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Cite as: [2004] ScotCS 67, 2004 SCLR 789

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Innes, Re An Order wind up Scotpigs Ltd [2004] ScotCS 67 (16 March 2004)

OUTER HOUSE, COURT OF SESSION

P158/04

OPINION OF LADY PATON

in the petition of

JAMES GRIGOR INNES

Petitioner;

for

an order to wind up Scotpigs Limited in terms of Sections 122, 123 and 124 of the Insolvency Act 1986

________________

Petitioner: Haddow Q.C., Gardiner, Advocate; Brodies, W.S.

Respondents: Edward, Solicitor-Advocate, Maclay Murray & Spens

16 March 2004

Introduction
[1] The Simmers family run a long-established pig-breeding business. Over the years, their limited companies (A. Simmers Limited and associated companies) have supplied pigs to many customers. One such customer was the petitioner, James Innes, trading as James C. Innes & Sons.

[2] In the 1990s the business ran into financial difficulties. Receivers were appointed to the companies. The Simmers family then reached an agreement with the petitioner. He was to provide significant new capital which would rescue the business from the receivers.

[3] In pursuance of the agreement, a new company, Scotpigs Limited, was incorporated in 1998. A Shareholders Agreement and a Limited Partnership Agreement were entered into. Land sold to the petitioner by the Simmers companies was leased back to a limited partnership formed by Scotpigs Limited and the petitioner.

[4] The petitioner owned 50% of the shares in the new company Scotpigs Limited. Members of the Simmers family owned the other 50%. There were two directors: Arthur Simmers, the managing director; and the petitioner, who was not to be involved in the day-to-day running of the business. The Articles of Association gave each director equal voting power, and specifically provided that a resolution could not be passed if a director voted against it.

[5] The Shareholders Agreement contained a provision (Clause 10) entitling Arthur Simmers, on 31 March 2004, to buy out the petitioner's entire interest in the company.

[6] The business continued to suffer various troubles, including outbreaks of foot and mouth disease, PMWS (the pig equivalent of AIDS), and cash-flow problems. Disagreements arose. In April 2003, the Simmers family presented a petition seeking the removal of the petitioner from his position as director in terms of section 459 of the Companies Act 1985. They accused him of pursuing his own interests over the interests of the company, shareholders, creditors, and employees, thus placing the company in jeopardy. In the course of those proceedings, the petitioner presented a petition seeking the winding up of Scotpigs Limited in terms of section 122 of the Insolvency Act 1986, on the ground that it would be just and equitable to do so, as there was a deadlock within the company. Matters came before Lord McCluskey on two occasions in April 2003. The court refused either to remove the petitioner, or to appoint provisional liquidators. An alternative solution seemed possible, namely the appointment for a brief period of the company accountant Mr. Repper as a third director, in order to break the deadlock and to bring about the sale of one of the business's farms (Ormiston Farm), thus producing cash of about £1 million which would be distributed as payments to account to creditors who were pressing for payment. Reference is made to a Note/Decision of Lord McCluskey dated April 2003, in particular paragraph [4] where he concludes:

"It is abundantly clear to me that there is deadlock between [the Simmers family and the petitioner]."

[7] Mr. Repper was duly appointed a third director for a brief period. The petition for the winding up of the company was dismissed, to enable the sale of Ormiston Farm to proceed. The farm was sold. Payments to account were made to various creditors, although not in the proportions originally envisaged, all as set out in payment schedules numbers 6/12 and 6/13 of process. Scotpigs Limited nevertheless remained in serious debt.

[8] In September 2003, the Simmers family again sought the removal of the petitioner from his position as director by amending the original section 459 petition and by referring to the need to sell further company assets. It was proposed that company land be sold to individual members of the Simmers family, thus raising about £800,000. There would be a lease-back of the land to the company. An extrajudicial agreement along those lines was reached. However the agreement was not implemented. The Simmers' financial backers would not accept the lease-back provision.

