High Court of Justice in Northern Ireland Chancery Division Decisions

Hylands v. McClintock [1998] NICh 3; [1999] NI 28 (10th November, 1998)

GIRF2714

1997 No. 1233

1. This matter comes before the court by way of a summons issued by the plaintiffs on 7 October 1998, the effect of which is to require the defendant to comply with the terms of a Tomlin Order made on consent on 11 June 1997 ("the Consent Order"). The application raises interesting questions as to the effect on the terms of the Consent Order of an individual voluntary arrangement ("IVA") entered into between the defendant and his creditors.

2. On the hearing of the application Mr Brangam appeared on behalf of the plaintiffs and Mr McEwen appeared on behalf of the defendant.

The Consent Order

3. The Consent Order was entered into by way of a settlement of a partnership suit between the plaintiffs and the defendant begun by a writ issued on 6 June 1997. In their writ the plaintiffs sought specific performance of a partnership dissolution agreement made on 5 February 1997 between the first named plaintiff, the defendant and a third person. The agreement in question made provision for the dissolution of a partnership which had existed between the first named plaintiff and the defendant in relation to a café business carried on at 139 Stranmillis Road, Belfast. The plaintiffs brought proceedings for interlocutory injunctions in relation to matters raised in the proceedings and ultimately by consent of the parties it was agreed that the motion would be treated as the trial of the action and the parties compromised the action by agreeing to the Consent Order staying the action on the terms set forth in the Schedule to the Order except for the purpose of carrying the terms into effect for which liberty to apply was granted. Under the terms of the Schedule to the Order it was provided (inter alia):

(a) By paragraph 1 that the defendant should within a period of six months of the date thereof discharge all the debts of the former partnership referred to in paragraph 4 of the defendant's affidavit sworn in respect of the interlocutory application on 11 June 1997.

(b) By paragraph 3 that the defendant should indemnify the first plaintiff in respect of any further debts of the partnership together with any costs incurred by the first plaintiff in the defence of any claim brought against him in respect of any liabilities of the former partnership referred to in the pleadings. Notification of any such claim was to be made to the defendant forthwith or his solicitor Mr Crawford.

(c) By paragraph 4 that in the event of any of the debts of the former partnership tabulated throughout paragraphs (i) to (xii) at paragraph 3 (sic) or any additional debt being established against the former partnership remaining unpaid on 12 December 1997 upon application in the action the plaintiffs should be at liberty to enter judgment against the defendant for any sum outstanding in respect of such debts, such judgment to carry interest at the rate of 8% per annum under the provisions of Section 33A of the Judicature Act (Northern Ireland) 1978 from the date of any such judgment.

4. The reference in paragraph 4 to paragraph 3 would appear to be a reference to paragraph 4 of the affidavit previously referred to in paragraph 1 of the Schedule.

5. The Schedule contained two appendices Appendix 1 being entitled "Undertakings by Defendant" and Appendix 2 being entitled "Undertakings by Jayne Ballentine, Solicitor". The Schedule did not expressly refer to the appendices, but it appears to be common case that they formed part of the scheduled terms and are to be read into and form part of the settlement. Paragraph 4 of Appendix 1 provided that:

"In the event of any debts of the former partnership remaining unpaid on the 11 December 1997 the defendant shall forthwith instruct Jayne Ballentine, solicitor, to sell either or both of the properties at 39 and 67 Tates Avenue, Belfast and to apply the net proceeds of sale towards the discharge of any debts of the partnership remaining outstanding."

6. Under Appendix 2 the undertakings of a solicitor provided that she was the solicitor with carriage of the sale of the defendant's property known as 60 Surrey Street, Belfast together with 39 and 67 Tates Avenue, Belfast and that she would hold the net equity of the proceeds of sale of the said property and was to enjoy priority to take legal costs as then outstanding from the same and that the remainder of the net equity was to be used solely for the purposes of discharging the debts of the former partnership in accordance with the instructions of the defendant. It was further undertaken by the solicitor that she would retain the title deeds to 39 and 67 Tates Avenue until such times as the defendant should discharge all of the debts of the former partnership set out at paragraph 3 of the Schedule to the Order. No charge or encumbrance might be placed upon the properties save for the defendant receiving same solely for the purpose of discharging the liabilities referred to in the Schedule. It was further acknowledged that such retention was subject to the rights and priorities of lending institutions which had prior charges on the properties. Paragraph 5 then provided:

"that in the event of any debts of the former partnership remaining unpaid on 12 December 1997 she shall take all necessary steps to sell each of the properties at 39 and 67 Tates Avenue, or such of the properties as necessary to discharge any debts of the partnership remaining outstanding. After discharge of all reasonable costs and outlay she shall account to the defendant for any surplus."

