Scottish Court of Session Decisions

[5] In response to those averments the pursuers admit that the assets of SR were sold to Gravure, a company in which they were a shareholder, and that Gravure was subsequently sold to Sidlaw plc, which had been a shareholder in SR. Otherwise they meet the defenders' averments with general denials. They explain that the sale of the assets of SR was carried out not by them, but by Arthur Andersen as receivers of SR.

[6] Each defender pleads that the pursuers' averments are irrelevant and lacking in specification, and that the action against him should accordingly be dismissed. The pursuers plead in each action that the defender's averments are irrelevant and lacking in specification, and that decree should therefore be granted de plano. Both cases were appointed to debate on those pleas.

[7] Mr Currie, for the defenders, formulated his submissions in six propositions.

[8] In support of those propositions Mr Currie cited five cases, namely Davidson v Scott 1915 SC 942, Tse Kwong Lam v Wong Chit Sen and Others [1983] 1 WLR 1349, Standard Chartered Bank v Walker [1982] 1 WLR 1410, Downsview Nominees Limited v First City Corporation Limited [1993] AC 295 and Westpac Banking Corporation v Kingsland and Others (1991) 26 NSWLR 700.

[9] Mr Currie pointed out that the defenders offered to prove that very detailed arrangements were entered into in connection with the receivership of SR to transfer its assets to a new company in which the pursuers themselves had a significant interest. It was averred that the pursuers became shareholders in that new company, and provided finance to enable a second new company to subscribe for shares in the first new company, doing so on terms that gave them an option to have their loan repaid or to acquire the second company's shares in the first company. The defenders further offered to prove that those arrangements were made by the pursuers and the receivers together. That carried the implication that the pursuers were directly involved in a material way in the conduct of the receivership. The premise on which a floating charge holder is not generally responsible for the conduct of the receivership is that he is not involved in determining its course; a receivership is ordinarily conducted by the receiver acting as agent for the company. In light of the authorities cited, those averments raised a relevant issue as to whether the pursuers were liable for any failure on the part of the receiver to obtain the best possible price for the assets of SR. The defenders themselves also made a number of specific averments about the disposal of significant parts of the assets of SR at prices below their true value. In particular such averments were made about the printing presses, the cylinders and the engravings on the cylinders. In those circumstances there was an onus on the pursuers to plead a factual basis for contending that the assets were not sold at an undervalue. In the absence of such averments, the pursuers had not made a relevant case for enforcement of the guarantees. The actions should therefore be dismissed. Failing dismissal, the appropriate course was to allow a proof before answer. There was no merit in the pursuers' contention that the defences were irrelevant and that decree in their favour should be granted de plano.

[10] Mr Currie then turned to deal with the attack on the specification of the defenders' averments formulated in paragraph 5 of the pursuers' Note of Argument (No. 12 of process). The first point taken was in relation to the averment that SR approached the pursuers with "certain proposals". Mr Currie accepted that no specification was given of what those proposals were, but submitted that the reference to them was simply historical narrative, and not an essential part of the defenders' case. In any event, those proposals having been made to the pursuers, what they were was a matter within the pursuers' knowledge. The second point was a complaint that no specification was given of the "detailed arrangements" said to have been made between the pursuers and Arthur Andersen for the conduct of the receivership. The third point was the related one that reference was made to a "plan", but no specification was given of what that plan was. To those two points Mr Currie's response was that the generally expressed averments isolated in the pursuers' argument were introductory to the more detailed averments that followed. The nature of the "detailed arrangements" and the "plan" were clearly set out in the subsequent averments in the passage from Answer 2 quoted in paragraph [4] above.