[9] On 17 October 2003, Mr. Repper resigned from his position as company accountant. On 1 December 2003, Scotpigs Limited lost its licence to operate under the Quality Meat Scotland Scheme. The company was criticised for its inadequate management systems and for inadequate standards of animal health and welfare. By letter to the petitioner's agents dated 2 December 2003, the Simmers family proposed that Arthur Simmers would make a payment of £3.5 million to buy out the petitioner's interest in the company. The Simmers family also enrolled a motion in the following terms:

"In respect that [Arthur Simmers] has given notice of his intention to exercise his right of buy-out of [the petitioner's] properties and shares, to regulate the position of the company in the interim pending completion of the buy-out by removing [the petitioner] as director of Scotpigs Limited ..."

Lord Carloway refused to grant the motion. Reference is made to his Opinion dated 17 December 2003.

[10] Further letters dated 23 January and 11 February 2004 (relating to the possible exercise of the buy-out option) were sent to the petitioner's agents and to the petitioner.

[11] The petitioner then presented the current petition for the winding up of the company in terms of section 122(1)(f) and (g) and section 123(1)(e) of the Insolvency Act 1986. He sought an order for intimation, service, and advertisement, and the appointment of provisional liquidators. The petition triggered a caveat, and Mr. Edward, solicitor-advocate, appeared on behalf of the company as instructed by Arthur Simmers as director. Mr. Edward also represented the Simmers family.

[12] At a hearing on 12 and 13 February 2004, Mr. Haddow Q.C. moved the court to grant the orders. Mr. Edward opposed his motion. He invited the court to postpone any decision until it could be seen whether the buy-out option would be exercised. Neither Mr. Haddow nor Mr. Edward wished a judicial factor to be appointed, taking the view that a factor would not have the necessary knowledge and expertise to run a pig-breeding business.

[13] In relation to section 122(1)(g) - winding up on the ground that it is just and equitable to do so - Mr. Edward submitted that the exercise of the buy-out option would have the effect of breaking the deadlock in the company. The option was exercisable on one day only, 31 March 2004. Mr. Edward could not give an assurance that Mr. Simmers would have the funds necessary by that date, nor that he would definitely exercise the option. But it was submitted that Clause 10 gave Mr. Simmers an entitlement. He was entitled to exercise the option, or not, as he chose. Mr. Simmers might ultimately decide that it did not make economic sense to exercise the option. However Mr. Edward stated that a potential funder was currently carrying out due diligence. The aim was to raise £6 million - sufficient to buy out the petitioner and to pay off creditors. The company then intended to down-size the pig herd and the business, and to diversify. Mr. Edward had in his hand a letter from the potential funder. He did not offer to lodge that letter. When enquiry was made as to the extent to which the contents of the letter could be made known, Mr. Edward indicated that a copy of the letter could be shown to the petitioner's counsel and solicitors, but not to the petitioner himself, nor to any expert instructed on behalf of the petitioner. The identity of the lender was to remain confidential. That limited degree of disclosure was not pursued, and the letter was ultimately not exhibited either to the petitioner's legal advisers, or to the court.

[14] In relation to sections 122(1)(f) and 123(e) - winding up on the ground that the company was unable to pay its debts as they fell due - Mr. Edward submitted that the petitioner owed the company significant sums of money, over £1 million. Mr Edward made reference to three Open Records in three separate actions in which Scotpigs Limited sought payment of various sums from James C. Innes & Sons. Thus not only were all the petitioner's claims against Scotpigs Limited in dispute, but also the petitioner owed the company sums in excess of the debts which he claimed were due to him by the company. Accordingly the petitioner was not a creditor of the company in respect of undisputed claims.

Opinion
Petitioner as a creditor of the company
[15] It is not possible at this stage to form a view about the merits of the three actions for payment by Scotpigs Limited against the petitioner trading as James C. Innes & Sons. The company's claims for payment are at present illiquid and unresolved. By contrast, the debts owed by Scotpigs Limited to the petitioner are liquid and quantified, instantly verifiable, and due and payable. In particular, the company currently owes the petitioner £61,447 in respect of stamp duty, as set out in note 17 to the company's accounts to 31 March 2000, number 6/5 of process; £51,030 in respect of a cattle purchase (note 17 to the accounts); and over £300,000 in respect of arrears of rent, no payment towards rent having been made since April 2002 (all as averred in paragraph 14 of the petition, and not disputed by Mr. Edward). I am therefore satisfied that the petitioner is a creditor of the company in terms of section 124, and is entitled to bring this petition seeking a winding up order. Moreover as such creditor, he is entitled in my view to seek an order in terms of either subsection (f) or (g) of section 122(1).