Events subsequent to the Consent Order

7. Between June 1997 and December 1997 the defendant made some effort to discharge some of the debts of the partnership, but there was still outstanding debts as at 12 December 1997. Amongst the outstanding debts is a debt alleged to be owed to a company S K Murphy Construction Limited ("Murphy"). Murphy's claim is for [sterling]27,835 and costs and Murphy has issued proceedings against the first plaintiff alone for the debt. There is apparently an issue as to whether Murphy is the proper claimant at all and a question whether or not the partnership has a claim over against the lessor of the premises at which the building work in question was carried out.

8. In April 1998 the defendant instructed Mr Lismore to act for him with a view to proposing a voluntary arrangement to his creditors under the provisions of the Insolvency (Northern Ireland) Order 1989 ("the 1989 Order"). Mr Lismore was appointed by the High Court under the 1989 Order as nominee in relation to the proposed IVA with his creditors. The details of the defendant's proposals were set out in a document prepared pursuant to Rule 5.04(2) of the Insolvency Rules (Northern Ireland) 1991 ("the Insolvency Rules "). Paragraph 10 of that document provides:

"Under the terms of the agreement I reached with my former partner Mr Roy Hylands I was required to discharge the former partnership's liabilities by 11 December 1997. As security for my former partner, my solicitor at my request gave an undertaking that she would not release the title deeds to my various investment properties until the partnership liabilities were discharged. This undertaking by my solicitor was confirmed by an order of the High Court on 11 June 1997. I now believe that by consenting to the making of the court order on 11 June 1997 the non-preferential creditors of the partnership known as 'The Edge Café' had been placed in a better position than my other non-preferential creditors all of which would rank equally in the event of my bankruptcy. I propose that the supervisor of my voluntary arrangement take steps in order to realise any interest I may have in the various investment properties included in my solicitor's undertaking following the approval of my arrangement by my creditors. All costs incurred in relation to this matter shall be paid by the supervisor as an expense of the arrangement."

9. The statement of affairs as at 21 May 1998 indicated that the estimated net equity (disregarding the first plaintiff's interests, if any) in the premises 60 Surrey Street, Belfast, 39 Tates Avenue, Belfast and 67 Tates Avenue, Belfast were [sterling]6,725, [sterling]13,300 and [sterling]9,750 respectively.

10. On 15 June 1998 a meeting of creditors approved the defendant's IVA and Mr Lismore was appointed supervisor, pursuant to the provisions of the 1989 Order.

The issues between the parties

11. The defendant in effect seeks to argue that as a result of the intervening IVA, the solicitors undertaking to retain the title deeds to 39 and 67 Tates Avenue until the partnership debts are cleared and to take steps necessary to sell those premises to discharge the partnership debts is no longer capable of being lawfully carried into effect and that the deeds should be delivered over so that the equity in the premises should be available for the general benefit of all the defendant's creditors and not merely the partnership creditors. The plaintiff contends that the solicitor's undertaking remains in place and must be carried into effect with the net equity being paid over to the partnership creditors (thereby relieving the first plaintiff in whole or in part in respect of his joint and several liability as a former partner in respect of the debts due to the partnership creditors). Alternatively it is argued that the premises should be sold by the solicitor on foot of her undertaking with the net proceeds being paid into court, with the solicitor to that extent being released from her undertaking. In the latter event it would be open to the defendant to apply to court for directions as to the payment out of the monies paid into court in those circumstances.

12. As Mr Brangam reminded the court a consent judgment is binding upon the parties until it is set aside and it acts as an estoppel. Lord Blanesburgh in the Privy Council in Kinch -v- Walcott [1929] AC 482 at 493 stated:

"... an order by consent, not discharged by mutual agreement and remaining unreduced, is as effective as an order of the court made otherwise than by consent and not discharged on appeal. A party bound by a consent order, as was tersely observed by Byrne J in Wilding -v- Sanderson (1897) 2 Ch 534, 544 'must, when once it has been completed, obey it, unless and until he can get it set aside and proceedings duly constituted for the purpose'. In other words, the only difference in this respect between an order made by consent and one not so made is that the first stands unless and until it is discharged by mutual agreement or is set aside by another order of the court; the second stands unless and until it is discharged on appeal."

