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Cite as: [2004] ScotCS 157
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Crimin v. Cairnbay Ltd [2004] ScotCS 157 (29 June 2004)
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OUTER HOUSE, COURT OF SESSION |
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A1104/03
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OPINION OF LORD CARLOWAY in the cause CHARLES CRIMIN Pursuer against CAIRNBAY LIMITED Defenders ________________ |
Pursuer: Lindhorst; Lawford Kidd
Defenders : Fairley; Balfour & Manson
29 June 2004
1. Pleadings
[1] The pursuer concludes for £150,000 from the defenders. He sues as an individual although explains that he is the senior manager of Victoria Electrical & Building Services Ltd ("VE&BS"). The defenders were incorporated on 23 April 2002 for the purpose of developing a plot of land at Easterhouse Road, Baillieston, Glasgow. This land was conveyed to the defenders by GM Services (Scotland) Ltd ("GMS"). Kenneth Paterson was a director of GMS and of two other companies: GM Self Drive Hire Ltd. ("Self Drive") and GMS Motor Services Ltd. ("Motor Services"). Between 29 April and 10 October 2002, Mr Paterson was also a director of the defenders. [2] The pursuer avers that:"Between 1997 and 2000 or thereby, the pursuer entered into various agreements with GMS, with Self Drive and with Motor Services, to the benefit of those companies. The sums loaned to GMS included funds to assist in the purchase and development of the Easterhouse Road property. On each occasion, Mr Paterson acted on behalf of the relative contracting company of which he was a director. The total value of the sums outstanding in terms of the agreements by June 2002 was £156,975. In June, 2002 it was agreed by Mr Paterson as director and on behalf of the defender that all sums outstanding by GMS, Motor Services and Self Drive to the pursuer and VE&BS should be repaid to the pursuer by the defender from the proceeds of sale of the Easterhouse Road property. An agreement to this effect was signed by the pursuer and Mr Paterson on 21 June, 2002 ('the agreement'). The agreement is contractually binding upon the defender. Mr Paterson acting as director of the defender in entering into the agreement acted within his authority as a director of the defender and in accordance with the objects of the defender...Reference is hereby made to the terms of the agreement, which is held as incorporated herein, brevitatis causa. In terms of the agreement, in the event of the Easterhouse property being sold, the defender was bound to make payment to the pursuer of the sum of £155,000 ('the sum'). The defender has entered into missives of sale in respect of the Easterhouse Road property and has disponed the property to Barratt Homes Limited for consideration under and in terms of the missives. The defender is accordingly bound to make payment of the sum to the pursuer in terms of Clause h) of the agreement."
"We the undersigned record and confirm an binding agreement made between Kenneth Paterson and Charles Crimin on the 6th June, 2002 in respect of GMS Motor Services Limited and Cairnbay Limited...the agreement is set out to eliminate any misunderstanding which may arise in the future and for the protection of both persons. This record and agreement is also intended to set out the establishment of and the operation/control of both Companys, we hereby consent and confirm by and with our signatures as follows and at the end of this record of our agreement that we subscribe fully with each and every item of this agreement.
Signed Kenneth Paterson Date 21st June 2002
Signed Charles Crimin Date 21st June 2002
Witnessed by Wayne Evans Date 21.06.02
Witnessed by Karen Hurley Date 21.06.02
A property Company namely Cairnbay Limited has been formed...for the initial purchase of the former property of GM Services (Scotland Limited) which has ceased trading
a) The office bearers of the property Company shall from the start of trading by the Company be :- Kenneth Paterson...and
Charles Crimin...
