England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		04/08/2006

The Honourable Mr Justice David Richards :

Introduction

1. This is an appeal by L.C.P. Retail Limited (the landlord) against an order of Registrar Derrett made on 30 March 2006, in which she ordered that the sale proceeds of goods belonging to Premier Karting World Limited (the company) be paid to Richard Andrew Segal, the company's liquidator.

Background

2. The company operated a go-karting race track at premises in Bridgwater, Somerset. The premises were let by the landlord under the terms of a lease dated 28 January 1998, the lease having been assigned to the company pursuant to a licence dated 22 July 2002.
3. The company failed to pay the rent due on 1 July 2003. On 2 July 2003 the landlord instructed Parkinson Bailiff Services Limited to execute a distress warrant and on the same day, again acting through Parkinson Bailiff Services Limited, took walking possession of go-karts and other goods belonging to the company. The walking possession agreement, in standard form, was signed on behalf of the company by Melvern Westwood, its director. The agreement stated "I will not remove or sell the goods or any part of them or allow any other person to do so without your permission." The agreement provided that the landlord could remove and sell the goods at any time after 2 October 2003 if the company had not by then paid the sum due and the bailiff's charges. The value of the distress was £25,077.44.
4. Various sums totalling just over £18,700 were paid by the company to the landlord in July, August and September 2003. It may be, although this does not arise for decision that the director believed that, taken together with a rent deposit of £14,000, these payments had the effect of discharging the distress. It is common ground that the landlord had not applied the rent deposit towards the outstanding rent and was not required to do so. Accordingly, whatever the belief of the director, the distress was not discharged in this way. On 18 September 2003, without the knowledge or permission of the landlord or the bailiff, the company instructed a firm of valuers and auctioneers to remove and sell goods from the premises, including some or all of those which were subject to the walking possession agreement. Between 7 October and 19 November 2003 the auctioneers realised a total of £5,816.90 from the sale of some of the goods, leaving a balance due to the company of £2,698.65 after deduction of the sale costs and expenses. It is this sum which is in dispute on this appeal.
5. The company ceased trading on 22 September 2003.The landlord inspected the premises on 9 October 2003, with a view to a sale of the lease. The Registrar found that the fact the goods had been removed "would have been clear to the Respondent when he inspected on 9 October 2003." The landlord subsequently wrote to the company on 14 October 2003. The landlord and the liquidator both place reliance on the letter, the key paragraphs of which are set out below:

"Following the landlord's inspection on 9^th October, I arranged to meet two local agents who are aware of the unit and are confident it could be re-let in short term. Subject to you agreeing to no waiving of landlord rights and privileges within the occupational lease dated 28^th January 1998 and subsequent documentation (Deed of Assignment, Deed of Variation and Rent Deposit Deed), we would be pleased to instruct Hatfield White and McKinlays Surveyors to market the unit on your behalf.

…

In the meantime, providing you have no intention of re-occupying the premises, please arrange for the units to be cleared including all old car tyres, tenant's fixtures associated with the Go-Kart use, engine parts and oil canisters etc from rear yard and any refuse/small items within the office areas. This will ensure the unit presents better for marketing purposes."

The letter was counter-signed on behalf of the company on 16 October 2003 and returned to the landlord.

6. On 17 October 2003 notices were sent out to creditors of the company, including the landlord, calling a meeting of creditors pursuant to section 98 of the Insolvency Act 1986. Creditors were also sent a proxy and proof of debt form. The landlord promptly returned the proof of debt form, which was dated 27 October 2003.
7. The proof of debt was in the form prescribed by the Insolvency Rules. The landlord stated its debts as £290,573.08. Box 10 of the form required the creditor to state:

"Particulars of any security held, the value of the security and the date it was given".

The landlord left this box blank.