13. Mr Brangam contended that the plaintiffs were entitled to rely on the terms of the settlement and require the solicitor to fulfil her undertakings. He correctly pointed out that consequences flowing from a solicitor's undertaking are clear from cases such as Udall -v- Capri Lighting Limited [1987] 3 All ER 262. Unless there is some legal reason why a solicitor should be relieved from the obligations undertaken by him in an undertaking it is professionally wrong for a solicitor to breach the undertaking and the court will enforce the undertaking notwithstanding the fact that the solicitor may be left in a difficult or impossible position by his client or former client. As pointed out in that case failure to implement an undertaking prima facie constitutes professional misconduct or a serious dereliction of professional duty even though a solicitor may not have acted dishonourably or actual performance of the undertaking required action by a third party and was therefore beyond the solicitor's control. The court has a power to order the solicitor to pay compensation to any person who has suffered loss because of the failure to implement the undertaking provided it is shown that the failure amounted to professional misconduct or serious dereliction of duty.

14. At the heart of Mr McEwen's arguments is the proposition that the IVA has overtaken events and has effectively discharged the defendant from the consequences of the obligations undertaken by him in the terms of the settlement. He recognised that the solicitor's undertaking remained intact and that the solicitor would be in breach of her undertaking if she handed over the title deeds and if she did not carry into effect the duties undertaken by her in paragraph 5 of Appendix 2. This would leave the solicitor personally liable for financial loss suffered by the first plaintiff, but the consequence of Mr McEwen's argument, if correct, would be that the equity of the property would become available to the defendant's general creditors. The result would be to throw a substantial financial liability on the solicitor.

Analysis of the issues

15. What is clear is that the sanctioning of an IVA by creditors cannot affect or detract from the rights of parties who have pre-existing, secured or proprietary interests or rights over, on or in respect of the debtor's property or assets. The debtor's property available for the implementation of the IVA must be subject to the pre-existing rights or interests of third parties. Article 232(5) of Part VIII of the 1989 Order provides that:

"The (creditors') meeting shall not approve any proposal or modification which affects the right of a secured creditor of the debtor to enforce his security, except with the concurrence of the creditor concerned."

16. Article 10(1) of the 1989 Order provides that:

"... A debt is secured for the purposes of Parts VIII to X to the extent that the person to whom the debt is owed holds any security for the debt (whether a mortgage, charge, lien, or other security) over any property of the person by whom the debt is owed."

17. Article 10(3) provides that in paragraph 1 the reference to a security does not include a lien on books, papers or other records "except to the extent that they consist of documents which give a title to property and are held as such."

18. Referring to the equivalent provisions of Section 383(2) and (4) of the Insolvency Act 1986 ("the English Act") the deputy judge in Peck -v- Craighead (1995) BCC 525 pointed out that:

"These subsections offer the only express statutory guidance. However, it is clear from the breadth of the language and the express exclusion of specific types of lien that section 383(2) contemplates, quite literally, any security afforded recognition under the law."

19. Reading together the terms of the Consent Order with the undertakings in the appendices the agreement between the parties was to the following legal effect.

(a) The defendant was to indemnify the first plaintiff against partnership debts so that if the first plaintiff were sued by any partnership creditor he was entitled to be indemnified in full by the defendant.

(b) The plaintiff was to be entitled to obtain a judgment against the defendant in the event of any remaining liability falling on the first plaintiff for partnership debts.

20. Had the agreement stopped there the plaintiff would have been an unsecured creditor in the event of the defendant's subsequent insolvency. However, the agreement did not stop there.

(c) In the event of debts of the partnership remaining unpaid on 11 December 1997 the defendant was to instruct the solicitor to sell either or both of the relevant properties and apply the proceeds towards the discharge of outstanding partnership debts. Equity looks on as done that which ought to be done and accordingly as from 11 December 1997 the defendant was bound to give the solicitor the direction to sell.

(d) The solicitor was to hold the deeds of the premises until the defendant discharged the debts and no charge or encumbrance was to be put on the property save for the purpose of discharging partnership liabilities. The effect of this was that a security over the deeds (which for the purposes of Article 10(3) of the 1989 Order gave title to the properties) was thereby created.