Company unable to pay its debts as they fall due: sections 122(1)(f) and 123(1)(e)
[16] I am satisfied that Scotpigs Limited is a company unable to pay its debts as they fall due in terms of section 122(1)(f) and section 123(1)(e) of the Insolvency Act 1986. That fact is clearly demonstrated inter alia by numbers 6/3, 6/4, 6/5 (note 17), 6/7, 6/8B, 6/9A, 6/12, 6/13, and 6/19 of process. In any event, that fact was very properly accepted by Mr. Edward on behalf of Scotpigs Limited in the course of the hearing. It is a state of affairs which has existed for some years. Nevertheless it might be thought that two matters could prevent the granting at this stage of the orders sought in terms of section 122(1)(f). I deal with each in turn:

(i) The buy-out option exercisable on 31 March 2004: Arthur Simmers has the right to seek to buy out the petitioner's interest in the company on one day only, 31 March 2004, all as set out in Clause 10 of the Shareholders Agreement (with definitions given in Clause 1). However my attention was not drawn to anything in the agreement or in the Insolvency Act, or to any principle or rule of law, suggesting that the petitioner is disabled by reason of the existence of such a buy-out option from seeking to exercise his statutory rights in terms of the Insolvency Act 1986 in respect of the company which is unable to pay its debts as they fall due. I am not therefore of the view that the existence of the buy-out option should prevent or delay procedures otherwise appropriate in terms of section 122(1)(f) of the 1986 Act.

(ii) Debts said to be owed by the petitioner to the company: Mr. Edward, for the company, drew attention to three Open Records numbers 7/5, 7/6 and 7/7 of process, in which Scotpigs Limited sue James C. Innes & Sons for certain sums as follows:

Open record A1660/03, number 7/5 of process: £10,243.20; £5,500; and £14,692.

Open record A1663/03, number 7/6 of process: £39,387.50; £9,000; and £9,489.20.

Open record (no reference number), number 7/7 of process: £1,090,862.

He also drew attention to a passage in volume 3 of Palmer's Company Law (release 83, December 2001) paragraph 15.214.2, which was in the following terms:

"Where the petitioner's debt is undisputed, but the company has a genuine and serious cross-claim, which it has been unable to litigate, in an amount exceeding that of the petitioning creditor's debt, there is Court of Appeal authority to the effect that dismissal or staying of the petition ought to take place unless there are special circumstances justifying a contrary exercise of the court's discretion: Re Portman Provincial Cinemas Ltd. (1964) 108 S.J. 581 (C.A.); Re LHF Wools Ltd. [1970] Ch. 27 (C.A.); Re Bayoil S.A. [1998] BCC 988 (C.A.)."

He submitted that, in view of the sums sought by the company from the petitioner trading as James C. Innes & Sons, all as demonstrated in the three Open Records, it would not be appropriate to allow any winding up procedure to commence.
[17] Mr. Haddow, in response, drew attention to another passage in Palmer's Company Law, at paragraph 15.214.2, where the authors note:

"... the courts have become increasingly alert in recent years for any indication that a debtor company is contriving to generate the impression that a dispute exists so that the petition may be obstructed."

He also pointed out that the sums sought from the petitioner were disputed and were illiquid: by contrast, the debts owed to the petitioner were liquid, admitted, due and payable.

[18] As indicated in paragraph [15] above, it is not possible at this stage to form any view about the merits of the three actions for payment by the company against the petitioner trading as James C. Innes & Sons. Accordingly had the petitioner been the company's only significant creditor, I might have been persuaded that it would be inappropriate to allow the procedures under the Insolvency Act 1986 to commence. However in the present case, there are other major creditors - in particular the Inland Revenue and the bank. While the petitioner required to demonstrate some debt owed to him by the company in order to be qualified to bring the present petition, that does not in my view restrict the court's view of the company's financial position. On the contrary, the terms of sections 122(1)(f) and 123(1)(e) invite a general, overall view of the company's financial position, rather than a view restricted to the company's standing and relationship with one creditor. In the present case, the company's overall financial position is that the company has for some years been unable to pay its debts as they fall due - debts owing to many creditors, not just to the petitioner. As at the date of the hearing on 12 and 13 February 2004, the company owed the Inland Revenue about £1.4 million, excluding interest. The company owed the bank about £800,000. The company owed further significant sums to other creditors. In all the circumstances I am not persuaded that the company's illiquid and unresolved claims for payment against the petitioner should prevent the procedures under the Insolvency Act 1986 from commencing.

