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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 158
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P802/08
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OPINION OF LORD HODGE
in the petition of
MACPLANT SERVICES
LIMITED
Petitioner;
To wind up
CONTRACT LIFTING
SERVICES (SCOTLAND)
LIMITED
Respondent:
________________
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Petitioner: Mr D. Sellar QC; Archibald
Campbell & Harley WS
Respondent: Mr D Johnston QC; Balfour
& Manson LLP
12 November
2008
[1] This is an application by
Macplant Services Limited ("Macplant") for an order to wind up
Contract Lifting Services (Scotland) Limited ("CLS"). CLS was a bulk lifting contractor. Macplant's principal business is the
maintenance of plant and equipment and, for a considerable time before the
presentation of the petition for the winding up of CLS, it had provided such
services to CLS in relation to plant which CLS leased to other parties. CLS was Macplant's largest customer by
turnover.
[2] The
proceedings in this petition have a prolonged and tortuous history in the courts
since a provisional liquidator was appointed to CLS on 17 November 2006. I set out that history in paragraphs 3
to 5 below. Hindsight suggests that
it might have been unwise of Macplant to proceed in the manner it did as it has
given rise to prolonged litigation. Be
that as it may, the issues which remain to be determined are (1) whether Macplant was and is a creditor of CLS
(in particular whether the debts were disputed or in any event Macplant had
agreed not to enforce those debts) and (2) whether CLS was at the date of
the presentation of the winding up petition and is unable to pay its debts.
The history of the winding up application
[3] Macplant presented an initial writ in Aberdeen Sheriff Court on 17 November 2006 seeking to wind up CLS on
the basis that it was unable to pay its debts.
Macplant claimed that CLS owed it £336,799.42 and vouched its claim by a
statement of account dated 14 November 2006. Macplant applied for the appointment of a
provisional liquidator and on 17 November 2006 the sheriff appointed
Mr Blair Nimmo CA to perform that role. CLS lodged answers to the application on 8 December 2006 and moved for the recall of
the appointment of the provisional liquidator.
The sheriff heard that motion on 22 January and 8 February 2007 and on the latter date
recalled the appointment, allowed parties further time to adjust their
pleadings and allowed a proof in May 2007.
Macplant appealed that decision to the sheriff principal who on 6 June 2007 issued a judgment allowing
the appeal and appointing Mr Nimmo interim liquidator of CLS.
[4] CLS
then appealed the sheriff principal's judgment to the Inner House of the
Court of Session and a summar roll hearing was fixed for 25 and 26 October 2007. But on 19 October 2007 CLS enrolled a motion to
allow a detailed Minute of Amendment to be received and so caused the
discharge of the hearing in the Inner House. After Macplant had answered the
Minute of Amendment the Inner House on a consented motion on
4 December 2007 allowed the appeal, recalled the interlocutors on
8 February 2007 and 6 June 2007 (thereby leaving the
provisional liquidator in office), and remitted the cause to the sheriff. On 8 February 2008,
Lord Glennie remitted the case to the Court of Session under section 120(3)(a)(ii)
of the Insolvency Act 1986 ("the 1986 Act"). Thereafter on 17 April 2008 Lord Menzies fixed
this hearing.
[5] As a
result of these protracted proceedings almost two years have passed since the
initial appointment of the provisional liquidator. That is of some significance as both parties
produced materials bearing on the merits of the application either shortly
before or during the hearing of the application and I had to continue the
application, which I had heard on two days in August 2008, to a third day
on 10 September 2008, to allow CLS to complete its submissions and to
give parties time to produce further material which was relevant to their
assertions.
The law which is relevant to this winding up
application
[6] The relevant statutory provisions in the
1986 Act are, first, section 124(1) which provides: "...an application to the court for the winding
up of a company shall be by petition presented ...by any creditor ..". Macplant asserts that it is a creditor of
CLS. Secondly, in section 122(1) it
is provided that "a company may be wound up by the court if - ... (f) the company is unable to pay its debts." In this application Macplant asserts that CLS
is unable to pay its debts. In order to
establish that inability Macplant relies on section 123(1) which provides
that "a company is deemed unable to pay its debts - (e) if it is proved to the satisfaction of the court
that the company is unable to pay its debts as they fall due". This is cash flow insolvency. Macplant also relies on balance sheet
insolvency; section 123(2) provides:
"A company is also deemed
unable to pay its debts if it is proved to the satisfaction of the court that
the value of the company's assets is less than the amount of its liabilities,
taking into account its contingent and prospective liabilities".
[7] There
are two cumulative requirements which Macplant must meet if it is to succeed in
its application to wind up CLS. First,
it must establish that it is a creditor of the company in order to have title
and interest to pursue the application.
Secondly, it must show to the satisfaction of the court that the company
is unable to pay its debts in order to obtain the winding up order. See Mann
v Goldstein [1968] 1 WLR 1091,
Ungoed-Thomas J at p. 1095D-F.
Thus if the petitioning creditor cannot establish its status as a creditor
of the respondent company but the latter company is insolvent, the court cannot
make a winding up order. Equally a
creditor cannot obtain the order without establishing the insolvency of the
respondent company.
[8] A
winding up petition is not the process in which to establish the respondent
company's liability to pay a disputed debt.
The petitioner will not be creditor for the purposes of
section 124, and thus will not have title and interest to seek the winding
up, if the respondent company shows that the debt is disputed in good faith and
on substantial grounds: Mann v Goldstein, Ungoed-Thomas J at pp. 1098-1099; Re a
Company No 006685 of 1996 [1997] BCC 830,
Chadwick J at p. 832 F-H and Baker
Hughes Limited v CCG Contracting
International Limited 2005 SC 65, Lady Smith at
paragraph 10. The Court will
normally dismiss the petition if it is clear that there is such a dispute. But honest belief on the part of the
respondent company is not enough to undermine the petitioner's title. The respondent company must also show that
there are substantial grounds for disputing the debt. See Professor Roy Goode,
"Principles of Corporate Insolvency Law" (3rd ed.)
para 4-23. The reasons which the courts
have given for taking this approach include the disruption and potential damage
which the presentation and advertisement of a winding up petition may cause to
the business of a respondent company.
But for this rule, this potential to damage would enable a petitioner to
apply commercial pressure to obtain payment of a disputed debt. At the same time, the court has to be astute
to prevent a respondent company from seeking to avoid or at least postpone the
winding up by advancing what Oliver LJ has described as "a cloud of
objections on affidavits" so as to force the petitioning creditor to establish
his claim in other proceedings when there is in fact no bona fide and substantial dispute as to the debt. See Re
Claybridge Shipping Company SA [1981] Com LR 107,
Oliver LJ at p. 109.
[9] Where,
as here, each side produces many affidavits and voluminous documentary
evidence, it appears to me that the court must look at the materials which the
parties place before it to see if it can form a view on whether there is a bona fide dispute about the petitioner's
claimed debt which is based on substantial grounds. Where the court is persuaded that there is
such a dispute, the proper course is to dismiss the winding up petition as the
petitioner will not have established its title as creditor. If there is doubt whether there is a bona fide dispute on substantial grounds
the court may sist the winding up proceedings to allow the parties to resolve
that question in other proceedings: Landauer
& Company v W.H. Alexander &
Company Limited 1919 SC 492.
Where there is affidavit evidence on both sides which prima facie is credible the court may
not be able to resolve the factual disputes and may, very exceptionally, have
to hear oral evidence in the winding up application. Re a
Company No 006685 of 1996 (above) at pp.837F-838B gives some support
for this view. Such a course of action
might be appropriate if the matters remaining in dispute are limited, most
matters having been resolved in the hearing, and it would be wasteful for
parties to commence separate proceedings.
But before dismissing or sisting the application or allowing oral
evidence in what is meant to be a summary procedure, I think that the court
should assess the conflicting evidence in the context of its consideration of
all of the evidence which is placed before it to see if it is credible and may
be relied on to demonstrate the existence of a dispute. The Companies Court in England takes a similar approach,
asking whether there is a fair or reasonable probability of the defendant
having a defence: Re a Company No 006685 of
1996 (above) at p.838C-F.
