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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 42
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A2/07
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OPINION OF LORD MENZIES
in the cause
J H CUNNINGHAM
& SON (HAULAGE) LIMITED
Pursuers;
against
JAMES SMITH &
OTHERS
Defenders:
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Pursuers: Howlin; Shepherd & Wedderburn LLP
Defenders: Logan; Campbell Smith
25 January 2007
Introduction
[1] This is an action for
damages for losses which the pursuers aver that they have sustained as a result
of breach of contractual warranties by the defenders. The summons was signetted on 5 January 2007 and warrant was granted
for arrestment and inhibition on the dependence of the action. The case came before me on the Motion Roll on
the defenders' motion for recall of the arrestment and inhibition granted on
the dependence of the action. The motion
lasted for two days, on 24 and 25
January 2007.
[2] The
pursuers aver that they are engaged in the business of transport services, standard
haulage, haulage between Scotland
and London, and air cargo haulage
services from Prestwick, Edinburgh
and Glasgow Airports
to customer hubs. The first and second
defenders were, and are, the partners of the firm Debsmith European Transport,
who are the third defenders. It is
averred that the first defender was in control of the day-to-day management and
running of the third, fourth and fifth defenders. Before 17 November 2006, the third defenders carried on the
business of haulage of air cargo, and the fourth defender carried on the
business of air cargo handling.
[3] By
means of a business sale and purchase agreement (the "agreement") between the
pursuers and all the defenders executed on 17 November 2006, the business and
certain assets of the third defenders were sold to the pursuers as a going
concern, and the business and certain assets of the fourth defenders were sold
to the pursuers as a going concern. The
agreement contained contractual warranties by the defenders in favour of the
pursuers. The provisions relating to
these warranties are to be found at clause 12 of the agreement, and in Part 2
to the Schedule to the agreement.
[4] The
contractual provisions on which the pursuers rely in this action may be
summarised as follows. Clause 12.1
provided that:
"The Warrantors
warrant to the Purchaser at Completion in the terms set out in this Clause 12
and Part 2 of the Schedule and acknowledge that the Purchaser has entered into
this Agreement in reliance on the Warranties.
The Warranties are given subject only to matters fairly disclosed to the
Purchaser in the Disclosure Letter (so long as sufficient details are provided
to identify the nature and scope of the matter disclosed)."
Clause 12.3 provided that:
"Each of the
Warranties shall be construed as a separate warranty and, save as expressly
provided to the contrary, shall not be limited by reference to or inference
from the terms of any other Warranty or by any other term of this Agreement."
By clause 12.6 the warrantors
jointly and severally undertook to pay to the pursuers on demand inter alia all losses and damages which
the pursuers might suffer or incur in consequence of any of the warranties
being untrue, inaccurate or misleading.
Paragraph 4.6.1 of Part 2 of the Schedule warranted inter alia that the third defenders had conducted their business,
and the fourth defenders had conducted their business, in accordance with all
applicable laws and regulations of the United
Kingdom and/or any relevant foreign
country. Paragraph 4.6.4 of Part 2 of
the Schedule warranted that neither the third defenders nor the fourth
defenders nor any of their officers, agents or employees had committed or
omitted to do any act or thing the commission or omission of which is or could
be in contravention of any act, order, regulation or the like giving rise to
any fine, penalty, default, proceedings or other liability in relation to
either of their businesses and which would have an adverse effect on their
businesses.
[5] The
pursuers make reference to the Transport Act 1968 and Council Regulation (EEC)
No. 3820/85 of 20 December 1985
("the 1985 Regulations"). They aver that
prior to the pursuers' purchase of the businesses it was the practice within
the third and fourth defenders for this legislation to be consistently and
significantly breached, and that drivers were required to drive for periods
materially in excess of those permitted by the legislation, and without the
rest breaks required by it. They aver
that the first defender was in control of the day-to-day management and running
of the third and fourth defenders and had an intimate knowledge of their
operations, that he was well aware of the breaches of the legislation which
took place when he was involved in the running of the business, and that he
wilfully concealed this from the pursuers.
They aver that the statements made in the passages of the schedule
quoted above were false and were made fraudulently, and that the warranties
were untrue, inaccurate and misleading.
The pursuers go on to aver that the goodwill element in the purchase
price specified in the agreement was £1,468,000, and that the value of the
goodwill element on the basis of the true position is zero. This is the sum for which the pursuers seek
decree.
