agreement was called the Principal Agreement. It contained clauses providing for the parties to enter into a number of supplementary agreements, as identified in various schedules, arising out of the transaction. By clause 5 of the Principal Agreement the parties agreed to enter into "the Agreement" (sic) in the agreed form and annexed thereto, including the agreement headed "Purchase of Stock" between PTE and Thrust Engineering, as set out in Schedule 4 to the Principal Agreement. It is recited as being "supplemental to" a Principal Agreement of the same date.

7. It is also stated in a summary of the provisions of the agreements attached to the Principal Agreement that the Purchase of Stock agreement governs the terms of sale by PTE to Thrust Engineering of its stock and work in progress upon terms that Thrust Engineering would complete and furnish such stock and work in progress for sale to a new company, Thrustmole Technologies. In the events which happened Thrust Engineering became liable to pay the purchase price of £20,484 plus VAT within 6 months .

8. Clause 18 of the Principal Agreement is at the heart of this dispute. Omitting immaterial parts, it provided as follows:-

"18.1 This agreement shall be binding upon the parties to this agreement and their respective successors and permitted assigns Provided that neither of the parties to this agreement shall be entitled to assign this agreement or any of its rights and obligations under this agreement except by a transfer of that party's shares in the Company which is permitted under the express terms of this agreement and/or which is made in accordance with the articles of association or which is otherwise approved in writing by the other party to this agreement and (in either case) on terms that the transferee shall covenant with that other party to perform all the obligations of the Transferor under this Agreement.

......................

18.6 This agreement (together with all agreements and documents executed contemporaneously with it or referred to in it) constitutes the entire agreement between the parties in relation to its subject matter and supersedes all prior agreements and understandings whether oral or written with respect to such subject matter...."

9. On 9 August 1994 PTE went into liquidation. One of the consequences of liquidation was that the floating charge on the assets and undertaking of PTE became enforceable and crystallised in accordance with clause 8 of the Debenture.

10. It was alleged that payment became due under the agreement on 3 December 1994. Thrust Engineering paid £6,762.90 to PTE under the Purchase of Stock agreement in November 1995 and a further sum of £3,822 in December 1995, leaving a balance of £13,519.80.

11. On 24 January 1996 Midland Bank formally transferred to Foamcrete

"...the Debenture......and all principal monies and interest secured by it and the full benefit of it subject to the conditions on which we hold it."

12. It was followed by a Deed of Confirmation necessitated by a mistake in the typing of the name of Foamcrete in the Transfer.

13. Thrust Engineering had been given notice of the intended assignment and had been notified that the payments due from it to PTE should be made to Foamcrete. A written demand for the balance was made on 26 September 1997.

14. Payment was not made. Foamcrete started proceedings against Thrust Engineering in the Croydon County Court relying on the terms of the Purchase of Stock agreement, the Debenture, the transfer of the Debenture and the notice of the transfer.

15. In the defence and counterclaim Thrust Engineering denied that the assignment relied on (i.e. the transfer of the Debenture) was either lawful or effective, being in breach of clause 18.1 of the Principal Agreement. It had not been approved in writing by Thrust Engineering, as required by clause 18.1. It was contended that, even if Foamcrete were assignee of the Debenture, it could not stand in any better position than the original debenture holder. A counterclaim was made for the rectification of the Purchase of Stock agreement if it failed to reflect the construction contended for by Thrust Engineering.

The Judgment

16. In dismissing the claim and the counterclaim the judge held as follows:-

1. The sum claimed was in fact due and owing to PTE as at 3 December 1994 by reason of clause 4 of the Purchase of Stock agreement in Schedule 4 to the Principal Agreement. He found that there was no basis for rectifying it.

2. An assignment of the Debenture was made to Foamcrete.

3. The assignment was unlawful by reason of clause 18.1 of the Principal Agreement.

4. No written approval to the assignment had been given by Thrust Engineering.

Summary of Legal Position

17. I would allow this appeal and enter judgment for Foamcrete.

In outline the legal position is as follows:-

1. Thrust Engineering does not appeal against the judge's finding that the balance was due from it to PTE under the terms of the Purchase of Stock agreement.

2. That debt was "property" of PTE within the meaning of clause 4 (b) of the Debenture. It was accordingly subject to the floating charge in favour of the Midland Bank. When crystallisation occurred on the liquidation of PTE, the floating charge became a fixed charge and the bank became entitled to enforce its charge securing the sums owed to it by PTE.

3. By reason of the written transfer of the full benefit of the Debenture by the Bank Foamcrete became entitled to the charge on that debt and was entitled to enforce it against Thrust Engineering, who had been given notice of the intended transfer of the Debenture.

18. The only ground on which this result is challenged is that the transfer of the debenture was ineffective to vest in Foamcrete a title to sue for the balance of the purchase price.

The Effect of Clause 18.1

19. Clause 18.1 of the Principal Agreement is central to the submissions of Thrust Engineering on this appeal. I agree with Mr Haycroft, who appeared for Foamcrete, that clause 18.1 is irrelevant to these proceedings for two reasons-

1. The Construction Point

20. On the true construction of the documents executed on 3 June 1994 the prohibition on assignment did not apply to Foamcrete's claim in these proceedings. The judge found that the balance was due to PTE under the clause 4 of the Purchase of Stock agreement, which does not contain any express prohibition on assignment, whether absolute or by way of equitable charge. Although it is recited as being "supplemental to" the Principal Agreement, the Purchase of Stock agreement is a separate agreement relating to a specific transaction. It does not incorporate, either expressly or by implication, the provisions of the Principal Agreement generally or clause 18.1 specifically.