[10] It is
well established that if a creditor of an undisputed debt seeks a winding up
order, he has in a question with the respondent company a right ex debito justiciae to the order: In re
Southard & Co [1979] 1 WLR 1198 CA, p. 1202E-G. As occurred in that case, the court may
exercise its discretion to refuse to make such an order when other creditors of
the company oppose the remedy of winding up on grounds which persuade the court
that it is inappropriate. But, absent
such issues between creditors, the court will exercise its discretion to grant
the petitioning creditor the order which it seeks. A dispute about part of a debt is not a
defence to a winding up application if the undisputed part of the debt is
sufficient to justify the presentation of the petition: In re
Tweeds Garages Limited [1962] Ch 406. The Companies Court in England treats the £750 required
for a section 123(1)(a) demand as the minimum debt unless there are
special circumstances which make the not inexpensive remedy of winding up
appropriate. I am content to follow that
approach as a guide to the exercise of the court's discretion in most
circumstances having regard to the cost of the winding up process. But where a creditor has an unsatisfied
decree or an expired charge against the company for a smaller sum a winding up
order may be the appropriate remedy and in some circumstances it may be the
only effective remedy; Speirs & Co v Central Building Co Limited 1911 SC 330
is such a case.
The commercial background
[11] Macplant's petition was
initially straightforward. It asserted
that it was a creditor of CLS, having serviced and repaired its plant, and
sought to vouch the claim by reference to a statement of account dated 14 November 2006. CLS's defence to the application relied in
large measure on the wider commercial context of the parties' dealings.
[12] CLS
leased plant and equipment to several customers including A Ogden & Sons
Limited (later renamed ATH Regeneration Limited after takeover by ATH Resources
plc), Clydeport Operations Limited and Forth Ports plc. Macplant repaired and serviced the plant and
equipment. In December 2005
Business Investment Group Limited ("BIG") acquired the share capital of CLS for
£1.2 million. BIG was controlled by Mr John Paul
who was its sole shareholder and director.
Mr Paul was aware of the close working relationship between CLS and
Macplant and aspired to acquire Macplant.
He discussed his interest in doing so with Mr Stewart McLean,
a director of Macplant, who was a friend of Mr Barrow, the previous owner
of the shares in CLS, and who had in 2005 assisted Mr Paul in BIG's
acquisition of CLS. In May 2006 CLS
signed a non-disclosure agreement with Macplant in order to allow it to examine
Macplant's books and records with the intention of making an offer for its
shares. It appears that, in his dealings
with Macplant, Mr Paul envisaged that BIG would eventually acquire
Macplant and made proposals to Macplant's directors to deal with Macplant's
claims for payment on that basis. But in
the months after May 2006 Mr Paul did not make significant progress
in his aspiration to acquire Macplant and did not envisage agreeing even heads
of terms until December 2006.
[13] After
BIG acquired the share capital of CLS Mr Paul became concerned that some
of CLS's contracts were not profitable. He therefore terminated those contracts. CLS also became involved in disputes with two
substantial customers, namely Ogdens and Clydeport. Mr Paul was also concerned that CLS
might not be able to retain a major coal-handling contract with Forth Ports
which was up for renewal in 2006. He
appears to have wanted Macplant to enter into parallel negotiations with Forth
Ports so that, if CLS did not win the contract, Macplant or a subsidiary might
and that once CLS or BIG had acquired Macplant the expanded group would have
the benefit of the renewed contract. CLS
produced a memorandum or brief on the proposed coal-handling contract and I was
informed that Mr Paul sent it to Mr McLean on about 18 November 2006. Among the many issues raised in the
affidavits, which were not of central importance to the case, there was a
dispute whether Macplant had ever agreed to negotiate with Forth Ports and had
so negotiated before the provisional liquidator met Mr Paul on 22 November 2006. Mr Paul asserted that they had. Macplant produced affidavits from Charles Hammond,
Group Chief Executive, and Alan Burns, Scottish Ports Director, of Forth
Ports who stated that there had been no discussions between Forth Ports and Macplant in relation to
the coal-handling contract at any time before the appointment of the
provisional liquidator. They affirmed
that Macplant took on a short term contract in place of CLS after the provisional
liquidator was appointed and won the principal contract by tender in January 2007. I accept the evidence of the Forth Ports
personnel and am satisfied that the evidence which CLS has adduced, including
the contemporary letter referred to in paragraphs 42 and 43 below, which
suggested that Macplant had been negotiating with Forth Ports before then, is
unreliable.
[14] I am
also not persuaded that Mr Paul had good grounds for the assumption, which
appears to have underpinned his approach, that his dealings with Macplant were
on a basis, which both parties accepted, that CLS's takeover of Macplant would
occur. Mr Paul and his advisers did
little to investigate Macplant after the non-disclosure agreement was
signed. It was clear from the pleadings
that CLS and Mr Paul were not aware who were the shareholders of
Macplant. CLS averred that Mr Mclean
and Mr Barrow were the shareholders of Macplant whereas in truth Mr McLean
owned 25% and his fellow director, Mr Cooper, owned 75% of Macplant's
shares. While there were suggestions in
the affidavits produced on behalf of CLS that Mr McLean had co-operated
with Mr Paul in his plans to take over Macplant, it is important to recall
that as a potential vendor of shares and as a director of Macplant, Mr Mclean
had interests which were potentially opposed to those of BIG and CLS at least
until a satisfactory price and other terms of the share purchase had been
agreed. Mr Cooper also had such
interests and there was no evidence which suggested that he had agreed in principle
to a takeover, other than the alleged agreement which I discuss in paragraphs
28 to 58 below. It appears that Mr Paul
had business plans which remained at a conceptual level and which he did not
take forward into firm agreements. This
may have coloured his understanding of his dealings with Macplant during the
autumn of 2006.
[15] The
directors of CLS also expressed concern that CLS had been the victim of a
conspiracy by the directors of Macplant as a subsidiary of Macplant, namely Mac
Bulk Services Limited, purchased or otherwise obtained some of CLS's plant and
equipment from Lombard North Central plc on the termination of CLS's finance
leases and subsequently won the coal-handling contract from Forth Ports
plc. I am not able to reach any view on
whether the directors of Macplant had aspirations to win that contract when
they decided to apply for a winding up order against CLS. I accept the affidavits of the officials of
Forth Ports plc to which I referred that there were no negotiations between Macplant
and Forth Ports in relation to the coal-handling contract before the winding up
petition was presented. If the directors
of Macplant saw commercial advantage from the winding up in addition to the
recovery of their debt, that would not invalidate their application: Bryanston
Finance Ltd v De Vries (No2) [1976] 1 Ch 63, Buckley LJ at
p75 D-F. The questions remain: (a) was
and is Macplant a creditor of CLS? and (b) was and is CLS unable to pay its debts?
Was Macplant a creditor of CLS?
[16] CLS did not dispute that
Macplant serviced and repaired the equipment which it leased to other
parties. But in support of the assertion
that there was a bona fide dispute on
substantial grounds CLS challenged Macplant's claim on three grounds. First, in its written pleadings it averred
that there had been overcharging, that certain sums had been paid and that CLS
had given Macplant assets to sell to set off against its claim. This ground related to the quantification of
Macplant's claim and not to the existence of a claim. Secondly, CLS asserted that it was not liable
to pay the sums sought by Macplant as Macplant had erroneously charged CLS for
work which it should have charged to CLS's customers. And, thirdly, against that background, CLS
asserted that in August 2006 Macplant's directors had entered into an
agreement with it which prevented Macplant from enforcing the debt. I consider each assertion in turn.
(1) Payments and overcharging
[17] Macplant averred that it was due
£336,799.42. That was the sum shown on
the statement of account dated 14 November 2006 which Macplant submitted
with its winding up petition. In
reduction of that sum CLS averred that Macplant held plant which belonged to
CLS which had a value of about £80,000. I
was informed that this plant was surplus to CLS's requirements after it
terminated its loss-making contracts and that CLS authorised Macplant to sell
the plant and set off the proceeds of sale against its claim. But Macplant asserted that the plant was
subject to finance leases and that over £103,000 was due in terms of those
leases. CLS did not dispute this. Thus it appears to me that there is no basis
for reducing Macplant's claim by reference to its possession of the plant as it
would have had to come to terms with Lombard North Central plc if it sought to
keep or sell those items. Secondly, CLS
averred that about £50,000 of Macplant's claim had been identified as
overcharging but did not vouch that sum.
Macplant disputed this assertion and Mr Sellar QC submitted that, in any
event, this made no difference to the validity of Macplant's application as a
very substantial debt remained even if this sum were deducted. Thirdly, CLS averred that a related company
had paid Macplant £9,448.66 in November 2006 to meet Macplant's claim for
October 2006. Macplant accepted
that that sum fell to be deducted from its claim but Mr Sellar made the
same point, namely that a debt of several hundreds of thousands of pounds
remained. Accordingly the second and
third deductions by themselves do not form a basis of opposing the application:
Re
Tweeds Garages Limited. CLS also
claimed that it disputed a batch of invoices amounting to £100,000 from before
December 2005 on the basis that Mr Barrow, the seller of the shares
in CLS, had warranted at that time that there were no sums outstanding to
Macplant. It was not made clear to me
how Mr Barrow's warranty gave CLS a basis for disputing those sums.