[6] The
basis on which the pursuers sought warrant for arrestment and inhibition on the
dependence of the action was set out in article 40 of condescendence in the
summons. There are seven factors on
which the pursuers rely, which are as follows:
"(a) It is respectfully submitted
that, in the circumstances condescended upon, the pursuer has a strong prima facie case against the defenders.
(b) Furthermore, the pursuer
alleges fraud against the first defender, in respect of which the other
defenders are jointly and severally liable in terms of the Agreement.
The pursuer is
reasonably apprehensive, given the fraudulent conduct of the first defender, in
particular, that he and the second defender will take steps to conceal or
dissipate their assets, and those held by the other defenders under their
control, with a view to avoiding payment of any decree pronounced by the court.
(c) The first and second
defenders have properties in Spain
and in Dubai, and the pursuer is
reasonably apprehensive that the relevant assets may well be dissipated to
those locations.
(d) The first and second
defenders, having sold their businesses to the pursuer, are not understood by
the pursuer to be in active employment.
(e) The businesses and
certain assets of the third and fourth defenders having been sold to the
pursuer, their means of generating income to meet any decree have been
significantly reduced, if not removed entirely.
(f) The sum sued for is
substantial.
(g) In the foregoing
circumstances, it is respectfully submitted that the use of diligence would be
proportionate to the claims made herein."
Submissions for the defenders
[7] Counsel
for the defenders submitted that diligence on the dependence of the action was
not justified because the pursuers do not have a prima facie case. In any
event, the pursuers do not need diligence on the dependence because of the
additional protection provided by the agreement. The onus was on the pursuers to satisfy the court
that diligence on the dependence was necessary.
He referred me to Karl Construction
Ltd v Palisade Properties plc
2002 SC 270, and Barry D Trentham Ltd v
Lawfield Investments Ltd 2002 SC 401,
and submitted that if the defenders' rights under article 1 of the First
Protocol of the European Convention on Human Rights were not to be infringed the
pursuers had to satisfy the court of various tests. Of these tests two were relevant to the
present case, namely (1) the pursuer must have a prima facie case and (2) the pursuer must have a specific need for
the remedy which he seeks. The
requirement for the pursuer to establish a prima
facie case was intended to be a substantial hurdle for the pursuer to
surmount, and if there is an apparently substantial defence to the pursuer's
claim it is difficult to say, on the basis of the whole of the material before
the court, that that claim amounts to a good arguable case - see Lord Drummond
Young's Opinion in Barry D Trentham Ltd v
Lawfield Investments Ltd at paragraph
19. This test was approved by the Inner
House in Gillespie v Toondale Ltd [2005] CSIH 92; 2006 SC
304.
[8] The
summons in the present action proceeds on the basis that the
1985 Regulations were directly applicable in the United
Kingdom.
Counsel argued that the 1985 Regulations were not directly applicable in
the United Kingdom,
and pointed to article 17 of the regulations in support of this position. He submitted that member states had an
obligation to implement the 1985 Regulations but this was not done until the
coming into force on 4 April 2005
of the Road Transport (Working Time) Regulations 2005 (SI 2005/639). He submitted that these 2005 regulations
implemented the 1985 Regulations and went beyond them, for example by
introducing provisions relating to periods of availability, breaks and rest
periods. The agreement (and its
associated disclosure letter) were negotiated when these regulations were very
new, and it was arguable that disclosure was made.
[9] Counsel
attacked the averments of fraud on the part of the first defender which are
made in the summons. These were only
made in order to avoid the limitation of liability provision in clause 13.6 of
the agreement. This limits the liability
of the Warrantors under clause 13 for any Determined Costs which relate solely
to compliance with the Working Time Regulations to £100,000, but this is
disapplied by paragraph 8 of Part 3 of the Schedule in respect of fraudulent
acts or omissions by the Warrantors. This
was the only reason for the pursuers making these averments. The defenders vehemently denied any breach of
warranty and a statement which they had obtained from a representative of the
Vehicle Operator Services Agency (referred to in article 22 of condescendence
in the summons) was supportive of the defenders' position. With regard to the averments in article 29 of
condescendence, full disclosure had been made in the disclosure letter (No. 6/2
of Process) and in disclosure document 68 (No. 6/3 of Process). The defenders employed a Mr Alexander to
produce reports on a weekly basis of all drivers' tachographs and analyse
whether there had been any breaches of any regulations. If there had been any breaches, disciplinary
action would have followed. These
reports are in the possession of the pursuers.