8. The meeting of creditors was held on 5 November 2003, and Mr Segal was appointed as liquidator.
9. On or around 19 November 2003 the liquidator's assistant telephoned the landlord to discuss the property. He was informed that there was an outstanding warrant of distress, and that a walking possession agreement had been made on 2 July 2003. The liquidator had not previously been aware that there was any warrant for distress in existence, nor that walking possession had been taken.
10. In subsequent correspondence the landlord maintained that it was entitled to the net proceeds of sale of the goods which had been subject to its distress and which had been removed and sold in breach of the walking possession agreement.
11. By an application notice dated 21 July 2005, the liquidator sought directions as to whether the proceeds, which were in the meantime held by the auctioneers, should be paid to himself as liquidator or to the landlord.
12. The application came before Registrar Derrett on 30 March 2006. In his evidence in support of the application, the liquidator relied on the provisions of section 183 of the Insolvency Act 1986 on the grounds that the landlord's distraint was an execution against the goods of the company which had not been completed before the commencement of the winding-up. However, it was accepted before the Registrar that, in the light of Herbert Berry Associates Ltd v IRC [1977] 1 WLR 783 and In re Modern Jet Support Ltd [2005] BPIR 1382, distress was not a form of execution and section 183 was not therefore applicable. A second argument advanced by the liquidator was that the debt which was the subject of the distress warrant had been extinguished by the application of the rent deposit. This, too, was not pursued before the Registrar.
13. In his evidence, the liquidator also drew attention to the terms of the letter dated 14 October 2003, requesting removal of all goods from the premises without references to its distress, and to the absence of any reference to the distress in the proof of debt form.
14. As foreshadowed by the skeleton argument of counsel for the liquidator, it was submitted to the Registrar that by the letter dated 14 October 2003 and by the proof of debt form the landlord had abandoned its distress. It was further submitted that the landlord was estopped from relying on the distress and that in any event the court should exercise its discretion, discussed in Herbert Berry Associates Ltd v IRC and In re Memco Engineering Ltd [1986] Ch 86, to restrain the landlord from completing the distress by claiming payment of the net proceeds of sale.
15. The Registrar held in favour of the liquidator on the grounds that the landlord had abandoned its distress and that in any event it would be inequitable to allow the landlord to proceed with the distress. In those circumstances, it was unnecessary for the Registrar to consider the submission based on estoppel.

Appeal

16. The Appellant's notice gives three grounds for the appeal. First, the Registrar erred in law in determining that the distress had been abandoned because the director of the company honestly believed that the warrant had been satisfied, such belief being immaterial. What mattered was the landlord's intention and there was no evidence to indicate that it had intended to abandon its distress. Secondly, the Registrar was wrong to place reliance on the letter of 14 October 2003 and the proof of debt as evidence of abandonment. Thirdly, the Register erred in law in holding that it would be inequitable to allow the landlord to complete its distress and retain the proceeds of sale.
17. After setting out the facts and summarising the parties' submissions, the Registrar in her judgment dealt first with the issue of abandonment. She said at paras 26 to 31:

"26. Abandonment is a question of fact. Having considered the facts in this case I am satisfied that the Respondent did abandon his rights. It is apparent from the evidence before me that the directors honestly believed that, in having made the payments which they did, when coupled with the rent deposit deed, the warrant of distress had been satisfied. In my judgment, it is for that reason they instructed the agents to clear the premises, technically this was a breach of the walking-possession agreement which they had signed. However, in the circumstances, in the absence of any statement by the Respondent I can understand why they believed that the distress had been satisfied.

27. What influences me further is the fact that there is nothing in the letter of the 14^th October 2003 to draw the director's attention to the fact that they were indeed in breach of the walking possession agreement. The agent attending the premises cannot have failed to see that the goods in question were no longer there. At the very least, one would have expected him to make enquiries and, if he did not obtain a satisfactory response from the directors, to put something in writing to them. "Where are my goods? You have broken your walking possession agreement". If that had been done the Respondent could have been told that the goods had been removed to be sold and the proceeds of sale could have been handed over to them.

28. The Respondent's position is compounded by the proof of debt form. Whilst I accept that current practice is for proof of debt forms to be generally sent out before meetings and for them to be filled in in a somewhat informal manner to assist the chairman making decisions at meetings for voting purposes, the Respondent's proof of debt makes no mention whatsoever of either security, the distress or the rent deposit deed.

29. Counsel for the Respondent suggests that this was an omission, it was inadvertent. Nevertheless, in order to file an amended proof of debt, Rule 4.96 of the Insolvency Rules 1986 makes it clear that an explanation has to be given and that evidence in the form of a witness statement is required.

30. I am not satisfied that the explanation presented today presents any real explanation at all. There can be no justification of the failure to include the rent deposit deed. I am satisfied that the Applicant did not have notice of this or of the distress at the time of the creditors meeting.

31. Therefore, in my judgment, the evidence leads me to conclude that the Applicant did as a matter of fact abandon his walking-possession and distress at that stage. "