(2) The alleged dispute as
to liability
[18] In its second ground of challenge CLS
asserted that the petition debt was disputed because Macplant had without
authorisation from CLS carried out numerous repairs on CLS's plant and
equipment which were the responsibility of the hirer and not of CLS. CLS averred that, under its standard terms,
it was responsible only for routine maintenance and service costs and the hirer
was responsible for any damage to the plant or damage caused by the plant or
its operator. Macplant, it averred,
should have invoiced CLS only for maintenance and service and should have
invoiced CLS's customers for all other costs.
CLS quantified the claims which it disputed on this basis as being
£147,817 in relation to Clydeport and £93,018 in relation to Ogdens. Macplant averred that those sums were the
total sums due to it from work done for CLS in relation to its Clydeport and Ogdens contracts.
[19] While
at the outset of the hearing Mr Johnston QC founded on this dispute
as one of the major grounds for asserting that there was a bona fide dispute on substantial grounds, it became clear in
discussion that this ground was without substance. He accepted that CLS had had a course of
dealing with Macplant for about two years before December 2005 when BIG
purchased CLS's shares and that thereafter CLS transacted with Macplant on the
same basis as before without a renegotiation of the contract terms.
[20] The
most that could be said for CLS was that it tightened up on the procedures by
which it authorised Macplant to carry out work.
The Construction Plant Hire Association's model conditions, which, as
CLS explained, governed the relationship between the owner and hirer, did not
permit the hirer to carry out repairs to the plant without the consent of the
owner. Macplant required to receive
instructions from CLS and the Macplant's spreadsheets which contained CLS's
order numbers suggested that it had done so, at least in the majority of the
work which it carried out.
[21] CLS
produced for the hearing on 10 September 2008 several e-mails which
Mr Paul had sent to Macplant in March 2006. They included an e-mail dated 6 March 2006 which purported to record
the results of a meeting which he had had with Macplant's directors shortly
before. In that e-mail he recorded among
many other things his instruction that CLS would authorise work on its own account, and
Macplant should send invoices to customers for all other work. But it was not until April 2006 that he
involved Mr Alan Stewart, the general manager of Propshaft Services
Limited, in organising CLS's administration of the hire contracts. Mr Stewart in an affidavit recorded that
there had been a lack of management by CLS of the repairs and servicing work
until Mr Paul involved him in April 2006. It was not until September 2006 that CLS
appointed a Plant/Operations Manager to put the operation of its hire contracts
onto what it saw as a proper basis.
[22] Mr Stewart
in his affidavit made general references to instances of alleged overcharging
and allegedly inefficient practices, such as having a man on call 24 hours
a day, but I note in paragraph 24 below that in relation to one of CLS's
contracts the hirer asserted that it had contracted for such cover. It is noteworthy that in the period between
November 2006 and the continued hearing in September 2008 CLS did not
produce any independent report or proper analysis of Macplant's claimed debt.
Mr Paul produced on 28 August 2008 a report which he had
prepared in which he asserted that every invoice by Macplant was challenged on
the basis that there was "no proof of service provision, timesheet, customer
authority and vehicle service record".
In the report he asserted that Macplant's claim was disputed in full and
on that basis sought to demonstrate that CLS was solvent and had a claim for £206,000
against Macplant. I was not able to give
any weight to this document.
[23] Mr Johnston
also accepted, as Macplant averred, that on a large majority of CLS's
contracts, including those with Clydeport, CLS provided its operators with the
plant and the requests to Macplant to carry out repairs came from CLS's
employees who telephoned instructions to Macplant. This not unimportant point was not disclosed
in any of the affidavits initially produced on behalf of CLS. In his third affidavit Mr Paul explained
his position by asserting that when a driver was hired with a vehicle he became
the employee of the hirer. That position
was not developed in the discussion before the court. In relation to contracts with Ogdens, it was
not disputed that, as Macplant averred, some instructions came to Macplant from
employees of the defenders and some from Ogdens. Macplant averred that in each case it
prepared a spreadsheet for CLS of all work which it did and CLS attached order
numbers to the items in the spreadsheet confirming that the work was authorised. Thereafter Macplant invoiced CLS. Although this averment is covered by a
general denial by CLS, Macplant lodged in process examples of such spreadsheets
which contained order numbers provided by CLS in relation to the overwhelming
majority of entries from March 2006 onwards. The spreadsheets gave considerable support to
Macplant's averments.
[24] Macplant
averred that it was in about April 2006 that Mr Paul first requested
it to distinguish between general maintenance charges and repairs to damaged
plant on its spreadsheets in order that CLS could pursue the hirers for repair
charges. Mac Plant averred that it did
so. It was only by Minute of Amendment
in October 2007 when the case was before the Inner House that CLS first
suggested in its pleadings that the hirers and not CLS were responsible for
part of the invoices. Macplant's
position was that it had no contracts with CLS's customers which entitled it to
charge them for the work which it carried out on CLS's plant. Macplant produced a letter dated 8 November 2007 from Clyde port in which it confirmed
that it had no contract with Macplant and that CLS was responsible for all
repairs on hired plant. Macplant also
produced a letter dated 29 October 2007 from ATH Regeneration
Limited to similar effect. ATH asserted
that CLS had agreed to provide twenty-four hour repair and maintenance cover
and had advised them to report breakdowns and defects to Macplant.
[25] In his
written submissions Mr Johnston referred to passages in the affidavits of
Mr Paul, Mr Michael Smith, a director of CLS, and Mr Alan Stewart,
in which they spoke of an issue of liability between CLS and Macplant and to
proposed legal proceedings to recover from the hirers the sums due to
Macplant. He referred to the two
companies working together to resolve the question of liability. In discussion, however, Mr Johnston
accepted that Macplant did not have any legal basis to claim payment from CLS's
customers and that the legal action which CLS had proposed could only have been
at its instance for unjustified enrichment, CLS having paid sums to Macplant
which the customers should have paid. No
such action was ever raised.
[26] The
outcome of this discussion in the hearing was that Mr Johnston did not
dispute Mr Seller's submission that CLS had no legal basis in its
contracts with Macplant for disputing at least the bulk of the debt incurred to
Macplant for its services in relation to plant provided under CLS's Clyde port and Ogdens contracts. I conclude therefore that Macplant provided
services under its contracts with CLS in accordance with an established course
of dealing and had invoiced CLS for those services for sums in excess of
£200,000. CLS has put forward no
substantial contractual basis for contesting that debt as its contractual
arrangements with its customers,
which allocated ultimate responsibility for the servicing and repair work which
CLS instructed, were res inter alios acta
in relation to Macplant.
[27] For
completeness, I should also state that CLS has not disclosed any tenable legal
basis for disputing the £100,000 of invoices to which I referred in paragraph 17
above. Accordingly, other than the
unspecific assertion of overcharging of £50,000 and the admitted payment of
£9,448.66, the only basis for asserting that Macplant's debt was disputed in
good faith and on substantial grounds is the alleged agreement which CLS
averred that it entered into with Macplant in about August 2006.
(3) The alleged agreement of
August 2006
[28] There is some uncertainty as to
the precise nature of the agreement. In
its written pleadings CLS described it thus (Record pp.21D-22A):
"In particular, in August 2006
they [Mr McLean and Mr Paul] agreed that the disputed invoices
(totalling about £350,000) would be put to one side and that from that time
onwards [CLS] would make monthly payments to [Macplant] to cover work done by
[Macplant] in the previous thirty-day period."
In the other formulation in the written pleadings
(which appears to have been the original formulation) CLS averred (Record
p.25A-B):
"[Macplant] and [CLS] agreed
further that the existing debts due by [CLS] to [Macplant] would be maintained
at their present levels but that the debt would not require to be repaid in
full".
CLS averred that subsequent payments to Macplant were
confined to the invoices raised in the preceding month.
[29] In
support of the existence of an agreement Mr Paul, Mr Smith, Mr Stewart
and CLS's solicitor, Mr Rennie, swore affidavits. Mr Paul and Mr Smith were present
at the meeting. But Mr Paul gave no
details of where or when the meeting took place, how matters came to be agreed
or how the discussions were recorded at the time. In his first affidavit all he said was that,
because of the dispute over Macplant's invoices, he agreed with Mr McLean
and Mr Cooper in August 2006 that the disputed invoices would be set
aside and that from then on Macplant would be paid monthly for the previous
month's work. From September onwards CLS
paid Macplant on that basis. He did not
give further specification of the meeting or the deal in his later
affidavits. Mr Smith in his first
affidavit affirmed that the freezing of the disputed invoices had been agreed
at a meeting in August or September 2006 with Mr McLean and Mr Cooper. He said that it was agreed that Macplant
would be paid for its future work on a month to month basis and that its
historic debt would be paid, when and if agreed, from the disposal of plant,
the settlement of the commercial disputes with the hirers or from warranty
negotiations with Mr Barrow.