[11] Mr Connal for the pursuers submitted first that this was a case in which there was incumbent on the defenders an obligation to set out with particularity the case of "wrongdoing" which they made against the pursuers. In that connection he sought to place reliance on my own observations in Wright v Cotias Investments Inc. 2001 SLT 353 at 366C. The defenders' averments did not satisfy that standard. He submitted that when regard was had to the terms of the guarantees, and to the very restricted circumstances in which a bank could conceivably be liable for inadequacy of the sums realised by the receiver for the assets of the company in receivership, it was very difficult for the defenders to state a relevant defence to the pursuers' claim for enforcement of the guarantees. Modern guarantees were designed to allow the bank to do a variety of things that might adversely affect the position of the guarantor without opening up the possibility of challenge by the guarantor. Such guarantees were drafted so as to obviate certain restrictions imposed by the common law in connection with the enforcement of cautionary obligations. Given that in terms of the guarantees the bank could give up other security entirely without losing its recourse against the guarantors, it was difficult for the defenders to find common law ground for preventing the pursuers from enforcing the guarantees. The matter was further complicated by the interposition of the receiver. It was, he submitted, difficult to envisage a situation in which there had been no breach of duty on the part of the bank but in which nevertheless the bank was disentitled from making full recovery under the guarantees.

[12] Mr Connal submitted that, in so far as the defenders' case was couched in terms of its being sufficient, for the purpose of throwing an onus on the pursuers to show that a proper price had been obtained for the assets of SR, for the defenders merely to "put in issue" the sufficiency of the price obtained, their approach was misconceived. An onus might be transferred by proof of certain circumstances making out a prima facie case, but could not be transferred by mere averment.

[13] In response to the six propositions advanced by Mr Currie (see paragraph [7] above) Mr Connal made the following observations:

[14] Mr Connal's primary position was that the pursuers had, by reference to the guarantees and the outstanding indebtedness of SR, and without addressing the question of whether the receiver had obtained the best price reasonably obtainable for the assets of SR, made a relevant case in support of the conclusions of the summonses. The defenders had not stated a relevant defence. The pursuers were accordingly entitled to decree de plano. If, however, I were to hold that the defenders had stated a relevant defence, he sought an opportunity to amend to address the issues raised in the defenders' averments.

[15] Mr Currie recognised that it was arguable that his primary motion for dismissal of the actions was going too far too fast. He did not depart from that motion, because (a) he submitted that in Davidson v Scott and Tse Kwong Lam there might be found sufficient support for the proposition that, in light of the pursuers' admission that the receiver sold the assets of SR to a company in which they had an interest, the onus of justifying the price obtained transferred to the pursuers, and (b) the defenders' averments cried out for a response, which the pursuers wholly failed to make. He recognised, however, that the allowance of a proof before answer might be seen to be the appropriate course in the circumstances. At all events, the defence, which involved drawing together three strands, namely (i) the admitted sale to a connected party, (ii) the pursuers' involvement in planning and facilitating the scheme put into effect by the receiver and (iii) the averments that specified assets were realised at a material undervalue, was a relevant basis for contending that the pursuers were not entitled to enforce the guarantees unless they averred and proved that the price obtained for the assets of SR was the best that could reasonably be obtained in the circumstances.

[16] I have no difficulty in holding that the averments made by the pursuers in the summonses, viewed in isolation from the defences, constitute a relevant basis for the claims set out in the conclusions. Prima facie each of the defenders is liable, in terms of the guarantee which he granted in favour of the pursuers, to make payment to them in satisfaction of the indebtedness of SR up to the limit of his guarantee.

[17] I turn therefore to the issues relating to the relevancy and specification of the defences. It is convenient to deal first with the issues of pure specification taken in paragraph 5 of the pursuers' Note of Argument. There is, in my view, no merit in the pursuers' submissions on these points. The averment that SR approached the pursuers with "certain proposals" is, as Mr Currie pointed out, simply a piece of narrative. Nothing turns on what those proposals were. In any event, the pursuers may be taken to know what the proposals put to them were. The absence of further specification of what the proposals were does not constitute good ground for criticism of the defenders' pleadings. The references to "detailed arrangements" and a "plan" are in a different position. They are central to the defenders' case and the pursuers are in my opinion entitled to insist on fair notice of what the defenders say the arrangements and the plan were. Reading the defenders' averments as a whole, however, I am of opinion that such notice is given. Mr Connal's submission in effect isolated two introductory phrases from the rest of the narrative. That narrative, in my view, gives precisely the sort of specification that Mr Connel sought. I am therefore of opinion that the defenders' pleadings are in those respects adequately specific.