Counsel pointed out that the tachograph records remain with the
defenders, because they are obliged to retain these. None of Mr Alexander's reports have been
produced by the pursuers in support of their averments. There is therefore no objective documentation
to support the pursuers' averments.
[10] Counsel also submitted that the sentence at the top of the
third page of the disclosure letter (No. 6/2 of Process) amounted to a full
disclosure with regard to this matter.
This sentence provides that "it is disclosed that the interpretation of
the Working Time Directive may have an impact on the manner in which the
Business is carried on in terms of vehicles and employees required to perform
the work of the Business". He accepted
that the wording was perhaps somewhat vague, and that reference to the "Working
Time Directive" was inaccurate, but on one view of this sentence it provided an
absolute defence to this action.
[11] Counsel went on to submit that in any event having regard to
the sums retained by the pursuers in respect of the purchase price, and the
sums wrongfully withheld by the pursuers as detailed in answer 40 of the
defences, the pursuers could not demonstrate a specific needs for diligence on
the dependence. In particular, the
pursuers are holding deferred consideration amounting to £737,500, which is due
to be paid in three tranches over the next three years. In addition the defenders estimate that the
pursuers are due to make payment to them of approximately £300,000 ingathered
by them as debts due to the third defenders in terms of clause 7. The pursuers have also wrongfully withheld
other sums as specified in answer 40, being approximately £140,000 for
un-invoiced work in progress, a further £150,000 as the Polar Air Retention and
approximately £20,000 in the Apportionment Retention Account. When all these sums are added together, the
pursuers have sums totalling about £1,333,000.
This sum is more than adequate to meet any award which might be made in
the present process, including principal, interest and expenses.
[12] Turning to the defenders' financial circumstances, I was told
that the first and second defenders own two houses in Scotland. Their interest in the house in which they
live is worth approximately £320,000 after payment of all debts secured
thereon, and they have an interest in the second defender's mother's house
which is worth about £60,000 after payment of all debts. When the arrestment on the dependence of this
action was served, the first and second defenders had a total of about £452,000
at credit of their account with The Royal Bank of Scotland. In addition, although the first and second
defenders live in Scotland
and intend to continue to do so, they have houses in Dubai
and Spain;
their interest in these houses is worth less than their interest in the two
Scottish houses. The first and second
defenders intend to set up another business in Scotland;
they are people of substantial means, with an expectation of receiving further
substantial payments from the pursuers.
In these circumstances the pursuers have failed to show a specific need
for diligence on the dependence, and the defenders' motion for recall should be
granted.
Submissions for the pursuers
[13] Counsel for the pursuers submitted that the test to be applied
in a motion for recall of diligence on the dependence of an action was that set
out in Advocate General v Taylor 2004 SC 339. This test is succinctly stated at paragraph [34]
of the Opinion of the Court, in which it is stated that:
"We have in mind
that the applicant for a warrant or for letters of inhibition need only establish
a prima facie case on the merits of
the action. The necessity for diligence
need not be demonstrated although it may no doubt assist the grant if it
is. But the applicant will have to
demonstrate that the diligence sought is proportionate to the claim."
It follows that counsel for the
defenders was wrong in submitting that the pursuers require to establish a
specific need for diligence - the modern test is proportionality. The passage quoted above was applied in Gillespie v Toondale Ltd. In applying
this test, counsel accepted that the onus of satisfying the court rested with
the pursuer not only at the stage of application for diligence on the
dependence but also at a motion for recall.
In considering whether a prima
facie case is made out, and whether the pursuers have demonstrated good
cause for the remedy they seek, the court should consider the summons and the
defences, and the statements made at the bar.
[14] With regard to the law forming the basis for this action,
counsel maintained that the 1985 Regulations were directly effective within the
United Kingdom
as soon as they came into force on 29
September 1986. In support
of this, he referred me to article 19 of the 1985 Regulations, which provides
that "this Regulation shall be binding in its entirety and directly applicable
in all Member States." He also referred
me to article 249 of the Treaty of Rome, which provides inter alia that:
"A regulation
shall have general application. It shall
be binding in its entirety and directly applicable in all Member States. A directive shall be binding, as to the
result to be achieved, upon each Member
State to which it is addressed, but
shall leave to the national authorities the choice of form and methods."