(e) The solicitor was directed to sell such of the properties as was necessary to pay the partnership debts outstanding as of 12 December 1997 and the defendant was only to receive such surplus, if any, as arose after the discharge of the partnership debts.

In Carleton, Atkinson and Sloan -v- Allied Irish Banks [1977] NI 158 the bank in question in 1973 advanced monies to C on condition that the proceeds of the sale of his house, then being sold, should be lodged with the bank. C's solicitors gave an undertaking that they would lodge such proceeds with the bank. Subsequently in 1975 the appellant was appointed by the Enforcement of Judgments Office as a receiver over the proceeds of sale by way of judgment execution. The appellant required the solicitors to pay the proceeds to him. The solicitors brought interpleader proceedings to determine the proper party to receive the proceeds. The Court of Appeal held that the 1973 agreement amounted to an equitable assignment to the bank of the proceeds of the sale of the house and ranked in priority to the interests of the receiver. Gibson LJ at 163 stated:

"As I see it, the approach was made by C to the bank. The inducement which he offered to the bank to make the advance was that his dwelling house was in the process of being sold on his behalf by the solicitors. The bank agreed to make the loan on condition that the net proceeds were lodged after deduction, inter alia, of legal costs. So the bank was adverting to the position of the solicitors and doubtless as further security, lest C would dispose of the net proceeds in some other way, required the undertaking of the solicitors which, with the authority of C as a necessary precondition of the loan, they gave. Taking this view of the negotiations and the arrangement as the reasonable inference from the affidavit I cannot read the undertaking as other than an intrinsic and necessary part of the single agreement. It follows that when the purchase money came to the hand of C's agents, the solicitors, it was immediately and without any further necessary act or event impressed with the agreement, which being for valuable consideration constituted an equitable assignment."

21. By parity of reasoning in the present case it seems clear that in order to bring about a compromise of the proceedings the defendant promised to pay off the partnership debts and rather than rely on an unsecured promise to that effect the first plaintiff required and the defendant agreed that the solicitor's undertaking should be given to secure the promise. In the words of Gibson LJ the undertaking was "an intrinsic and necessary part of a single agreement."

22. The defendant gave the solicitor an irrevocable authority to sell off the relevant premises and once the proceeds of sale are received the proceeds will be impressed with the obligations undertaken in the agreement to use them to pay the partnership debts in ease of the plaintiff.

23. Mr McEwen raised three arguments to resist this result. Firstly, he argued that paragraph 4 of the Schedule required the plaintiffs to obtain a judgment for the outstanding partnership debts before reliance could be put on the remaining provisions set out in the defendant's and solicitor's undertakings. Reading the terms of the settlement as a whole I do not consider that the obtaining of a judgment under paragraph 4 is a prerequisite to reliance on the secured rights created by the undertakings. In particular the undertakings of the solicitor are in no way expressed to be conditional on the obtaining of a judgment against the defendant.

24. Secondly, he argued that the agreement constituted a fraudulent preference of the first plaintiff and the partnership creditors. In the event of the bankruptcy of an individual subject to Articles 313 to 315 of the 1989 Order if it is alleged that the bankrupt has given a creditor a preference the trustee of the bankrupt's estate may apply to the court for an order setting aside the preference. In an IVA there is no similar mechanism. If there is a suggestion that at the time of creditors' meeting facts exist which may give rise to claims of (inter alia) wrongful preferences of given creditors they should be referred to in the proposals so that the creditors can make a decision as to whether or not to allow the debtor's affairs to proceed to bankruptcy when the statutory power arises (see Rule 5.04(2) of the Insolvency Rules and see generally "Individual Voluntary Arrangements" Lawson 2^nd Edition at page 62). The fact that the terms of the Consent Order might or might not constitute a wrongful preference in the event of the bankruptcy of the defendant does not affect the position as it stands at this point, the debtor not being a bankrupt.

25. The third point raised by Mr McEwen is one of greater difficulty. Mr McEwen contends that the IVA affects the rights (if any) of the first plaintiff and his only and proper remedy was to apply to the court under Article 236(1) of the 1989 Order. Article 236(1) provides:

"Subject to the following provisions of this article, an application to the High Court may be made by any of the persons specified in paragraph (2) on one or both of the following grounds, namely -

(a) that a voluntary arrangement approved by a creditor's meeting summoned under Article 231 unfairly prejudices the interests of a creditor of the debtor;

(b) that there has been some material irregularity at or in relation to such a meeting."