b) The share distribution for the new Company shall be :-
Kenneth Paterson 10%
Charles Crimin 90%
c) A loan has been taken out with the Bank of Scotland plc., for the purchase of the property of the former Company GM Services (Scotland) Limited. The loan is for the sum of £95,000...which is repayable over a period of 10 year the loan interest is based on % floating rate of interest
d) On completion of each year...of the lease by GMS Motor Services Limited 4% of the shares held by Charles Crimin...Shall revert to Kenneth Paterson...thus redistributing the shares in the Company after the loan is repaid to the Bank of Scotland to an equal shareholding of 50% to Kenneth Paterson...and 50% to Charles Crimin...This agreement in no relieves the agreement that the first £155000.00 one hundred and fifty five thousand pound and £35,000.00 pound will be paid to Charles Crimin...and Kenneth Paterson respectively in the event that the property is ever sold.
e) A lease will be entered into between the new property Company Cairnbay Ltd., and GMS Motor Services Limited for the lease of the property at a rent of £1500.00 per calendar month...
g) Charles Crimin...shall have total financial control of the property company...
h) In the event of the property being sold the first £155000.00 one hundred and fifty thousand pound and £25000.00 twenty five thousand pound shall be paid to Charles Crimin and Kenneth Paterson respectively...thereafter the remaining balance shall be devided equal three way, Charles Crimin...Kenneth Paterson...and Alexander Buchanan...
Signed Kenneth Paterson Date 21st June 2002
Signed Charles Crimin Date 21st June 2002
Witnessed by Wayne Evans Date 21.06.02
Witnessed by Karen Hurley Date 21.06.02"
The purported signature of Mr Paterson in both locations is illegible.
[4] The pursuer pleads: "1. There being a contract between the defender and the pursuer in terms of which the pursuer is entitled to payment by the defender, decree should be granted in favour of the pursuer accordingly"; and "2. The sum sued for being the sum due to the pursuer in terms of the said contract, decree should be granted therefor as concluded for." The defenders' response is that they did not ratify the agreement and that the purported signature of Mr Paterson on it is forged. They also tender a general plea to the relevancy of the pursuer's averments.2. Submissions
(a) DEFENDERS
[5] The defenders' first submission followed the line of the second paragraph of their Note of Argument which states: "The defender is not a party to the...agreement. Rather, the...agreement bears to be solely between the pursuer and...Kenneth Paterson. It is in the nature of a shareholders' agreement. The...agreement neither confers rights nor imposes obligations upon the defender." This was expanded into two chapters. First, the pursuer's averments that Mr Paterson entered into the agreement as a director and on behalf of the defenders were irrelevant because, on an objective construction of the contract taken together with the averred facts, the agreement does not bear to be signed by the defenders. Secondly, clause "h)" could not be construed as a clause which binds the defenders as distinct from the pursuer and Mr Paterson as individuals and shareholders of the company. Accordingly, the action should be dismissed. [6] Whether a person has concluded a bargain personally or as an agent for a company was a matter of interpretation of the contract as a whole (Macgregor: Agency and Mandate, Stair Memorial Encyclopaedia Reissue Vol 1 paras 128-129). If directors of a company contract without purporting to bind the company then the company is not bound, but the directors as individuals would be (Palmer: Company Law para 8.602.1 release 85). Each case depended upon its own facts and circumstances (McLean v Stuart 1970 SLT 77), although there were few surrounding circumstances averred here and none that could assist in the construction of the agreement. The agreement is stated to be between "we the undersigned" and the undersigned were Mr Paterson and the pursuer as individuals. It also referred to it being for the protection of "both" persons and that meant there were only two contracting parties. There was no reference in the agreement to the signatories acting in a representative capacity. These factors were, of themselves, sufficient for the defenders' purposes but other parts of the agreement supported their position. Paragraphs "a)" and "b)" narrated an agreement relative to the involvement of each individual in the management and ownership of the defenders. Paragraph "d)" was an agreement regarding the transfer of shares and this could only