[18] The other aspect of Mr Connal's complaint of lack of specification was that the defenders were advancing a general allegation of wrongdoing on the part of the pursuers without clearly identifying what the wrongdoing was. That argument seems to me to be misconceived. The case to which he referred (Wright v Cotias Investments Inc) was concerned with the high standard of specification required in the pleading of an allegation of fraud. There is no allegation of fraud in the present case. Mr Connal submitted that the same approach was appropriate to any allegation of "wrongdoing" but, as Mr Currie in my view correctly submitted, the defenders are not here accusing the pursuers of "wrongdoing" as such. They are merely contending that the circumstances in which the assets of SR were realised at an apparent undervalue disable the pursuers from enforcing the guarantees unless they discharge the burden of proving that the price obtained for the assets was the best that could reasonably be obtained. In any event, as I have already indicated, I am of opinion that the defences set out the defenders' contentions with adequate clarity.

[19] I accept that a receiver who sells assets attached by the floating charge under which he has been appointed is under a duty to take reasonable steps to obtain the best price that is reasonably obtainable in the circumstances. The position of a receiver is not peculiar in that regard. The principle applies in various contexts in which security subjects are being realised. A standard security holder exercising his power of sale comes under such a duty by virtue of section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970, as did the holder of a disposition in security at common law (Davidson v Scott). In English law a mortgagee comes under such a duty (Tse Kwong Lam at 1355A-B; Cuckmere Brick Co Ltd v Mutual Finance Ltd) and so too does a receiver (Standard Chartered Bank v Walker at 1425E-F; Downsview Nominees at 315C-D). It has been accepted that a Scottish receiver comes under the same duty (Forth & Clyde Construction at 11). It is unnecessary for present purposes to enter upon discussion of whether a receiver owes that duty to inter alios a guarantor whose position under his guarantee may be adversely affected by under-realisation of the assets of the principal debtor, because this is not an action in which the guarantor seeks damages from the receiver. Nor is it necessary to consider whether Lord Denning was right to assert a general duty of care on the part of the receiver in the realisation of the property affected by the charge (Standard Chartered Bank v Walker at 1415E-F) or whether the view expressed in Downsview Nominees (at 315A-D) is preferable, because nothing in this case depends on the existence of a duty broader in content than a duty to take reasonable steps to obtain the best price reasonably obtainable.

[20] I accept, moreover, that a floating charge holder is not ordinarily liable for a failure on the part of a receiver appointed by him to fulfil his duty to take reasonable steps to obtain the best price reasonably obtainable (Standard Chartered Bank v Walker per Lord Denning MR at 1416A-B). It seems to me, however, that it is not the fact that the receiver is the agent of the company (in Scotland by virtue of section 57(1) of the Insolvency Act 1986), but rather the fact that the receiver, although appointed for the purpose of realising the floating charge holder's security, is not the agent of the floating charge holder, but instead operates independently in accordance with a statutory scheme of regulation, that dictates that result.

[21] The critical issue, it seems to me, is whether the circumstances which the defenders aver are such as to affect the pursuers' entitlement to enforce their guarantees against the defenders. In my opinion, Mr Currie correctly analysed the defenders' averments as drawing together three elements, namely (i) the fact (admitted by the pursuers) that the assets of SR were sold to a company in which the pursuers had a material financial interest, (ii) the assertion (to which the pursuers respond with a bare denial) that the scheme that resulted in that disposal was devised before the appointment of the receiver by the pursuers and the firm to which the receiver belongs, and was then put into effect by the receiver with the further active involvement of the pursuers, and (iii) the assertion (to which the pursuers again respond with a bare denial) that in implementing that scheme the receiver disposed of certain important assets of SR to Gravure at prices materially less than their true value. In my opinion, if those averments made by the defenders are established at proof, the result will be that the pursuers will not be entitled to enforce the guarantees.

