England and Wales High Court (Chancery Division) Decisions

In the High Court of Justice
Chancery Division
Companies Court
In the matter of Mitchell McFarlane & Partners Limited
And in the matter of the Insolvency Act 1986

		18 December 2002

N.Strauss QC:

1. This is an application by the Company for an order restraining the advertisement

of a winding up petition presented by Foremans Limited ("Foremans") on 29^th May 2002.

2. The petition is based upon an alleged debt of £179,763.25 in respect of the provision of designs for electrical, mechanical and public health services relating to the development of a leisure and retail complex near Lisbon in Portugal.
3. The Company applies to restrain the advertisement of the petition on the basis that the debt is disputed. It is common ground that the application should succeed if, but only if, there is a genuine dispute and that the test is whether, if ordinary proceedings had been brought, the petitioner would have been entitled to summary judgment. The debt is disputed on three grounds namely (a) that if any money is due, it is not due to the petitioner but to another company previously called Foremans Limited ("old Foremans"), (b) that if the debt has been assigned by old Foremans to Foremans, no notice of the assignment had been given to the Company by the date on which the petition was issued and (c) that in any event no money is due.
4. There is nothing in the first point. The position is set out in the witness statement of Mr. Barry Shaw, now the Chairman and Chief Executive of Foremans. In the summer of 2001 there was a management buy-out and Foremans, a company owned and controlled by Mr. Shaw and Mr. Richard Kennedy, took over the business of old Foremans. Mr. Shaw exhibits the minutes of a directors' meeting of Foremans held on 1^st August 2001 at which it was resolved that the trade assets, contractual obligations and liabilities of old Foremans be transferred to Foremans and that the contracts of employment of old Foremans' staff should also be transferred to Foremans by way of written notification to each staff member. After a short time, Mr. Shaw took over as managing director from the previous managing director, Mr. Brew. Mr. Shaw states that the transfer included "the assets, liabilities and contractual obligations of (old Foremans), without exception". From about the end of July 2001 onwards, invoices bore the company registration number of Foremans, in place of the number of old Foremans. Although there is no formal document of transfer as between old Foremans and Foremans, there is no reason to doubt that there was an agreement between them for the transfer of all assets and liabilities which, so far as contractual debts are concerned, operated as an equitable assignment.
5. The Company's second point is that no notice of the assignment was given to it by the date on which the petition was issued. In my view, notice was given. The test is whether the notice (whether given by the assignor or the assignee) "bring(s) to the notice of the debtor with reasonable certainty" the fact that the debt has been assigned so as to prevent him from paying it to the original creditor: see per Atkin J. in Denney, Gasquet and Metcalfe v. Conklin [1913] 3 KB 177 at 180. Foremans relies upon the fact that the later invoices bear its company registration number, rather than that of old Foremans. However, this is hardly likely to have been noticed by the Company and does not, in my view, constitute a valid notice of the debts covered by those invoices. Whilst it is clear from the evidence that the Company was notified, both orally and by circular, that there had been a management buy-out, this did not constitute notice of assignment either, since the particular form of management buy-out was not specified; Foremans might have bought the shares of old Foremans, rather than the assets.
6. Foremans then relies upon the correspondence between its solicitors and the Company's solicitors following the service of a statutory demand on 25th February 2002 which said nothing about an assignment; indeed on the contrary it referred to Foremans in terms which suggested that it was the party which had entered into an agreement with the Company in the year 2000. It seems very probable that whoever drafted the statutory demand was unaware of the assignment or of the change in the company names. The Company's solicitors asked for clarification in a letter dated 13th March and received a reply the same day stating: "Your client is well aware that Foremans Limited took over the assets and undertakings of Foremans". In response to a request for further clarification, the Company's solicitors wrote as follows:

"... we are now in a position to give you a definitive answer to the question raised ... Foremans Ltd (registration number 3811827) tendered for a proposal for a retail park development near Lisbon in Portugal by letter dated 16^th June 2000. That letter was in direct response to a proposal for tender made by your client company. Subsequent to that, BSRK Ltd acquired all the assets of Foremans Ltd (3811827).

Subsequently, on 3^rd April 2001, Foremans Ltd a fresh corporation registration number 4192845 but originally Energy Edge Ltd changed its name to Foremans Ltd on 23^rd July 2001. That company acquired the assets of BSRK. All the assets continued as before. The deliberate adoption of the name Foremans Ltd was to enable it to be used for reasons of continuity and goodwill."