[30] Mr Stewart
and Mr Rennie recorded what Mr Paul or Mr Smith reported to them
after the meeting. Mr Stewart said
that he was made aware of the agreement by letter dated 4 September 2006 from Mr Paul, a copy
of which he attached to his affidavit.
He also affirmed that both Mr Paul and Mr Smith had told him
orally of the agreement. The copy letter
dated 4 September 2006 contained a description of
the terms of the agreement which was substantially the same as that contained
in the enumerated paragraphs of the copy letter set out in paragraph 33
below. Mr Rennie affirmed that he
had been informed in the course of September 2006 that Macplant had agreed
at a meeting in late August 2006 to have invoices totalling over £300,000
set aside because the focus at that point was on obtaining the renewal of the
coal-handling contract with Forth Ports.
He understood that Macplant accepted that the sums were disputed.
[31] Macplant
denied that there was any such agreement.
In the discussion during the hearing on 26 and 27 August 2008 Mr Sellar stated that
there had been a meeting in August 2006 and that Mr McLean and Mr Cooper
had listened to CLS's proposals but had not agreed to them. But Mr McLean did not discuss this matter
in his first affidavit dated 18 January 2007. Mr Cooper in his first affidavit of the
same date commented on CLS's averments (which are the second statement in
paragraph 28 above), stating that Macplant did not enter into that
arrangement, which would have made no commercial sense to it.
[32] While
extensive documentary material was produced in relation to this application I
was struck by the sparsity of contemporary documentation to support parties'
contentions as to what occurred at the meeting and what each party was doing in
the period between the end of August 2006 and the appointment of the
provisional liquidator on 17 November 2006 which might have cast
light on the outcome of the meeting.
Macplant averred that it had repeatedly demanded payment of the sums
which it claimed were due but produced no letters or e-mails vouching such
demands either before or after August 2006. CLS averred that there was the agreement in
relation to disputed invoices and that no such demands were made. But it was not until 20 August 2008 that CLS produced a copy of
a letter dated 4 September 2006 on BIG letterhead from Mr Paul
to the directors of Macplant which referred to an agreement.
[33] That
letter was in the following terms:
"CLS\MacPlant Agreed
Strategic Direction
Further to our recent meeting at your registered office last week. I have set
out the details of our agreement on the way forward for both trading companies
to ensure mutual commercial success.
Please read over these
carefully and advise by return in writing any points that require any further
clarification, explanation or indeed alteration as appropriate. In the absence of any such advice or
notification I will assume we have comprehensive agreement on all points herein
as intimated at the meeting.
Agreement
We have collectively agreed to proceed with legal recovery through CLS &
Peterkins of the claimed charges on Mac Plants behalf, this is likely to be an
extremely lengthy and complicated matter that will required careful management
and commercial prudence throughout.
Mac Plant/A Ogden/Clydeport
Disputed Charges
We have agreed a methodology for dealing with the disputed charges to allow
both companies to proceed as one, up until the takeover and thereafter.
1. The entire CLS/Mac Plant account balance as 31st
August, some £300K is to be set aside as "disputed" pending resolutions with
the customers which CLS has agreed to undertake with the assistance and
guidance of Peterkins, our commercial lawyers and of course Mac Plant.
2. We "CLS" have agreed to give commercial assistance, help and
support to Mac Plant wherever required to ensure overall commercial
success for us both and to cover any additional costs incurred by the
respective trading entities as a result of this position caused by a complete
lack of professional control in the past.
3. We "CLS" will work in tandem with Mac Plant to secure
the revised contract with the appropriate terms in either of the new trading
entities we each set up for this purpose.
A trust deed arrangement will effectively ensure that the holding
company effectively controls the entire share capital of the Mac Plant fronted
new company bid, Peterkins will be instructed to complete this arrangement
between the selected parties.
4. We "CLS" will provide the spare completely overhauled D65 to
Mac Plant for exclusive use at Avondale ....
5. Stewart is to conclude settlement negotiations with Brian Barrow/BIG
on the SPA at £350K if settlement is completed by the end of our (CLS)
financial year, 31st October 2006.
6. As a final fall back position for both trading companies, it
has been agreed that any uncollected disputed sums be allocated on a 50/50
write off basis between Mac Plant and CLS.
CLS will then pay in full within 30 days of such a conclusion, the
full agreed Mac Plant account balance holding back only agreed disputed
amounts pending resolution and immediate payment thereafter to Mac Plant. BIG Ltd has in effect agreed to
underwrite the entire loss to each respective party conditional on completion
of the takeover.
7. We "BIG & the Mac Plant holding company are to
agree a valuation methodology and then financially binding commercial heads of
terms on the agreed takeover limiting their exposure to the loss should they
not succeed.
8. As far as the valuation of Mac Plant is concerned we
have agreed to treat any loss they experience from this situation as an
exceptional item so as to protect shareholders from any potential loss of value
and ensure completion."
[34] There
was no evidence in Mr Paul's affidavits or otherwise as to how this letter
was delivered to the directors of Macplant and Macplant denied that it had
received this letter.
[35] There
was no evidence that CLS took any other steps to refine the terms of or
formalise what would have been a very important agreement from its perspective. The descriptions of the agreement, which
Mr Paul, Mr Smith and Mr Rennie gave, differed markedly in
relation to the identity and source of the funds by which Macplant's claim
would eventually be paid off. No
satisfactory explanation was forthcoming as to why the two copy letters dated 4 September 2006 were produced only in the
late summer of 2008 when the winding up application had been in court since
November 2006 and there had been contested hearings before both the
sheriff and the sheriff principal. Mr Sellar
invited me to approach with caution the assertion that they were in fact
contemporary documents. When on 27 August 2008 I continued the hearing
until 10 September 2008 I invited parties to look
for and produce further vouching of their discussions in August 2006 and
of their actings thereafter in the hope that further specification of the
alleged agreement and contemporary documents would assist the court to reach a
firm view on parties' contentions.
[36] In
response to that request Macplant produced supplementary affidavits by Mr Cooper
and Mr McLean. They affirmed that
they made repeated demands for payment to Mr Paul, both face to face and
on the phone. Mr Paul worked in
premises of Propshaft Services Limited which were across the road from
Macplant's premises and he visited Macplant's offices several times a
week. They also demanded payment by
e-mail. They were unable to provide
copies of their e-mails as their computers had been stolen in May 2007 and
British Telecommunications plc, their e-mail provider, did not provide a back
up service. I am satisfied from
independent evidence from the police and from Macplant's loss adjusters that
the burglary and loss of the computers occurred as Mr McLean and Mr Cooper
stated. Mr Paul affirmed that he
had instructed research into Macplant's IT systems in the context of the
proposed take-over and that any e-mails should have been stored on a server and
on a back up tape device. But no
evidence of any e-mails was produced.
Thus the only extant documents which provide evidence of Macplant's
making demands for payment are the copy statements to which I refer in
paragraph 38 below.
[37] Mr McLean
and Mr Cooper also affirmed that they had arranged a meeting in August 2006
at Mr McLean's home with Mr Paul and Mr Smith to discuss CLS's
indebtedness. They affirmed that they
had asked Mr Paul to produce a repayment schedule by the end of September 2006
as Macplant's bank was concerned about the level of its overdraft. They did not agree to any setting aside of
CLS's debt. Mr Cooper set out his
recollection of what was discussed at that meeting. That did not include any arrangement to set
aside Macplant's existing claims. Mr Cooper
stated that at no point in the meeting did he or Mr McLean agree that the debt
would be set aside and would not be repaid in full. Mr McLean gave a similar account of what
was discussed and stated that neither Mr Paul nor Mr Smith suggested
that the debt owed to Macplant should be set aside. Both stated that from Macplant's perspective
the whole purpose of the meeting had been to obtain early payment by CLS. They stated that they had also discussed
CLS's contract with Forth Ports, which Mr Paul had said was not profitable
and his proposals to move CLS's assets into a new company to obtain better
terms in that contract. They affirmed
that they had also discussed a proposal that Macplant should incorporate a
subsidiary to obtain ad hoc work from
Forth Ports which they no longer gave to CLS, a proposal that Macplant should
use CLS's surplus plant and operators and a proposal that Macplant should sell
some of CLS's surplus equipment and set the proceeds off against its debt. The equipment had been surplus as CLS's
disputes with Ogdens and Clydeport had resulted in a downturn in work.