take place between the two individual shareholders. The only logical conclusion to this was that the agreement was one between shareholders. Clause "h)" could only be construed as a bargain between individual shareholders agreeing the dividend payable upon the sale of the company property, i.e. differently from the shareholding proportions. The pursuer's contention that this clause bound the defenders would involve an unqualified and gratuitous obligation to make payment to shareholders from the sale of its assets, although the agreement itself as distinct from the pleadings does not say where the money is to come from. This contention could not be correct given a company's obligations to maintain its capital. [7] The latter point introduced the defenders' secondary position, not foreshadowed in the Note of Argument, that if clause "h)" could be construed as imposing an obligation upon the defenders, it was, in any event, ultra vires and hence unenforceable. This was because such an obligation would amount to an agreement by the defenders to make a distribution out of its assets and to reduce its capital by returning assets to its shareholders contrary to section 263 of the Companies Act 1985 (c 6). That section provides that a company can only make a distribution to its members out of profits (see Clydebank Football Club v Steedman 2002 SLT 109, Lord Hamilton at 124 quoting Pennycuik J in Ridge Securities v Inland Revenue Commissioners [1964] 1 WLR 479 at 495; MacPherson v European Strategic Bureau [2000] 2 BCLC 683, Chadwick LJ at 701; see generally Gower and Davies: Principles of Modern Company Law (7th ed) p 279; Gloag and Henderson: The Law of Scotland (11th ed) para 50.28). It was not appropriate to circumvent the rules on the winding up of companies by this means of returning assets to shareholders. What was proposed was also illegal a common law. There was nothing on record to suggest that, if the pursuer's contention were correct, this would be anything other than an illegal distribution. On this basis too the action was irrelevant.(b) PURSUER
[8] The pursuer moved for a proof before answer. The terms of the agreement explained that it was "in respect of" the defenders. On a clear reading of the agreement, notably clauses "d)" and "h)", the intention of Mr Paterson, as director of the defenders, in signing the agreement was that the defenders were to pay the sum to the pursuer in the event of a sale of the property, which the defenders had been created to acquire and develop. This bound the defenders. Although part of an agreement could bind the persons signing it as individuals, other parts could bind a company (Montgomery Litho v Maxwell 1999 SLT 1431, Lord Sutherland, delivering the Opinion of the Court, at 1433; Neilson v Stewart 1991 SC (HL) 22, Lord President (Hope), delivering the Opinion of the Court, at 32, Lord Jauncey at 37). That was the case here with clause "d)" referring to the agreement in "h)" which contained a separate obligation from those between the shareholders regarding their shareholdings. Reading the agreement as a whole, where the defenders did buy and have sold the property, the obligation in "h)" must be read as an obligation on the defenders. That was the common sense view and it reflected the common sense reality. If there were any doubt about the appropriate construction then that ought to be resolved only after proof. [9] In terms of Schedule 2 paragraph 3(1) of the Requirements of Writing (Scotland) Act 1995 (c 7) where the granter of a document is a company, the document is signed by the company if it is signed on its behalf by a director (see also sections 35A and B and 36B of the Companies Act 1985). The question of whether a document is signed on behalf of a company is an objective one, but there did not require to be any particular form of words used. Here, Mr Paterson entered into the agreement as an agent for a disclosed principal and therefore bound the defenders. He himself was not liable in respect of the payment on the sale of the property (see Gloag: Contract (2nd ed) 133; Palmer (supra) para 3.112 (release 46)). [10] In relation the effect of section 263, the defenders required to speculate in order to make the argument. It could not be assumed that the pursuer was currently a shareholder of the defenders. The argument presupposed that the agreement had been implemented but the existence of the action would suggest that this had not happened. Furthermore the agreement did not tie in the payments with the proceeds of sale. There was a background of loans here and it could not simply be asserted that the proposed payment would be a gratuitous one.