18. Counsel for the landlord submitted that the director's belief was immaterial and that the Registrar had accordingly misdirected herself in finding that the landlord had abandoned its distress. She should have focussed exclusively on evidence of the landlord's intention and, if she had done so, she should have concluded that there was no evidence, or insufficient evidence, from which to infer an intention to abandon the distress. Instead of concentrating on events in October 2003, she should have had regard also to events before October, specifically the walking possession agreement, and after October, particularly the clear assertion of and reliance on the distress from 19 November 2003. He submitted that the liquidator could not rely on the failures to mention the distress or to object to the removal of the goods in the letter dated 14 October 2003 or on the request to remove the remaining goods from the premises, because all or most of the goods subject to the walking possession agreement had been removed in breach of the agreement before the landlord's inspection on 9 October 2003. In any event, the landlord's inspection was for the purposes of marketing. The proof of debt was neutral on the issue of abandonment, particularly as there was no obligation to use the prescribed form. In the light of the later assertion by the landlord of its distress, the Registrar should not have inferred an intention to abandon the distress from the letter and the proof of debt.
19. Counsel for the landlord also had a specific point on the letter dated 14 October 2003. He submitted that the words "[s]ubject to you agreeing to no waiving of landlord rights and privileges within the occupational lease dated 28^th January 1998 and subsequent documentation (Deed of Assignment, Deed of Variation and Rent Deposit Deed)" included a reservation of rights under the walking possession agreement. In my judgment the reservation was restricted to the rights arising under the documents expressly referred to and did not include the walking possession agreement.
20. I agree with counsel for the landlord that the belief of the company or its director is irrelevant. Whether a landlord has abandoned a distress depends on the intention of the landlord, as it appears from the evidence before the court. See Swann v The Earl of Falmouth (1828) 8 B&C 456, Kerby v Harding (1851) 6 Exch 234, Bannister v Hyde (1860) 2 E&E 627, Lumsden v Burnett [1898] 2 QB 177. In the last of those authorities, on which counsel for the landlord particularly relied, a walking possession agreement was unenforceable because it had been signed by the tenant's minor daughter. In reliance on the agreement, the landlord had left the tenant in possession of the distrained goods. It was held that, even though the agreement was of no effect, it was evidence that the landlord had not intended to abandon his distress by leaving the goods in the tenant's possession. The issue in this case is somewhat different: did the landlord by his acts in October 2003 intend to abandon the distress previously and validly preserved by the walking possession agreement?
21. In reaching her decision, the Registrar relied on the terms of the letter dated 14 October 2003 and the proof of debt, as well as on the belief of the company's director, to infer an intention to abandon the distress. In my judgment, the proof of debt is particularly significant. Proofs of debt were sent out to creditors to enable them to vote at the first meeting of creditors and to submit their claims for the purposes of admission to proof. For the purposes of voting at meetings, rules 4.67 and 4.70 of the Insolvency Rules 1986 make provision for the submission of proofs and their admission or rejection by the chairman. Rule 4.67(4) provides that:

"A secured creditor is entitled to vote only in respect of the balance (if any) of his debt after deducting the value of his security as estimated by him."

22. For the purposes of admission to proof, the Rules do not require the use of a prescribed form in the case of a creditors' voluntary winding-up, but the liquidator or the convenor or chairman of any meeting may call for details of any matter specified in rule 4.75 (1): rule 4.76. Those matters include particulars of any security. By sending out a prescribed proof of debt form, the liquidator as convenor of the meeting called for those details. Rule 4.96 (1) provides:

"If a secured creditor omits to disclose his security in his proof of debt, he shall surrender his security for the general benefit of creditors, unless the court, on application by him, relieves him for the effect of this Rule on the ground that the omission was inadvertent or the result of honest mistake."

Counsel for the landlord accepted that a distress was security for these purposes.

23. The effect of these provisions is that by omitting to disclose its distress in box 10 of the proof of debt form, the landlord surrendered it for the general benefit of creditors. The court could relieve the landlord from the effect of the rule but only if satisfied that the omission was inadvertent or the result of honest mistake.
24. In these circumstances, the failure to state the distress in the proof of debt form, which was signed by the landlord's credit controller, is evidence of an intention to abandon it, in the absence of evidence of inadvertence or honest mistake. The letter dated 14 October 2003 and the absence of protest were also consistent with an intention to abandon the distress. There was no evidence from the landlord, before the Registrar or on this appeal, as to the reasons for the omission of any reference to the distress in the proof of debt, or for the failure to protest at the removal of goods or for the request to the company to clear the premises. It is not sufficient to rely on the landlord's assertion of its distress from 19 November 2003, for an inference that there was not an earlier intention to abandon the distress, where there may be other explanations and where direct evidence could have been, but was not, put before the court.
25. In order to allow an appeal against the Registrar's order, the court must be satisfied that her decision was wrong. Having regard to the matters detailed above, I am satisfied that her decision on the facts, that the landlord had abandoned its distress, was right.
26. Having decided that the distress was abandoned, it is unnecessary to go on to consider the alternative ground for her decision, that the landlord should be restrained from completing its distress, or the further ground of an estoppel, put forward by the liquidator in his respondent's notice. Both of these grounds assume that the distress had not been abandoned.
27. Accordingly, I dismiss the appeal.
28. I have a final observation. The amount at stake in this case is just under £2,700. The parties' costs up to and including the hearing before the Registrar were nearly £22,500. It was a purely commercial dispute between the landlord, which is a commercial property company and would apply the sum in reduction of its claim for £290,000, and the liquidator, who will apply it towards the costs of the liquidation and his remuneration (there are no assets available for unsecured creditors). The case raises no point of principle and is not a test case for any other disputes between these parties. Even the winning party is likely to be out of pocket. Both sides would have done better to split the sum at the start. As it is, a disproportionate amount of time and resources have been spent. If ever a case illustrated the need to introduce a requirement for permission to appeal in insolvency proceedings, it is this.