The 1985 Regulations were therefore
binding legislation within the United Kingdom
with no need for further domestic legislation to implement them. This falls to be contrasted with the Directive
2002/15/EC, which is commonly referred to as the "Working Time Directive",
which required to be implemented by domestic legislation. The Road Transport (Working Time) Regulations
2005 (SI2005/639), which came into force on 4 April 2005 and were referred to
by counsel for the defenders in his submissions, were enacted to implement the
2002 Directive not the 1985 Regulations.
It was clear from article 2(1) that the 1985 Regulations applied to all
carriage by road within the European Community, and did not exclude roads
within the United Kingdom. The purpose of article 17 was to oblige
member states to adopt laws, regulations or administrative provisions in order
to implement the regulations, by the provision of systems of enforcement,
checks and penalties. It was clear from
the decision of the European Court of Justice in E Clarke & Sons (Coaches) Ltd and D J Ferne [1998]
ECR 1-247 that the 1985 Regulations applied at that time to the United Kingdom.
[15] Counsel submitted that the defences proceeded on a
misinterpretation of the law, and on a misconception as to the basis for the
action. The pursuers were not seeking
indemnity in terms of clause 13 of the agreement, but damages for breach of
warranties in terms of clause 12. Soon
after they took over the running of the business on 17 November 2006, the pursuers realised that
some of the drivers' working schedules were impossible if the 1985 Regulations
had been complied with. They looked into
the business records and found widespread breaches of the regulations, with
drivers driving for much longer than the 1985 Regulations permitted. The defenders' employee Mr Alexander was not
a specialist, and no report by him was contained within the business books
passed to the pursuers. Counsel said
that on numerous occasions Mr Alexander told the first defender that drivers were
driving for longer periods than permitted in terms of the regulations, but on
most occasions the first defender took no action. The pursuers have instructed an independent
audit from the Freight Transport Association to see if the businesses' routes
have been operated in accordance with the regulations; the draft audit points
to widespread and systemic breach of the regulations. One route regularly driven by the drivers was
from Prestwick Airport
to Glasgow Airport
to Heathrow Airport
and finally to Gatwick Airport,
all in the course of the same driver's journey.
The workforce of the third and fourth defenders was acquired by the
pursuers as a result of the agreement; solicitors acting for the pursuers have
spoken to drivers and managers in the workforce, as a result of which the
averments in article 23 of condescendence were made. Counsel told me that the pursuers have
analysed the journeys of eight drivers (out of a total of 26 drivers) for the
ten-day period from 6 November to 16 November
2006, being the last ten days before the transfer of the
business. I was told that this exercise
showed that there had been 83 infringements of legislation, of which 78 were
infringements of the 1985 Regulations, in relation to these eight drivers
alone. The first defender was in charge
of the day-to-day running of the business, and must have known of these
infringements. He gave the warranties
contained in the agreement knowing them to be untrue.
[16] Counsel accepted that there would be no breach of warranty if
there had been a relevant disclosure. The defenders relied on three
disclosures. First was the general
reference to the Working Time Directive at the top of page 3 of the disclosure
letter (No. 7/4 of Process). This was of
no relevance to the action, because the pursuers' position is not based on the
Working Time Directive but on the 1985 Regulations. Second was paragraph 8.1.11 of the disclosure
letter, relating to disciplinary procedures involving two employees named Booth
and O'Hara. Disclosure of these two
individual incidents could not amount to fair disclosure in terms of clause
12.1 of the agreement of the widespread systematic failure to comply with the
1985 Regulations as to drivers' hours, which is the foundation of the
action. Third, disclosure document 68
(No. 6/3 of Process). This relates to a
public enquiry before the Deputy Traffic Commissioner on 12 January 2006, which was concerned with
127 offences in the period form 21
November 2004 to 24
December 2004. The
defenders' position is that since that hearing, their systematic problem has
been resolved. As is clear from earlier
submissions, this is not correct and there were numerous continuing breaches of
the regulations, even in the ten days leading up to the transfer of the
business. There has accordingly been no
disclosure which would serve to avoid breach of warranty.
[17] Counsel for the pursuers submitted that articles 25 to 28 of
condescendence amounted to a clear, relevant and specific case of fraud on the
part of the first defender. Counsel who
drafted the summons had seen statements from employees who were transferred to
the pursuers with the purchase of the business and which stated that they were
systematically breaching the regulations.