[38] Macplant
produced an affidavit by Claire Jack, who was and is Macplant's office
manager and credit controller. In his
private life Mr McLean was and is her partner. Ms Jack affirmed that Macplant had
been concerned in 2006 about CLS's
indebtedness and that Macplant's directors had spoken to Mr Paul about it
on the many occasions on which he had visited Macplant's premises. She stated that Macplant's directors had
regularly instructed her to produce statements of account to give to Mr Paul
to press him for payment and that Mr Cooper, Mr McLean or she had
given them to him. By August Macplant's
directors had become very concerned about CLS's outstanding debt and its effect
on the company's cash flow. She affirmed
that if there had been any agreement to set aside the debt she would have been
aware of it. There had been no such
agreement. She affirmed, as did
Macplant's directors, that CLS's debt remained in MacPlant's management
accounts. Copies of the statements of
account were lodged in process. Four
such statements were produced in August, one in September, three in October and
four in November 2006.
[39] In
response to my request for further information (paragraph 35 above), CLS
lodged further affidavits from Mr Paul and Mr Rennie, which did not
address the circumstances of the meeting at which the agreement was said to be
reached. It also lodged the e-mails from
CLS to Macplant in March 2006 referred to in paragraph 21 above, and
a copy of CLS's earlier Answers to the winding up application. In those Answers CLS in describing an
agreement reached "in or around August 2006" stated that Macplant and CLS
"agreed further that the
existing debts due by the Defenders to the Pursuers would be maintained at
their present levels but that the debt would not require to be repaid in
full".
They also averred that at no time before the
presentation of the winding up petition had Macplant called on CLS to pay the
debt.
[40] I
cannot reconcile contradictory statements in the affidavits, in particular on
what was said at the August meeting, without having that evidence tested by
cross-examination. Without that, I am
not prepared to make findings in fact on what was said at the meeting. I remain very uneasy about the late
production of the two letters of 4 September 2006 from BIG. But for the purposes of reaching a decision
in this application I am prepared to assume, contrary to Mr McLean's and
Mr Cooper's recollection, that at a meeting in late August 2006 with
them, Mr Paul and Mr Smith on behalf of CLS proposed that the
invoices which they disputed should be set aside. I am prepared to accept that Mr Paul, Mr Smith,
Mr Stewart and Mr Rennie were surprised by the liquidation
application. Nonetheless, I am not
satisfied that CLS has a reasonable basis for asserting that the parties
entered into a legally enforceable agreement at that meeting which barred
Macplant from seeking to recover the sums due to it. In reaching this view I have relied in
particular on (i) the evidence of the
contemporary actings of those involved in CLS, (ii) the evidence of such actings by those involved
in Macplant, (iii) the failure of CLS to
give further specification of the terms of the agreement or produce further
vouching of it after being invited to do so and (iv) the lack of commercial rationale and the
resulting improbability of Macplant entering such an agreement. I discuss each in turn.
The actings of CLS and Mr
Paul after August 2006
[41] Mr Sellar founded on a
letter which CLS had e-mailed to Macplant on 15 November 2006 as an acknowledgement of
the debt being due and payable. The
letter was written under a CLS letterhead, dated 14 November 2006 and signed by Mr Paul. It was entitled "MacPlant Account Settlement
Proposal" and stated the account balance to be £350,000. It then set out a table of twenty monthly
instalments of £17,500 from November 2006 until the debt would be paid off
in June 2008. The letter continued:
"The above repayment
schedule (£17.5K) will be met from normal trading contracts. Any additional cashflow from new contracts
will be added to allow faster repayment as and when available. We currently have two large legal disputes
which if settled in our favour would again facilitate faster repayment."
[42] CLS
admitted that Mr Paul had given this repayment schedule to Macplant. But it asserted that the document should not
be taken as an admission of liability as Macplant, which had cashflow problems,
had requested it solely for the purpose of reassuring its bank that it would
receive payment from the debtors shown in its accounts. Mr McLean and Mr Cooper accepted
that on about 13 November 2006 Mr Cooper had requested Mr Paul
to make written proposals for settling the account as Macplant's bankers had
asked for cash flow forecasts. Parties thus
agreed to that extent on the circumstances in which the document was
produced. But the difficulty for CLS and
Mr Paul is that if there had been a binding legal agreement that the debt
of £350,000 would be put to one side and would not be paid in full, Mr Paul
in producing this repayment schedule would have been a party to an attempt to
deceive Macplant's bankers. In support
of its contention, CLS produced a copy of a covering letter to Macplant dated 14 November 2006 which Mr Paul in a supplementary affidavit said that he had
given to Mr McLean with the repayment schedule in the same envelope when
Mr McLean uplifted them from his house.
Macplant denied receipt of that letter.
[43] In that
letter Mr Paul referred to an urgent telephone call from Mr Cooper
requesting immediate assistance by providing documentation to assist Macplant
to extend their banking facilities. He
enclosed the final version of the repayment schedule as requested and invited
Mr Cooper to advise him of the outcome of his meeting with the bank. In the letter Mr Paul went on to give
details of other business matters which concerned CLS and Macplant and referred
to the payment of "agreed CLS October jobs (£9,000 approx)" which would be paid
on the following week "as per the Set aside agreement of the beginning of
September". That is consistent with his
having a belief that there was such an agreement; but it cannot be reconciled
with the repayment schedule being an honest representation. If Mr Paul at that time believed that he
had negotiated a binding arrangement along the lines set out in the document
quoted in paragraph 33 above, I do not see how he could honestly have made
the representations in the repayment schedule.
[44] More
significant is the fact that on learning of the winding up petition on 22 November 2006 and for some time
thereafter Mr Paul accepted that the debt due to Macplant was not
disputed. If there had been a binding
agreement to set aside all or almost all of the £337,849.10 claimed by Macplant
at the end of August 2006, it is astonishing that Mr Paul did not
refer to that arrangement when he was questioned by the provisional
liquidator's staff.
[45] Macplant
lodged affidavits by James Thornton and Craig Allison, respectively
the case manager and case administrator appointed by Mr Nimmo, the
provisional liquidator, to administer the company during the provisional
liquidation. Mr Thornton affirmed
that on the morning of 22 November 2006 he had telephoned Mr Paul,
advised him of the appointment of the provisional liquidator and arranged to
meet him in the afternoon. He explained
that at about 3pm he and Mr Allison had met Mr Paul at KPMG's
offices in Glasgow and advised him that the
petition stated that CLS was indebted to Macplant in the sum of £336,799.42. He had asked Mr Paul if CLS disputed the
debt. Mr Paul had replied that it
did not and that the sum was due to Macplant.
He had also asked whether CLS was in a position to pay the debt and Mr Paul
had replied that there was no prospect of it being able to do so. When he asked if there was an alternative to
winding up CLS Mr Paul had said there was not. Mr Allison corroborated Mr Thornton's
account.
[46] In a
supplementary affidavit Mr Thornton affirmed that in questioning Mr Paul
he had followed the terms of a KPMG protocol which involved asking whether the
debt was disputed and also whether the petitioner's debt could be paid by third
party cleared funds. He stated that Mr Paul
had said that there were no such funds available and that there was no
alternative to winding up CLS.
[47] Mr Thornton
also affirmed that on the morning of 22 November after he had spoken to Mr Paul
on the phone, he had received a phone call from Mr Rennie, CLS's
solicitor, who had not disputed Macplant's debt but had stated that he would
advise Mr Paul to meet and co-operate with the provisional
liquidator. While I do not question Mr Thornton's
recollection on this matter I cannot infer much from Mr Rennie's silence
as he in a supplementary affidavit affirmed that he had spoken with Mr Thornton,
that he had not been asked if the petitioner's debt was disputed and that if he
had been asked that he would have said that there was a dispute.
[48] Mr Thornton
also affirmed that on 24 November 2006 he had received a telephone
call from Michael Smith who had accepted what had happened and had not
disputed Macplant's debt. Mr Smith
had given his contact details so that he could co-operate with the provisional
liquidator. Finally, Mr Thornton
affirmed that it had not been until he received intimation copy Answers to the
winding up petition from CLS's solicitors on 8 December 2006 that he had become aware
that Macplant's debt was disputed. I
accept Mr Thornton's and Mr Allison's evidence on all of these
matters.
[49] Mr Paul
did not seek to deny that he had made the statements to Mr Thornton and Mr Allison. He explained that he had been shocked at the
time and had been resigned to the winding up of CLS as the provisional
liquidator had terminated CLS's contract with its principal customer, Forth
Ports, on the termination of its finance leases for its plant. He affirmed that he had co-operated fully
with the provisional liquidator. He
produced another affidavit by Mr Thornton, which confirmed that
co-operation. Mr Thornton stated that
Mr Paul had told him in later discussions of his shock at the time of the
meeting because the winding up application had come out of the blue and that he
had thought that it had been pointless to try to do anything to avoid the
winding up. Be that as it may, Mr Paul's
surprise at the appointment of the provisional liquidator does not explain why
he accepted that Macplant was entitled to be paid the sum which Mr Thornton
said was stated in the winding up petition.