21. Although the parties to the Purchase of Stock agreement are also parties to the Principal Agreement, clause 18.1 relates only to their non-entitlement to assign "this agreement." On its natural and ordinary meaning that expression is a reference only to the Principal Agreement. The context reinforces that construction: the Principal Agreement embodies the joint venture provisions, which are by their nature less likely to be regarded by the parties as assignable than the right to be paid for the purchase of stock, which arises under a different agreement, as indicated by the provisions of clause 5 and 18.6 of the Principal Agreement.

2. The Unlawful Assignment Point

22. If, contrary to my view, clause 18.1 of the Principal Agreement does apply to the assignment of a debt arising under the Purchase of Stock agreement, it is necessary to address the contention of Thrust Engineering that the debt due from it to PTE was unassignable and that any purported assignment of it by PTE was unlawful and ineffective.

23. Mr Green, on behalf of Thrust Engineering, pointed out that Foamcrete was not a party to the Purchase of Stock agreement and was not entitled to sue on it as such. He also submitted that it was not a legal assignee of the debt arising under that agreement, either directly from PTE or indirectly via the transfer of the Debenture granted by PTE to the Midland Bank. It could not be a legal assignee for the simple reason that the debt claimed by Foamcrete was unassignable. At most the purported assignment to it could only be effective as between the parties to the transfer of the Debenture i.e. the Midland Bank and Foamcrete. Thrust Engineering was not party to that transfer. It had not given written consent to it. It had never agreed to pay any sum of money to Foamcrete. The judge was right to dismiss the claim for that reason.

24. In my judgment, this point is misconceived. It is based on a misreading of the decision of the House of Lords in Linden Gardens Trust Limited v. Lenesta Sludge Disposals Limited [1994] 1 AC 85 and on a fundamental misunderstanding of the juristic nature of the floating charge contained in the debenture.

25. Mr Green cited Linden Gardens as authority for the proposition that clause 18.1 was effective to prevent assignment without consent. That proposition fails to reflect fully the law as laid down in that case and the particular facts of this case.

26. Linden Gardens is authority for the proposition stated by Lord Browne -Wilkinson at p. 109C-D that

"....an assignment of contractual rights in breach of a prohibition against such assignment is ineffective to vest the contractual rights in the assignee."

In an earlier passage at p.108F-G he said

" Therefore the existing authorities establish that an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights. I regard the law as being satisfactorily settled in that sense. If the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition, viz, to ensure that the original parties to the contract are not brought into direct contractual relations with third parties."

27. This case is not caught by that principle. It is not a case in which PTE, after entering into the Principal Agreement (and the related agreements) on 3 June 1994, made an assignment of its contractual rights to a third party, Foamcrete, in breach of the contractual prohibition in clause 18.1.

28. Foamcrete claims as transferee of the charge conferred on the bank by PTE in the Debenture executed 2 years before the Principal Agreement was made. The grant of the Debenture and the creation of the fixed and floating charges in it could not possibly constitute a breach of the contractual prohibition against assignment in clause 18.1, as that contractual prohibition did not then exist.

29. The bank's security rights over the debt due from Thrust Engineering to PTE, now vested in Foamcrete, do not derive from any assignment made by PTE in breach of the prohibition in clause 18.1. They derive from the antecedent floating charge. That charge was lawfully created by the Debenture before the joint venture was entered into with the Thrust companies. The Debenture was effective to vest in the bank the security of an immediate equitable charge over all the present and future property of PTE , without in the meantime restricting its right to engage in trading activities prior to the occurrence of a crystallising event (i.e. the liquidation of PTE) , when it was converted into a fixed charge on PTE's assets, including the debt due from Thrust Engineering.

30. By virtue of the floating charge the bank acquired an immediate beneficial interest in all the property, present and future, subject to the equitable charge prior to the creation of the debt due to PTE from Thrust Engineering. The bank acquired a beneficial interest in that future debt : Re Margart Pty Ltd [1985] BCLC 314 at 318, a decision of the Supreme Court of New South Wales, (Equity Division). That interest of the bank was not subject to the prohibition against assignment in clause 18.1 of the Principal Agreement.

31. I prefer this analysis of the position to the surprising implications of the analysis proposed by Mr Green. For example, on his case PTE acted in breach of the prohibition in clause 18.1 of the Principal Agreement either (a) by the very act of entering into the Principal Agreement containing the prohibition against assignment at a time when its assets were subject to a prior floating charge or (b) by being put into liquidation and suffering a crystallisation of the floating charge in accordance with the terms of the pre-existing debenture.

32. It also seems that on his case a company could, without the consent of the chargee, remove assets entirely from the reach of an existing floating charge by agreeing that property (of whatever kind) subsequently created and vested in it from time to time should be subject to a contractual prohibition against assignment, either at all or without consent. I know of no authority for that proposition and it does not seem to be consistent with the nature and purpose of a floating charge, which is to secure the indebtedness of the company by means of a present charge to the lender over existing and future assets of the company, while leaving the company free to deal with the charged assets in the ordinary course of business. It might be possible, I suppose, for the chargee to seek to guard against such actions by the company by insertion of a suitably worded provision in the Debenture creating the charge.

33. For the above reasons I would allow the appeal.

LORD JUSTICE KEENE: I agree

Order: Appeal allowed; Judgment agreed in the sum of £19,670 inclusive of interest; Respondent to pay the costs of the appeal and of the hearing in the Court below, to be the subject of a detailed assessment; permission to appeal to the House of Lords refused.