26. Article 236(3) provides that such an application must be made before the expiration of 28 days from the day on which the report of the creditor's meeting was made to the High Court under Article 233. Article 236(8) provides:

"Except in pursuance of the preceding provisions of this Article, an approval given at a creditor's meeting summoned under Article 231 is not invalidated by any irregularity at or in relation to the meeting."

27. Mr McEwen referred to no authority in support of his argument.

The case of Pecks -v- Craighead to which reference has already been made is some authority in support of Mr McEwen's proposition. In that case the applicant had obtained a judgment against the debtors and execution had proceeded under a writ of fi. fa. and the sheriff took walking possession of the chattels. Subsequently the debtors' IVAs were approved. The applicant contended that he was a secured creditor whose security rights had been wrongly affected by the approval of the IVAs. He argued that his interests had been unfairly prejudiced. Noting the provisions of Article 258(4) of the English Act (equivalent to Article 232(5) of the 1989 Order referred to above), the deputy judge stated:

"It is a fortiori that if a meeting approves a proposal or modification which in some way affects or purports non-consensually to affect security rights the business is to such extent irregular and legally ineffective. However, in my judgement, that fact could only be asserted by challenging the meeting's decision under Section 262 because sub-section (8) of that section provides:

'Except in pursuance of the preceding provisions of this section, and approval given at a creditor's meeting summoned under Section 257 is not invalidated by any irregularity at or in relation to the meeting.'

28. It is noteworthy that Mr Peck challenges the IVAs on grounds that they unfairly prejudiced his interests as a creditor rather than on grounds of irregularity."

29. The deputy judge in his judgment went on to conclude that the creditor in that case was a secured creditor whose security rights had been "wrongly affected by the approval of the IVAs" and that the creditor's meeting which approved the IVAs was materially irregular rather than unfairly prejudicial.

30. If, as appears to be case, the deputy judge in that case was holding that the irregularity if not challenged under the equivalent of Article 236(3) has the effect of destroying or undermining the creditor's secured rights, then I respectfully disagree with his conclusion. Since in a voluntary arrangement the rights of secured creditors may only be varied with the concurrence of the secured creditor and the creditors' meeting is precluded from approving any proposal or modification of the secured creditor's rights without his consent, any purported interference with the secured creditor's rights is not a mere irregularity but is outwith the jurisdiction of the creditor's meeting. The creditor's approval cannot affect or detract from the rights of third parties with secured or other proprietary interests over the assets of the debtor. An improper attempted interference with the secured rights of the creditor may in itself constitute an irregularity which an unsecured creditor may call on to challenge the IVA. Accordingly, I reject Mr McEwen's argument that the arrangement binds the first plaintiff because he did not challenge within the strict 28 day period the arrangement insofar as it unlawfully sought to undermine his security in relation to the relevant premises. Under the terms of the proposal the debtor was proposing that the supervisor was to take steps to realise any interest that he might have in the various investment properties included in the solicitor's undertaking. Since for the reasons I have indicated the interests of the first named plaintiff in the properties takes priority to the defendant any steps undertaken by the supervisor to undermine or destroy the first plaintiff's rights would be doomed to failure for the reasons indicated.

31. In the result I hold that the first plaintiff remains entitled to enforce the solicitor's undertaking to continue to hold the title deeds of the relevant premises as security for the partnership debts and to sell the premises with a view to raising monies to discharge the partnership debts in ease of the first plaintiff's liability to the partnership creditors. On realisation of the assets as the undertaking currently stands the monies must be paid to the partnership creditors or held pending the resolution of any dispute about any of those debts. Mr Brangam on behalf of the plaintiffs appeared to be prepared to release the solicitor from the latter part of the undertaking if she paid the monies into court to be held pending the resolution of the disputes in respect of the partnership debts. If the parties are prepared to agree to that course it would be a sensible way forward and would relieve the solicitor of further obligation once the premises are sold. It must be put on record that the parties fully and rightly acknowledged that the solicitor had at all times acted very properly and professionally in relation to the undertakings. Any agreed step that relieves her from the further burdens of the undertaking in this unfortunate situation would no doubt be welcomed by her. I shall hear counsel on this aspect of the case and on the question of the costs of these proceedings.

1997 No. 1233