If Mr Paul knew or believed at the time that there was a legally
enforceable agreement in terms of which arrears of about £350,000 had been set
aside and only the subsequent months' work was to be paid for and had been
paid, I do not think that he would have answered Mr Thornton's questions in
the way which he did.
[50] That Mr Paul
believed at the time that CLS was due to pay Macplant a substantial sum is
confirmed by his revisals to the statement of affairs which the provisional
liquidator's staff prepared in about December 2006. The statement, once Mr Paul had revised
it, showed that of the £353,000 claimed by Macplant, CLS disputed £233,000 in
relation to debtor balances discounted in relation to Ogdens, Clydeport and
Forth Ports, £50,000 which were listed as disputed purchase-ledger invoices and
£10,000 (a reference to £9,448.66 paid by Propshaft) which had been paid. That left £60,000 of Macplant's claim
undisputed and unpaid. While in CLS's
favour the revisals can be seen as pointing to an early assertion by Mr Paul
of an agreement to set aside disputed claims, the figure of £233,000 does not
match the figure of £300,000 referred to in the letter of 4 September 2006 quoted in paragraph 33
above. This calls into question the
certainty and thus the enforceability of any arrangement discussed or agreement
reached at the end of August 2006 and supports the inference that Mr Paul
knew at that time that the arrangement which he had attempted to put in place
to park Macplant's claim pending CLS's intended take-over was not agreed or in
any event was not sufficiently clear to be enforceable.
[51] In any
event, and significantly, the revised statement of affairs acknowledged that
not all of Macplant's claim was disputed.
That supports the view that Macplant was a creditor for the purposes of
section 124 of the 1986 Act: Re
Tweeds Garages Limited. To avoid
this conclusion Mr Johnston submitted that Mr Paul's revised
statement of affairs did not take account of other offsets which were referred
to in the pleadings, namely (a) the
£80,000 which CLS attributed to the plant which CLS gave Macplant to sell and
(b) a payment by contra invoice in
relation to a PC 130-6 machine dated 13 November 2006 in the sum
of £20,562.50. But in relation to (a) there appears to have been no net value in the
plant which was subject to a finance lease on which over £100,000 remained due
and it remained in the ownership of the finance company. In relation to (b) Macplant denied the contra invoice in its
pleadings and in any event its deduction would still leave an undisputed debt
of about £40,000.
[52] It
appears also that CLS's management accounts in periods after August 2006
continued to show that CLS was due to pay Macplant almost all of the sums which
it claimed. In particular as at 30 October 2006 CLS's management accounts
showed the Macplant debt to amount to £352,817.49, of which £192,229.35 had
been due for more than three months.
While it is appropriate for a company to provide for contingent and
prospective liabilities in its management accounts, it appears to me that if it
had been agreed (as appears from the copy letter set out in paragraph 33
above) that Macplant were to be paid not by CLS but out of recoveries from
CLS's customers and only fifty percent of any eventual shortfall of that
recovery would be paid by CLS, there would have been no basis for including the
whole of Macplant's debt in the management accounts.
[53] If
there had been an agreement to freeze Macplant's claims until CLS had recovered
sums from Ogdens and Clydeport, there would have been some urgency in resolving
CLS's claims against those companies.
Yet no legal proceedings were commenced against Ogdens and Clydeport in
the ten weeks following the alleged agreement and I was given no information to
suggest that CLS or its solicitors, Peterkins, took any significant steps to
prepare for litigation in that period. At
the same time there was no evidence that BIG had made any progress towards the
agreement of heads of terms for its proposed take-over of Macplant.
Macplant's actings after
August 2006
[54] If there had been an agreement
to set aside the £350,000 of debt at the end of August 2006, there would
have been no purpose in Macplant producing and giving Mr Paul the periodic
statements of account referred to in paragraph 38 above. Yet it appears from the evidence of the
Macplant directors and Ms Jack and from the copy statements of account
which were produced that that is what happened.
[55] It is
also clear that whatever Mr Paul thought he had agreed with Macplant's
directors about a two-pronged approach to winning a renewal of the contract
with Forth Ports, neither Mr McLean nor Mr Cooper had any dealings
with Forth Ports before the provisional liquidator was appointed to CLS. It appears that on about 18 November 2006
CLS sent Macplant materials which could have assisted a bid by Macplant for the
Forth Ports contract but by then Macplant's directors had abandoned their
attempts to persuade CLS to pay its account, had presented the winding up
application and had obtained the appointment of the provisional liquidator.
CLS's failure to specify and
vouch the agreement
[56] As I have mentioned in
paragraphs 30 and 32 above, the copies of letters which appeared to have
been written shortly after the alleged agreement emerged only in the summer of
2008. When I gave both parties the
opportunity to shed more light on the circumstances of the alleged agreement
CLS provided a supplementary affidavit by Mr Paul which set out among
other things his understanding of the relationship between CLS and Macplant but
did not disclose any details of the meeting at which the agreement was said to
have been reached or the precise terms of the agreement. Nor did CLS produce any other documents which
directly supported the existence of the agreement. See paragraph 39 above. The terms of the agreement, including the
sources from which and the extent to which Macplant's claim was to be paid off,
remained unclear.
The commercial improbability
of the alleged agreement
[57] Mr Sellar in inviting me to
hold that no such agreement was reached submitted that the alleged agreement
made no sense commercially to Macplant. He
submitted that against a background in which Macplant's cash flow was
threatened by CLS's failure to pay its invoices, it was not credible that
Macplant would agree to an arrangement which set no time limit on the
identification of which invoices were in fact disputed, which provided no
security for the debt or interest on the balance found to be due and where
there was no agreed timetable within which CLS would pursue claims against its
customers or within which BIG would bid to acquire Macplant. It was implausible that Macplant would agree
to make the payment of its claims depend upon the success of CLS's claims
against its customers. There was
uncertainty as to the source of the funds by which Macplant's claim was to be
paid. There had been no agreement even
in principle on the basic terms of an offer for Macplant's shares. In this context an agreement to set aside the
large debt would have materially weakened the bargaining position of Macplant's
shareholders.
[58] I
consider that there is force in those submissions. I recognise that CLS was Macplant's largest
customer and that the businesses of the two companies were interdependent. It is likely therefore that Macplant's
directors would have felt the need to go some way to accommodate Mr Paul
and that they were placed in a difficult position by his stance on who was or
should have been responsible for repairs of plant. Nonetheless for the reasons advanced by Mr Sellar
I am persuaded that it is highly improbable that Macplant would have agreed to
the arrangement for which Mr Paul contends.
Conclusion on whether
Macplant was and is a creditor
[59] I am satisfied that there was no legally
binding agreement between CLS and Macplant that Macplant's claims for payment,
whether of £300,000, £350,000 or £233,000, were to be treated as disputed and
set aside pending CLS's attempts to recover from its customers sums which CLS
asserted that those customers should have paid.
I reach this view (a) having held
that there was no substantial basis for CLS disputing the debts, which arose in
a course of dealing which originated before BIG's takeover of CLS and which had
not been innovated upon contractually since then, (b) having regard to the response of CLS's
directors to the appointment of the provisional liquidator and in particular Mr Paul's
responses to Mr Thornton's questions, (c) taking into account CLS's and Macplant's
actings at the time and the contemporary accounting documents of both CLS and
Macplant, (d) giving weight to the
uncertainty as to the terms of the alleged agreement and the sums covered by it
and (e) considering that it is
inherently unlikely that Macplant would have consented to such an
agreement.
[60] I am
therefore satisfied that Macplant has demonstrated that it was at the date of
the presentation of the winding up petition and remains a creditor of CLS and
that the material adduced on behalf of CLS does not support any reasonable
degree of likelihood that the debt was or is disputed bona fide and on substantial grounds.
[61] I turn
therefore to the second question: whether CLS was at the date of the
presentation of the winding up application and is unable to pay its debts.
Whether CLS was and is unable to pay its debts
[62] Before considering the two bases
on which Macplant asserts that CLS is unable to pay its debts, namely the cash
flow insolvency and balance sheet insolvency to which I referred in paragraph 6
above, it is necessary to determine the date at which such insolvency is to be
assessed.