The first defender, who is himself also a HGV driver, checked the
drivers' tachographs and knew that the legislation was being breached. He went on to give warranties that the
legislation was being complied with.
[18] With regard to the calculation of the pursuers' loss, they
sought payment of the goodwill element of the purchase price, being
£1,468,000. This was the level of profit
which the business could be expected to generate per annum, i.e. approximately
£350,000 per annum, multiplied by a factor of 4.2. The pursuers have been advised by the
Independent Auditors that they will require up to 13 extra drivers in order to
comply with the 1985 Regulations. They
have already employed seven extra drivers, and five more candidates are in the
process of being appointed. The goodwill
element of the purchase price is worth nothing, and this is because of the
defenders' breaches of warranty.
[19] In summarising his position on a prima facie case, counsel submitted that the pursuers have an
extremely powerful case to be answered.
There are clear and specific averments of fraud on the part of the
defenders, and breaches of warranties which have resulted in loss to the
pursuers. The defences are irrelevant
and would not survive a debate. They
aver that the basis of the action is the 2005 Regulations, but this is
misconceived - the basis of the action is the 1985 Regulations. They aver that there have been no substantial
breaches of the legislation, but this is incorrect and the pursuers have been
able to point to repeated breaches of the legislation. The defenders aver that in any event if there
has been non-compliance with the legislation this has been covered by the
various disclosures, but the disclosures do not relate to what the pursuers
complain of. The defenders aver that the
pursuers' claim is limited as provided for by clause 13.6 of the agreement, but
the pursuers' claim does not relate to the Working Time Directive at all, and
in any event this is not a claim for indemnity but is rather a claim for breach
of warranty. The defences therefore do
not diminish the strong prima facie
case presented by the pursuers.
[20] Counsel then turned to the proportionality of the diligence on
the dependence sought. The purpose of
the diligence was to provide security for not only the principal sum, but also
interest thereon at the judicial rate and expenses. Counsel estimated interest at about £120,000
per annum and expenses at perhaps £80,000.
In addition, further claims for breaches of warranty had been intimated
to the defenders by the agents' letter dated 11 January 2007 (No. 6/4 of Process) and there were two
further claims which would be added to the action which had not yet been placed
before the court. These four further
claims added a total of approximately £273,000, resulting in a total sum for
which security was sought of over £1.9 million.
Towards this, the pursuers have the deferred consideration of the
purchase price provided for in the agreement, amounting to £737,500. On the basis of the information provided by
the defenders, cash amounting to about £452,000 has been arrested in the
defenders' bank account, and heritage worth in excess of £400,000 is subject to
inhibition. The total available to the
pursuers is therefore around £1.6 million.
[21] With regard to the matters raised in answer 40 of the defences,
the pursuers accept that sums ingathered by them as debts due to the third
defenders in terms of clause 7 should be paid to the defenders, and counsel
told me that arrangements were in hand for this to be done on the day that the
motion was being heard. There was no
substance at all to the claim for £140,000 for un-invoiced work in progress in
answer 40, as is apparent from a signed statement of George Templeton, the
in-house company accountant, dated 23 January
2007 (No. 6/6 of Process).
With regard to the Polar Air Retention, the Polar Air Contract has not
yet been executed; if and when this happens, the pursuers accept that they will
require to pay this sum to the defenders, and it is not therefore available as
security. With regard to the
Apportionment Retention Account, the pursuers have provided such accounting, as
appears from another signed statement from George Templeton (No. 6/7 of
Process), and 6/8 of Process is that accounting. Far from the pursuers wrongfully retaining
£30,000, the amount due to the pursuers by the defenders exceeds the amount due
by the pursuers to the defenders. There
is therefore no substance in any of the matters raised in answer 40. It follows that including the value of the
property which is subject to arrestment or inhibition, the pursuers only have
security for £1.6 million. If the
arrestment and inhibition on the dependence of the action were to be recalled,
they could only rely on the deferred consideration of £737,500 against a total
liability in excess of £1.9 million.
Standing the averments of fraud against the defenders, this motion
should be refused.