[22] In Standard Chartered Bank v Walker Lord Denning indicated (at 1416A-B) that the general rule that the security holder is not responsible for what the receiver does is subject to exception where the former gives directions to or interferes with the conduct of the latter in the realisation of the security subjects. I see no reason not to adopt that exception in Scots law. A floating charge holder is ordinarily not accountable for the receiver's conduct, it seems to be, because the receiver acts independently in accordance with statutory powers in pursuance of a statutory function. The fact that the object of that statutory function is the realisation of the floating charge holder's security is not enough to bring responsibility home to the floating charge holder. If, however, the floating charge holder acts in such a way as to cut across that separation of the receiver's role from his own role, that will undermine the ordinary rule. I do not attempt to define comprehensively the circumstances that may have that result. It seems to me, however, that if the floating charge holder devises, prior to the appointment of the receiver and in consultation with the firm to which the receiver belongs, a scheme for the disposal of the assets affected by the charge to a company to be formed for the purpose in which the floating charge holder is to have a material financial interest, and the receiver then implements that scheme, the floating charge holder has to a sufficient degree involved himself in the conduct of the receivership to disable him from avoiding responsibility for any failure on the part of the receiver to conduct the realisation as he ought to have done.

[23] The question then comes to be: what effect does the involvement of the floating charge holder in that way in responsibility for failings on the part of the receiver have on his entitlement to enforce a guarantee to secure payment of a debt left unsatisfied by the realisation of the assets attached by the floating charge? The answer, in my view, flows from the duty of the floating charge holder, in seeking to enforce the guarantee, to act in good faith. Good faith does not, in my view, permit the floating charge holder who has involved himself in a scheme for realisation of the assets attached by the charge, where that scheme results in realisation of the assets at less than their true value, to look to the guarantor to make good the deficiency left by that under-realisation. To such extent as a proper fulfilment of the receiver's duty to obtain the best price reasonably obtainable would have resulted in the reduction of the debt to less than the amount of the guarantee, the floating charge holder will, in my view, be disabled from enforcing the guarantee.

[24] Applying that reasoning to the present case, it seems to me that the defenders have relevantly averred circumstances from which it may be inferred (i) that the receiver failed in his duty to take reasonable steps to obtain the best price reasonably obtainable for the assets of SR, and (ii) that the pursuers involved themselves in the conduct of the receivership in such a way as to make them answerable for that failure on the receiver's part. On the defenders' averments the amount which would have been realised for the assets of SR in aggregate would have been sufficient to discharge SR's debts, if their proper value had been obtained. I am therefore of opinion that if the defenders' averments are proved, it will be open to the court to conclude that the pursuers cannot, in good faith, look to the defenders to pay the sums mentioned in the guarantees. I am therefore of opinion that each of the defenders has averred a relevant defence to the action against him.

[25] There remains the question of whether the pursuers' failure to respond specifically to the defenders' averments renders the actions irrelevant. In my view it does not. As Mr Currie recognised, the defenders' case involves bringing together the three elements mentioned in paragraph [21] above. Although the pursuers admit the first element, they deny the second and third elements. As their pleadings stand, they peril their position on putting the defenders to proof of their averments about (i) the pursuers' involvement in determining in advance how the realisation by the receiver would proceed and (ii) the under-realisation of the assets of SR by the receiver. I cannot hold that that is not a stance that is open to them. Mr Connal was, in my opinion, right in his submission that the mere raising in averment of the issue of the inadequacy of the realisation is not enough to lay an onus of proof on the pursuers. I therefore do not consider that the actions can be dismissed for want of a specific response by the pursuers to the defenders' averments. On the other hand, as I have said, if the defenders at proof established their averments, and the pursuers had offered to prove nothing in response, the defenders would be entitled to succeed. As I understood Mr Connal's position, it was that if I reached the conclusion that I have reached, namely that the defence stated is relevant, the pursuers would wish to reconsider the terms of their response to the defenders' pleadings. I am prepared to give them the opportunity to do so.

[26] Although I have taken the view (i) that the actions are relevant and (ii) that the defences are also relevant, it seems to me that it is preferable that any proof should be before answer. I shall therefore not at this stage repel the parties' respective preliminary pleas, but instead allow in each action a proof before answer with those pleas extant. I shall put the cases out By Order so as to allow (a) the pursuers to consider whether they wish to seek leave to amend to deal more specifically with the averments in the defences, and (b) discussion of any further procedural steps necessary by way of preparation for the proofs. I shall reserve the question of the expenses of the debate.