Winding up just and equitable: section 122(1)(g)
[19] As Lord McCluskey noted in paragraph [4] of his Decision dated April 2003:

"It is abundantly clear ... that there is deadlock between [the Simmers family and the petitioner]. That is a matter of the utmost importance here because the company simply cannot function when there is deadlock between these two parties who are respectively holders of 50 per cent of the shares. Neither can act if the other imposes a veto."

[20] The parties themselves acknowledge the existence of a deadlock. For example, in an Open Record in another litigation (number 6/17 of process) in Article 6 of Condescendence, page 17, the Simmers family aver that: "The company is deadlocked and unable to pursue its objectives", and that averment is admitted by the petitioner.

[21] I agree with Lord McCluskey and with the parties that there is a deadlock within the company, making the proper running of the business impossible. The Simmers family (who own 50% of the shares) are at complete loggerheads with the petitioner, who owns the other 50% of the shares. The two directors (Arthur Simmers and the petitioner) have no working relationship. They cannot agree on fundamental matters. They do not have adequate communication. For example, the petitioner had not been advised of important developments, such as the Inland Revenue's action for payment against Scotpigs Limited, or the fact that the Department of Trade and Industry had raised proceedings against Arthur Simmers in relation to the management of the previous Simmers limited companies. Mr. Repper, the company accountant appointed as a third director for a brief period to enable Ormiston Farm to be sold and the proceeds to be distributed, resigned from his post in October 2003. I am quite satisfied that the company is in deadlock and therefore that the petitioner is prima facie entitled to an order winding up the company on the ground that it would be just and equitable to do so in terms of section 122(1)(g).

[22] However the buy-out option exercisable on 31 March 2004 may be a factor which has to be taken into account when considering a winding up in terms of section 122(1)(g). Although it is difficult for the court, on the material put before it, to have any faith in the re-financing which the Simmers family are currently trying to achieve, and although the mechanics of the buy-out option as set out in Clauses 1 and 10 of the Shareholders Agreement suggest that a large amount of ready money together with a high degree of skill, efficiency, and co-operation on the part of professional advisers would be required in order to achieve practical fulfilment of the buy-out conditions, it nevertheless seems to me that the court cannot ignore the faint possibility that the deadlock might be resolved by a successful buy-out of the petitioner's interests by Arthur Simmers. Accordingly, had this petition been presented on the single ground that it would be just and equitable to wind up the company, I might have been persuaded to postpone my decision until after the date for the exercise of the buy-out option (31 March 2004). But the petition has been presented on two grounds, each capable of standing independently of the other. As indicated above, I am satisfied that the petitioner is entitled to an order for the winding up of the company on the ground that the company is unable to pay its debts as they fall due; that this state of affairs has existed for some considerable time; that there is nothing in the Shareholders Agreement or in any contractual term or in any principle or rule of law making the existence of the buy-out option an obstacle to the winding up order to which the petitioner is entitled; and standing the serious financial difficulties experienced by the company over a protracted period, that it is appropriate that the company be wound up in terms of section 122(1)(f) without delay.

Provisional liquidators
[23] In the circumstances of this case as outlined above, I am satisfied, in the exercise of my discretion, that it is necessary that provisional liquidators be appointed as soon as possible in terms of section 135 of the Insolvency Act 1986.

Conclusion
[24] I shall order intimation, service, and advertisement once in the Edinburgh Gazette and once in the Scotsman. I shall appoint the two individuals named in the prayer of the petition as provisional liquidators, and authorise them to exercise the powers contained in Part II of Schedule 4 to the Insolvency Act 1986.