Response for the defenders
[22] Counsel submitted that the pursuers have failed to meet the
test enunciated in paragraph 13 of Gillespie
v Toondale Ltd. They have not produced the reports provided
by Mr Alexander. (With regard to the
allegation by counsel for the pursuers that Mr Alexander repeatedly complained
to the defender that drivers were being asked to drive for longer than the
regulations permitted, this was not true; counsel produced a letter from James
Alexander dated 24 January 2007 to this effect.) The pursuers had failed to produce any draft
audit in support of their position, and no statements of drivers were
produced. Counsel lodged one tachograph
record at the bar which showed that a driver had driven for 10 hours, which was
permitted in terms of the regulations twice in any week. The pursuers had therefore failed to make a
case out that was "both cogent and convincing".
Counsel disputed the method of valuing goodwill advanced on behalf of
the pursuers. He reiterated that it was
for the pursuers to show a specific need for this diligence on the dependence,
and asked why the court should interfere with the defenders' property rights
over the whole course of this litigation, which might well last for over one
year.
Discussion
[23] Because of the urgency
of the matter, I gave my decision on this motion from the bench. I refused the defenders' motion for recall of
the arrestments and inhibition on the dependence of the action. I gave my reasons for my decision at the
time, and what follows is intended to be a rehearsal of those reasons. It is not a verbatim repetition, but I hope
conveys accurately the reasons which I gave.
[24] First, I consider that the test to be applied in a motion for
recall of diligence on the dependence of an action is summarised in paragraph
34 of the Opinion of the Court in Advocate
General v Taylor,
quoted at paragraph [13] above. That was
the test applied in Gillespie v Toondale Ltd, in which the Court agreed
with Lord Drummond Young's approach in Barry
D Trentham Ltd v Lawfield Investments Ltd and at
paragraph 13, stated:
"In particular,
it is in our opinion necessary for the court at the stage of a motion for
recall to consider the pleadings as a whole, both the pursuer's averments and
the defence stated, and the submissions made by both counsel to determine
whether, in all the circumstances, inhibition is appropriate on the basis of
the existence of a prima facie case. We also agree that the prima facie test is a substantial hurdle for the pursuer to
surmount. It is not sufficient for him
to advance a colourable case. Grant of
judicial security and the serious interference with the defenders' property
warrants the application of a higher test. ...
Our law now recognises the potential for harm through unwarranted
diligence and for abuse based on a pretended or imagined debt. The ease with which a superficially valid
summons can be presented is self-evident.
The safeguard now imposed is the requirement of judicial assessment of
the validity or otherwise of the pursuer's claim. It is for the pursuer to demonstrate good
cause for the remedy he seeks."
It is this test which I have sought
to apply in the present case. The onus
of satisfying me that this test has been met rests with the pursuers.
[25] Turning to the applicable law underlying this claim, I accept
that the provisions of the 1985 Regulations are directly applicable in the United
Kingdom without the need for further
domestic legislation, by reason of article 19 of the 1985 Regulations and
article 249 of the Treaty of Rome as amended.
I am satisfied that the 1985 Regulations became effective within the
United Kingdom on 29 September 1986 and related to carriage by road within the
United Kingdom. The Road Transport
(Working Time) Regulations 2005 (SI2005/639) implement the provisions of
Council Directive 2002/15/EC, and not the 1985 Regulations. This is clear from the explanatory note to
the 2005 Regulations, but is also clear from the terms of the regulations
themselves, which are concerned with working time, periods of availability,
breaks and rest periods. The subject
matter of these regulations is very closely aligned to that of Council
Directive 2002/15/EC (the "Working Time Directive"). This action is founded on allegations of
breaches of the 1985 Regulations.
[26] The action comprises a claim for damages for breach of warranty
under clause 12 of the agreement. It is
not a claim for indemnity under clause 13 of the agreement. Moreover, the action is not concerned with
compliance with the Working Time Regulations, so the limitation provided by
clause 13.6 is not relevant to the present proceedings.
[27] The pursuers have made out a prima facie case - that is a good arguable case - that the
defenders fraudulently, or in any event wilfully concealed or misrepresented
matters when they granted the warranty on which the pursuers relied. It has always been a requirement of our
practice that averments of fraud must be clear and spell out with precision
what acts are alleged to be fraudulent and why they were fraudulent. The pursuers have spelt this out clearly in
the summons, and in particular at articles 23 to 29 of condescendence. The pursuers have made out a prima facie case that there has been a
breach, or breaches, of warranty, and that the behaviour averred to amount to
breach of warranty was not covered by any disclosure by the defenders. I do not consider that the three aspects of
alleged disclosure which are relied on by the defenders can be fairly read as
disclosing that the businesses were conducted systematically in breach of the
1985 Regulations, even after the period in December 2004 to which disclosure
document 68 (No. 6/3 of Process) was directed.