[63] Section 122(1)(f)
empowers the court to wind up a company if it "is unable to pay its
debts". The use of the present tense in
the provision points towards an assessment at the date of the hearing of the
application. In support of his primary
position that the court should assess insolvency at the date of the hearing Mr Sellar
referred to Re Fildes Brothers Limited [1970] 1 WLR 592. That case involved an application for winding
up on the just and equitable ground (now section 122(1)(g) of the 1986 Act). Megarry J emphasised that the section
used the present tense ("the court is of the opinion that it is just and
equitable that the company should be wound up") and held that the question
whether the court was of that opinion should be determined on the facts
existing at the date of the hearing. As
in that case the circumstances which earlier might have justified a winding up
order on that ground had been remedied, he dismissed the petition.
[64] I
accept that in most cases in which the court determines the application for a
winding up order within a short time after the presentation of the petition, it
is sufficient in practice to look at the circumstances which exist at the date
of the hearing if there is no suggestion of a material change of circumstances
since the petition was presented. While
a petitioner to be in good faith must be able to support its contention that
the respondent company is unable to pay its debts at the date on which it
lodges its application, the Act directs the court's attention principally to
circumstances at the date of the hearing.
But if circumstances have changed between the date of presentation of
the application and the hearing, it is not sufficient for the court to look
only at the circumstances as they exist at the date of the hearing. For example, where a provisional liquidator
has been appointed or a significant time has elapsed between the presentation
of the petition and the hearing, the circumstances of the respondent company
may have altered materially to its disadvantage. In that context I consider that the court
should also look at the circumstances as they existed when the petition was
presented in order to assess whether at that time the company was unable to pay
its debts: Syd. Mannix Pty. Ltd v Leserv Constructions Pty Ltd [1971] 1N.S.W.L.R. 788. See also French, Applications to Wind Up
Companies (2nd ed) para 2.2.2.2 and MacPherson's Law of Company
Liquidation, para 3.19. Otherwise a
petitioner could rely on the change of circumstances which it had brought about
by raising the winding up proceedings.
Insolvency at the date of
the hearing
[65] In this case the appointment of
the provisional liquidator resulted in the collapse of CLS's business. Its plant was in large measure the subject of
finance leases which came to an end on his appointment. The provisional liquidator promptly terminated
CLS's last major contract, namely the interim contract with Forth Ports. Sums which were payable over time would
become immediately payable on the Court pronouncing the winding up order. The provisional liquidator prepared his
statement on that basis and estimated that there was a deficiency of funds to
pay creditors of about £493,000 as at 24 July 2008. It was not disputed that at the date of the
hearing CLS was unable to pay its debts.
The remaining question therefore is whether CLS was unable to pay its
debts at about the time of the presentation of the winding up petition.
Cash flow insolvency
[66] In support of the contention
that CLS was cash flow insolvent at that time Mr Sellar invited the Court
to have regard to a number of factors from which, he submitted, it should infer
such insolvency. CLS's failure to pay the
petition debt was only one of several factors which supported the conclusion
that it was insolvent.
[67] Parties
did not disagree materially on the law which may be summarised shortly. In assessing cash flow insolvency the court
looks at what the company was actually doing at the relevant time and adopts a
commercial view of insolvency. The test
is not whether a company can pay all its due debts immediately on a particular
day. I accept as an accurate summary
Professor Goode's statement in "Principles of Corporate Insolvency Law" (3rd
ed) para 4.16:
"The essential question is
whether the company's financial position is such that it can continue in
business and still pay its way. The Court
therefore has to consider whether any liquidity problem the company may have is
purely temporary and can be cured in the reasonably near future".
Section 123(1)(e) speaks of inability to pay
debts as they fall due. This involves,
in the present context, a consideration of the company's debts which were due
at the date of presentation of the winding up application and in the near
future thereafter: Lewis v Doran [2005] N.S.W.C.A. 243
at paragraph 103, Re Cheyne Finance
Plc [2008] BCC 182, Professor Goode, at paragraphs 4.18
- 4.20.
[68] Whether
the Court should infer cash flow insolvency from the non-payment of an
undisputed debt depends on the circumstances of the case. A company's failure to pay when a creditor
has demanded payment of an undisputed debt may justify the inference: Re Imperial Motors Limited [1990] BCLC 29; Taylor's Industrial Flooring Ltd v M and H Plant Hire (Manchester) Ltd [1990] BCLC 216 CA. But it is much less straightforward to draw
the inference when the creditor has not made such a demand: Re a
Company No 006798 of 1995 [1996] 2 BCLC 48. In this case the periodic statements of
account which Macplant gave to CLS point towards a conclusion that Macplant was
pressing for payment. But having regard
to the unresolved contradiction in the affidavits whether Macplant had demanded
payment before presenting the winding up application it is appropriate, in
fairness to CLS in the absence of cross-examination, to proceed in this
exercise on an assumption that it did not.
[69] Nonetheless,
in considering what inferences may be drawn from the non-payment, I consider
that it is relevant to take into account my conclusions that CLS did not have a
substantial legal basis on which to challenge the bulk of Macplant's claim,
that there was no binding agreement to set aside over £300,000 of Macplant's
debt, and, on 22 November 2006 when interviewed by Mr Thornton,
Mr Paul did not believe that there was.
[70] Other
factors which support the inference of cash flow insolvency are as
follows. First, the repayment schedule
dated 14 November 2006 which Mr Paul produced
at Macplant's request showed the balance of £350,000 being repaid over twenty
months. See paragraphs 41 and 42
above. Secondly, while CLS had £114,263
in its bank account on 17 November 2006 that sum fell, once debits
in the banking system had been processed, to £28,533 by 22 November 2006. The provisional liquidator used the latter
sum in his statement of affairs as at 17 November 2006. Neither sum was in any event sufficient to
pay Macplant. Thirdly, the shortage of
cash was not confined to November 2006.
CLS's management accounts for October 2006 showed "bank and cash"
as a liability of £13,209.62.
[71] Fourthly,
CLS's debts to Macplant were seriously overdue.
The provisional liquidator's statement of affairs recorded that as at 23 November 2006 over £331,000 of Macplant's
debt of £352,978 had been due for ninety days or more. Several other creditors had overdue debts but
the sums involved were very modest compared with Macplant's debt. A similar picture was found in CLS's
management accounts for October 2006.
The aged creditor analysis in those accounts showed that of creditors of
£374,812.98, only £22,989.88 were current, but the vast majority of the overdue
debt related to Macplant. Fifthly, the
provisional liquidator's statement of affairs showed that CLS's debtors, which
its accounts valued at £328,803, included debts of £189,572 which were
overdue. The overdue debts included
£148,104 from Ogdens and Clydeport which were disputed and were significantly
overdue. The provisional liquidator
estimated that there would be no recovery from Ogdens and Clydeport. In addition, as Mr Derek Forsyth CA
of Campbell Dallas LLP pointed out in his report, CLS were several
months overdue on PAYE and NIC payments to H M Revenue and Customs.
[72] Sixthly,
Macplant relied on Mr Paul's admission to Mr Thornton on 22 November 2006
that CLS was not able to pay the petition debt which he accepted was not
disputed. See paragraphs 44 to 46
above. I consider that Mr Paul's
position at this time and also Mr Smith's acceptance of the winding up are
significant. It is clear from Mr Rennie's
affidavit that he had spoken to Mr Paul before his interview with Mr Thornton
and thus Mr Paul had had access to legal advice.
[73] Seventhly,
Macplant relied on the payment of £9,448.66 by Propshaft Services Limited
rather than by CLS as indicative of the latter's cash flow difficulties. Mr Stewart however in his affidavit
explained that the reason for Propshaft's payment was that it had a means of
effecting rapid payment which CLS did not.
In the circumstances I attach little weight to this payment as a support
for an inference of insolvency although in the light of the other factors it is
capable of supporting such an inference.
[74] CLS
produced two reports from Robert Caven CA of Grant Thornton. The first was based principally on CLS's
financial records and briefings by Mr Paul. I do not need to consider his approach on the
basis that Macplant's debt had been set aside as I have held that there was no
binding agreement to that effect. I
confine my comments to his approach on the basis that the Macplant debt was
due. I accept that if one takes the
figures in CLS's management accounts there was a surplus of assets over
liabilities. But that does not address
cash flow insolvency directly as it fails to take account of the liquidity of
CLS's assets, and in particular its debtors, to provide it with funds to pay
the debts which had become due. In
particular I see no basis for treating the sums said to be due from Ogdens and Clydeport
as assets available to meet CLS's debts as they fell due. See paragraph 71
above.
[75] Mr Caven
pointed out that BIG, whose only investment was in CLS, had bank balances of
£468,254 on 17 November 2006 and recorded that Mr Paul had told
him that if he had known about the winding up petition and it had been
necessary to pay off Macplant's debt, he would have made BIG's funds available
to CLS. Mr Caven suggested that it
was reasonable to assume that BIG would have done so as about eleven months previously
it had invested over £1 million in CLS. Thus
he concluded that on 17 November 2006 CLS appeared to have
sufficient resources available to it to meet its debts as they fell due.