3. Decision
[11] The determination of which persons are bound by a written contract is made after a consideration of the terms of that contract in the circumstances in which it was made. Each case will, of course, depend upon its own facts and circumstances (McLean v Stuart (supra)). Where the analysis concerns whether a director of a company is contracting for himself or on behalf of the company, the issue will turn on whether the words used, in the context of the whole contract and the surrounding circumstances averred, indicate that the intention was to bind the company only or the director as an individual. It may be that with the use of particular wording or in certain circumstances an agreement will be construed as binding upon both (Neilson v Stewart (supra); cf Montgomery Litho v Maxwell (supra)). [12] The surrounding circumstances as averred in this case, and as appear from the agreement, reveal that it was the pursuer and Mr Paterson who were seeking some form of restructuring of loans made to certain of Mr Paterson's companies with a view to the continued development of the Baillieston property. The vehicle for this was a new company, namely the defenders, which bought the property. The agreement reached between the pursuer and the Mr Paterson was designed, at least in part, to secure repayment of the loans in due course. The method by which this was to be achieved was that the pursuer was to become the major shareholder in the defenders, which was to receive rent over a 10 year period during which his shareholding would diminish to parity with that of Mr Paterson. Meantime, if the property were sold, the proceeds would, up to a certain level, go to the pursuer. That could be achieved without any need on the part of the pursuer to enforce the agreement against the defenders as he would be the majority shareholder and was to have "total financial control" over them. The context of the agreement, so far as averred, is one involving a bargain between two individuals regarding how they planned to operate a new company and the financial consequences of that operation. [13] When the agreement itself is looked at in this context, it appears also to be a bargain between two individuals, namely the pursuer and Mr Paterson, and not one which imposes obligations or confers rights on a company. The agreement says this in its preamble where it specifically narrates that it is an agreement "between Kenneth Paterson and Charles Crimin". The defenders appear as part of the subject matter of the agreement and not as a party to it. The parties are referred to as "both", implying that there are only two, and these two must be the signatories, namely the pursuer and Mr Paterson. There is no hint, clue or suggestion in the agreement that it is being signed by the signatories for or on behalf of a company, notably the defenders. They do not sign as directors but simply in their own names. The terms of the agreement are typical of those entered into by individuals regarding their actions inter se in the running of the company, hence the references to share transfers between them. There is also reference to certain matters which they agreed were to occur and which could only be done by the defenders, notably the entering into of a lease. However, there was no need at the time of the agreement to bind the defenders to bring about those matters since the parties would themselves secure these objects as they would control the defenders. In all these circumstances, it is plain that this agreement is a bargain between, and binding only upon, the pursuer and Mr Paterson. Since it does not purport to bind the defenders, and cannot be held to do so in these circumstances, the action against the defenders founding upon the agreement is irrelevant and falls to be dismissed. I should add also that, in any event, notwithstanding the terms of the record, the agreement itself does not state that the defenders are to pay the sum sued for. Clauses "d)" and "h)" are simply to the effect that the sum is payable if the property were to be sold. They do not say that the defenders are liable to make that payment. In that situation, it would be difficult to create such an obligation upon the defenders from the terms of the agreement. [14] Where a party maintains that the terms of a contract, or their implementation, are illegal then it is for that party to aver the circumstances of that illegality and plead it accordingly. The defenders have not done that in this case and their argument based upon section 263 of the 1985 Act (supra) falls to be rejected on this basis alone. This is not a mere technicality. For the argument to have succeeded, the pursuer would have to be a member of the company. Although, had the agreement been fully implemented, he would have been such a member, it is not said that it has been. Indeed, since, if it had been implemented, the pursuer would be in control of the defenders, the existence of this action points towards a current situation whereby he is not in control and would suggest that he is not a member, at least to the extent contemplated in the agreement. Furthermore, for the payment to be illegal, it would have to be made by way of a distribution under the section and not capable of being paid in some other manner, either within one of the excepted categories mentioned in the section or as a payment for value set against the background of loan restructuring. The categorisation of the payment as an illegal distribution is something which would have to be the subject of averment. In the absence of averment and a plea-in-law dealing with this area of the debate, the defenders' submissions on this matter would have fallen to be rejected. [15] I will sustain the defenders' first plea-in-law and dismiss the action.