[28] In making these observations, I should make it clear that I am
of course not prejudging the issue of whether the defenders did act
fraudulently or whether they were in breach of warranty; clearly there is an
issue to try in this case. There is potential
for conflict of evidence at a later stage in the proceedings between the
evidence available to the pursuers and that available to the defenders. However, our procedures do not require the
tendering or assessment of evidence at this stage of the proceedings. In this regard it seems to me that the attack
by counsel for the defenders on the fact that the pursuers have produced no
evidence to support their averments is misconceived - partly because much of
the evidence is not presently available to the pursuers, and partly because
they are not obliged to disclose it at this stage. On the basis of statements made by counsel at
the bar, it appears that there was sufficient material to enable responsible
counsel to draft the averments contained in the summons. Looking to the summons, the defences and the
submissions of both counsel in court, I am satisfied that the pursuers have
made out a prima facie case in the sense described in Gillespie v Toondale Ltd.
[29] I now turn to the question of the proportionality of the remedy
sought. The sum sued for is £1.468
million; when interest, expenses and additional claims are included, the
maximum value of this action (i.e. the maximum amount which the pursuers might
seek to secure by way of diligence on the dependence of the action) may be not
far short of £2 million. If the
defenders' motion were to be successful and the arrestments and inhibition on
the dependence of the action were recalled, the only security which the
pursuers would have would be the deferred consideration of £737,500. The monies arrested and the heritable
property subject to inhibition on the dependence amount to just over
£850,000. In light of the signed
statements from Mr Templeton and the accounting, which form together Nos.
6/6, 6/7 and 6/8 of Process, and the assurances given by counsel for the
pursuers, I am not persuaded that there is much, if any, substance in the
matters raised in answer 40 of the defences which could be regarded as
providing security to the pursuers.
Again, there is clearly a dispute about the contents of article 40 of
condescendence and answer 40, and it would not be appropriate to prejudge that
issue at this stage. For present
purposes it is perhaps sufficient to indicate, in light of all the information
narrated above, that I have reached the view that the pursuers have
demonstrated good cause for the remedy which they seek. If circumstances change, it is open to the
defenders to return to court to seek a restriction on the diligence which has
been granted.
[30] Although this did not form part of the reasons which I gave
when announcing my decision, it is perhaps worth reiterating that this action
is concerned with allegations by the pursuers of fraud on the part of the
defenders (or at least the first defender).
This feature may distinguish this case from some of the recent
authorities to which I was referred. In
particular, Barry D Trentham Ltd v Lawfield Investments Ltd turned on
whether a significant risk of the defenders' insolvency existed at the time when
a claim if sustained by the court fell to be paid; the pursuers were not
alleging fraud, but apprehension that the defenders were practically insolvent
and vergens ad inopiam. No question of fraud arose. Similarly in Gillespie v Toondale Ltd
there was no question of fraud on the part of the defenders - warrant for
arrestment and inhibition on the dependence of the action was granted initially
on the basis of the pursuer's reasonable apprehension that the defenders by
reason of their indebtedness would be unable to pay any decree awarded by the
court. Again, there was no question of
fraud in the particular circumstances of Karl
Construction Ltd v Palisade
Properties plc, but in his wide-ranging assessment of the law relating to
diligence on the dependence in a variety of jurisdictions, Lord Drummond
Young accepted that the risk of the defender's insolvency was not the only
ground on which a pursuer might establish a need for an interim remedy; as he
observed (at paragraph [54]):
"... this will
generally involve demonstrating either that there is a significant risk of the
defender's insolvency or that the defender is taking steps to conceal or
dissipate his assets or that there is a significant risk that the defender will
remove his assets from the jurisdiction."
In the present case, standing the
pursuers' specific and relevant averments of fraud against the defenders, it
may be that the court should look more favourably on the granting of diligence
on the dependence in this action. This
appears to me to be a factor which is at least arguably in favour of the
pursuers when considering the question of the proportionality of the remedy
sought.
[31] In conclusion, when giving my decision, I indicated that I
accepted that the continuation of this diligence on the dependence represented
an interference in the right of the defenders to do what they wish with their
property. However, applying the
principles of our law I reached the view that this interference was, in the
circumstances of this case, both justified and proportionate. Accordingly I refused the defenders' motion
for recall.