[76] On the
assumption that BIG would have made the necessary funds available I can readily
understand Mr Caven's conclusion.
In assessing whether there is cash flow insolvency it is appropriate to
take into account outside funds which would be available to a respondent
company. If a company raises funds by
selling assets or borrowing it may not improve its balance sheet but it may
nonetheless pay its debts as they fall due.
See Professor Goode (above) at paragraph 4.22. In Re a
Company [1986] BCLC 261 Nourse J dismissed a winding up
petition against a company which was able to pay its debts with the help of
loans which associated companies and other persons were giving to it. In that case the company had a history of
receiving such assistance. In Lewis v Doran the relevant company also could show such a history as the holding
company had acted and continued to act as banker for the companies in its
group. But circumstances are different where
there is no such history and the court is simply invited to speculate on
whether such assistance might be (or might have been) forthcoming. I consider that in order for borrowed funds
to be a factor in the assessment of cash flow insolvency the funds must be
available or there must be a significant probability that they would be
available in time to enable the debts to be paid.
[77] I am
satisfied that there is not such a probability in this case. There is no evidence that BIG or any other
potential investor had any legal obligation to provide financial support to
CLS. While BIG made an investment in CLS
in December 2005 when it acquired its share capital, there was no evidence
that it gave further economic support.
On the contrary, CLS's October 2006 management accounts suggested
that BIG had withdrawn £400,000 and a further £7,000 as dividends or similar
payments. CLS paid a further £50,558.53
to BIG on or shortly before 21 November 2006. Leaving to one side as disputed assertions
which have not been tested on cross-examination the evidence of Mr McLean
and Mr Cooper that Mr Paul had expressed concerns about CLS's cash
flow, there is a considerable body of evidence which suggests that it was
unlikely that BIG would have invested further sums in CLS in November 2006. Mr Smith in his first affidavit
described the inadequacies of CLS's management of its contracts, the warranty
claim made against Mr Barrow and the claims which CLS made against Ogdens
and Clydeport. He described how he and
Mr Paul were pre-occupied in trying to put the management of CLS on a
proper professional basis and explained that the business prospects which Mr Paul
had understood existed when he acquired CLS appeared to be "more or less
illusory". Mr Stewart also spoke of
the serious problems with the management of CLS which Mr Paul discovered
after BIG took over the company and his request that he assist as expenditure
was ineffective and out of control. By
involving Mr Stewart and later by appointing a plant/operations manager Mr Paul
improved the administration of CLS's contracts.
But it is also apparent that CLS became involved in disputes with two
significant customers, Ogdens and Clydeport, over who was liable to pay for
repairs to plant and it appears from the provisional liquidator's aged debtor's
list in his statement of affairs that the Ogdens contract had come to an end in
the spring or summer of 2006 and the Clydeport contracts at some time
later. In relation to Ogdens I was referred to an e-mail
of 10 March 2006 from Mr Paul to Mr McLean
which informed him that the Ogdens contract was to be
terminated that day. I was also informed
that CLS had terminated loss-making contracts. CLS's other significant
contract was the Forth Ports contract which was up for renewal. Mr Paul was not confident of winning
that contract and sought to involve Macplant in a parallel bid. See paragraph 13 above.
[78] Against
this background of CLS's withdrawals of funds, disputes with customers,
terminated contracts and no certainty of winning the renewal of the Forth Ports
contract, I cannot conclude that it is to any degree probable that BIG would
have chosen to invest further funds in CLS.
[79] I
derive support for this view from Mr Paul's actions after the appointment
of the provisional liquidator. While he
spoke of attempting without success to enter into discussions with Macplant
before the hearing to recall the appointment of the provisional liquidator in
January 2007, he did not suggest that BIG offered to invest in CLS to
enable it to meet Macplant's claim or a significant proportion of that
claim. I recognise that the termination
of CLS's interim contract with Forth Ports and the finance leases would have
required Mr Paul to act quickly and decisively to restore CLS's finances
and that he might not have succeeded.
But I am not persuaded that the position was as irretrievable as he
asserted and there is no evidence that he attempted to save CLS in the
immediate aftermath of the appointment of the provisional liquidator. It appears from Mr Paul's third
affidavit that it was only after the hearing before the sheriff in January 2007
that CLS attempted to reach an accommodation with Macplant.
[80] Having
regard to the circumstances which I have discussed from paragraph 66
onwards, I am satisfied that CLS was not able to pay its debts as they fell due
at the date of presentation of the winding up petition. Accordingly the test under section 123(1)(e)
is satisfied; CLS was cash flow insolvent.
Balance sheet insolvency
[81] The conclusion that CLS was cash flow
insolvent is sufficient to determine the application for a winding up
order. But for completeness I set out my
opinion on balance sheet insolvency.
[82] In this
context I am not concerned with the possible availability of borrowed funds: Byblos Bank S.A.L. v Al Khudairy [1986] 2 BCC 99,549. The focus is on CLS's assets and
liabilities. In CLS's management accounts
at 30 October 2006 there is a positive balance
of £86,391.99. Those accounts were
prepared on a going concern basis. That
balance contrasts markedly with the provisional liquidator's statement of
affairs, which, after taking account of Mr Paul's revisals, showed a
deficiency as regards creditors of £262,000.
But that statement of affairs was prepared on a break up basis after the
termination of the Forth Ports contract and involved a substantial write down
of the company's debtors.
[83] But for
CLS's cash flow insolvency, I would not consider that I had a basis on the
information presented to me to look at CLS's accounts other than as a going
concern. Once cash flow insolvency is established, it ceases to be appropriate
to use the going concern basis when there is no likelihood of avoiding an
insolvent winding up. When that occurs,
assets, including debtors, often have to be reduced in value to take account of
the insolvency. Tangible assets are
disposed of on a break-up basis where there is no business to be sold. The debtors of an insolvent company generally
have no interest in maintaining a commercial relationship with it and may be
more reluctant to pay than they would have been if they envisaged continuing to
do business with the company. The result
may be disputed debts. CLS's plant,
which was leased, would not appear as assets in its balance sheet. Plant and machinery which were valued at
£1,953,026.66 in the 30 October 2006 management accounts
disappeared in accounts prepared on a break-up basis. Instead the debt to the finance company was
reduced by the estimated realisable value of those assets. The provisional liquidator's statement of
affairs was prepared in that context.
Among trade debtors, both the Ogdens and Clydeport debts were overdue
and were shown in the provisional liquidator's statement of affairs to be
disputed. They were written off in the provisional
liquidator's initial assessment and, after Mr Paul's revisals, were
presented as discounted by fifty percent.
Those factors were sufficient to establish insolvency with a deficiency
as regards creditors of £262,000. While
Mr Caven and Mr Forsyth contested other matters in their reports, it
is not necessary for me to consider those matters. My conclusion that CLS was balance sheet
insolvent arises from and depends on my assessment that it was cash flow
insolvent in circumstances which rendered it inappropriate to present its
accounts on a going concern basis. But
for my conclusion on cash flow insolvency, I would not have been satisfied on
the information presented to me that it was balance sheet insolvent.
The appointment of the
provisional liquidator
[84] It is not clear precisely what discussions
took place between Mr Paul and the directors of Macplant about the
incorporation of subsidiaries or new companies in the autumn of 2006. Mr McLean and Mr Cooper gave their
account which I summarised in paragraph 37 above. It appears from Mr Paul's evidence that
one of his proposals was to transfer CLS's business to a new company, Contract
Lifting (Scotland) Limited, and wind up CLS
in the context of his proposal to take over Macplant. The directors of Macplant used the suggestion
that assets would be transferred from CLS as the basis for applying for the
appointment of a provisional liquidator.
That appointment brought about the end of CLS's business before the
winding up application had been served on the company.
[85] It is
not clear to me whether it was necessary that a provisional liquidator should
have been appointed to protect CLS's assets.
I am not aware of what the sheriff was informed about the circumstances
in which the new company was incorporated.
Macplant's directors have not focussed on this issue in their evidence
as it was not relevant to the questions which I have had to determine. I therefore make no findings on the context
of any discussions between Macplant and CLS in relation to the incorporation of
the new companies. But the consequences
of the appointment of the provisional liquidator on CLS's business illustrate
the need for both applicants and the court to consider with care whether such
an appointment is appropriate and for applicants to make proper disclosure of
the relevant circumstances to the court when seeking such an appointment.
Conclusion
[85] I am satisfied that Macplant was
on 17 November 2006 and is a creditor of CLS
and CLS was then and is unable to pay its debts. I therefore sustain the first plea in law for
Macplant, repel CLS's pleas in law and grant the winding up order.