7. In response to that, the Company's solicitors wrote to say that the query as to the legal basis of the statutory demand had not been instigated by the Company but "having read the explanation in your letter, we actually feel that the point we have taken is correct". This was not further explained, and no further questions were asked as to the details of the assignment.
8. Whilst Foremans' solicitors' letter of 19^th March might have been phrased more clearly, it seems to me that the effect of their letters of 13^th and 19^th March, taken together, was to state unequivocally that all the assets of old Foremans had been acquired by Foremans. The sentence "All the assets continued as before" could not, in their context, reasonably have been taken as meaning that all the assets remained with the old company. The clear meaning, against the background of the management buy-out of which the Company already knew, was that all the assets of the business remained as before and had been transferred by old Foremans to Foremans.
9. In Van Lynn Developments Ltd v. Pelias Construction Ltd [1969] 1 Q.B. 607 at 613613, Lord Denning M.R. said that whilst the notice in that case was a valid notice, the debtor could have of course have asked to see a copy of the assignment so as to be satisfied that it was valid. This suggests that, even when a debtor is given notice of an assignment in clear and unequivocal terms, he may be entitled to ask reasonable questions to ensure that he can safely pay the assignee. This would particularly be so where the notice comes from the assignee, rather than from the debtor; in such circumstances, a sight of the assignment or some kind of confirmation from the assignor/original creditor may be necessary in order to achieve the requisite degree of certainty. Where reasonable questions are asked, it may be that the notice is not complete until they are satisfactorily answered. In the present case, it would in my view have been reasonable for the company to ask for further details as to the method by which the debts were transferred and, for the avoidance of all doubt, the meaning of the sentence "all the assets continued as before". However, no such request for clarification was made and I consider that the notice of assignment was given with the necessary degree of certainty.
10. Even if I had held that notice of the assignment had not been given, I do not think that this would have made any difference. As an equitable assignee Foremans could not have brought an action at law without joining the assignor, old Foremans. It was nevertheless a creditor in equity and as such entitled to present a winding-up petition, even though it could not serve an effective statutory demand and rely upon the failure to comply with it as evidence of insolvency: see re Steel Wing Company Limited [1921] 1 Ch. 349. Therefore, it is in my judgment irrelevant whether notice of the assignment was given to the Company. Whether or not it was given, there was no legal assignment and Foremans was an equitable assignee and as such entitled to present a petition for windingup. In the absence of support from the assignor, or from other creditors, it might not succeed in establishing insolvency, but that is not in my view a ground for restraining the advertisement of the petition.
11. This leaves the third and main issue, namely whether any debt is due. The Company entered into a contract with Freeport Portugal S.A. ("Freeport"), a Portuguese subsidiary of Freeport Plc, which is an English company, for the design and drawings for a national retail complex on a project called Freeport Alcochepe. The Company was the main contractor, and old Foremans was the sub-contractor for the electrical, mechanical and public health parts of the design.
12. Mr. Peter Meyer, a director of the Company, having referred to frequent delays in payment by Freeport, states that:

"…new cash flows were prepared by the Company and Foremans from time to time and submitted to Freeport; the arrangement was that we pay Foremans as soon as we receive payment from Freeport. There was certainly no obligation on the Company to pay any interim charge which had not been paid by Freeport".

On the basis of this evidence, the Company contends that, having paid over everything received by it from Freeport it is under no further liability unless and until further payments are made by Freeport.

13. This is rejected in the witness statement of Mr. Davies, a director of Foremans, and it is in my view inconsistent with the correspondence, and in particular Foremans' letter of 13^th October 2000. In my view, this was a straightforward arrangement under which old Foremans as sub-contractor was entitled to be paid as and when fees became due irrespective of whether the Company had received payment from the employer. There is no suggestion to the contrary in any of the correspondence evidencing the original agreement.
14. However, Mr. Meyer further states that, following a dispute between Freeport and the Company in which the Company threatened to withdraw their services because they had not been paid, new payment arrangements were made. It appears from the correspondence that by the beginning of July 2001, both Foremans and the Company were separately trying to persuade Freeport to pay substantial overdue sums. On 2^nd July 2001, Mr. Meyer wrote to Mr. Brew, in the following terms:

"Reference your meeting with R Dattani at 2.00 p.m this afternoon regarding fees. I have not been invited to the meeting, therefore, so that you are aware, I will explain what has and has not been invoiced. I have a suspicion that Rik will try to split us up regarding outstanding monies. Currently I have re-spread the monies outstanding up to contract start on site over six months, which includes the £180,000 due to your good self. That amounts to £57,000 over the 6 months from April to September, which amounts to a total of £342,000. The invoices for April, May and June amounting to a total of £57,000 x 3 = £171,000 are currently with Freeport, in addition to that a figure of £10,000 for CHP advice has been with them since March of this year. I am requesting an additional £71,000 for my works which total 4 invoices at £17,750 to be invoiced, if accepted by Freeport, in June, July, August and September. Any additional monies that you manage to negotiate, bearing in mind your cost of £150,000, will need to be spread over the four months. May I suggest that you produce a basic sheet which shows payments to MMP as per the above and what payments you require on the additional monies that Foremans require.

We both obviously need a lump sum now, it would suit MMP if Foremans were paid direct. Please give me a call once you have digested this so we can discuss."

15. On the following day, Mr. Meyer wrote as follows:

"The offer from Freeport is as follows:-

£180,000 plus £65,000 subject to Foremans making the proper representations to the Portugese Statutory Authorities.

Mr Dattani has agreed to release £90,000 now, with £30,000 being paid in August, September and October. In addition he will release £65,000 half at the end of the August and the balance at the end of October. It is therefore imperative that we sort out the stats urgently.

The above will provide you with a total of £245,000 over the next four months.

I have, as you are aware, promised you an additional sum of £39,000, even though Freeport have turned down all MMP requests for additional money.

Therefore, I propose to pay Foremans per month for the next 6 months £6,5000 in addition to the £245,000 which will bring your total up to £284,000.

Now we can all make a loss together."

16. On 6th July, Mr. Brew replied as follows:

"Thank you for your letter dated 3rd July 2001 which confirms the agreement reached with our joint client for payment of our outstanding fees and for the payment of the redesign costs.

I further note your agreement to provide further fees to ourselves, for which I am appreciative and will be very useful to reduce our loss on this element of the redesign works

Thank you for your support in reaching a settlement to this matter."

17. It is clear from this correspondence that old Foremans agreed, at least, to accept payment of £245,000 in accordance with the schedule agreed with Freeport. The Company contends that the agreement went further than this and that it was obliged only to pay over only the amounts actually paid by Freeport in accordance with the agreed schedule, except for the extra £39,000, which it was obliged to pay in any event. Whilst I am very doubtful about this, in circumstances in which there appear to have been direct negotiations between old Foremans, the sub-contractor, and Freeport, I cannot exclude the possibility that this was what was agreed. In the end, the issue will turn on oral evidence, but it is possible to find some support for the Company's case in the correspondence, in particular in the letter of 6th July which seems to draw a distinction between what was to be paid by Freeport and what was to be paid by the Company. If I were hearing this as a summary judgment application, I might be tempted to require payment into Court as a condition of giving permission to defend, but I would not be prepared to give judgment for the unpaid balance of the £245,000 (the first instalment of £90,000 was duly paid).
18. However, I do not consider that there was any justification whatsoever for not paying the additional sum of £39,000 which it was undoubtedly the obligation of the Company to pay and which, according to Mr. Meyer, was promised in order "to give (Foremans) extra revenue to persuade them to agree to the new arrangements and keep working". It is common ground that they did keep working until September when, again according to Mr. Meyer, Freeport suspended the project. In particular, it does not seem to be in dispute that fresh calculations and drawings were produced to deal with issues raised by the Portuguese statutory authorities. According to Mr. Davies, the reason why they stopped work was that the Company had failed to pay the first two instalments of the additional £39,000, but it does not seem to me to matter whether the reason was the suspension by Freeport of the project, or the non-payment, or both. Whichever it was, there is no suggestion that Foremans were in breach of contract by stopping work. In these circumstances, it seems to me to be beyond argument that they remained entitled to the additional payments promised in return for their agreeing to the new arrangements needed to restart the project.
19. The present position is that a total of £13,000 has now belatedly been paid, but the balance of £26,000 remains unpaid. In these circumstances, I am not prepared to restrain the advertisement of the petition, except for a very short time to enable the Company to pay the balance of £26,000 and interest and to give full security for any costs order which I may make. I will hear counsel on the precise terms of the order and on any issues as to interest and costs.

N.Strauss Q.C.
Deputy Judge, Ch.D.
December 2002