Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 175

P669/06

FURTHER OPINION OF LORD GLENNIE in the Note by JOHN CHARLES REID and JAMES BERNARD STEPHEN, both of Deloitte & Touche LLP, Lomond House, 9 George Square, Glasgow, the Joint liquidators of Arakin Limited (SC061475) Noters; for Audit of their intromissions with the Company's estate, for approval of their accounts, for discharge from liability as regards their conduct in the liquidation, and to sist the winding up. ­­­­­­­­­­­­­­­­­________________

Noters: Connal QC; McGrigors

Respondents: personally present

22 December 2009

Introduction

[1] The background to this Further Opinion is set out in my Opinion of 28 March 2008 ([2009] CSOH 56). A draft of the Interlocutor pronounced at that time is appended to that Opinion. The final version of the Interlocutor was issued on 2 April 2008. It forms the background against which this Further Opinion is to be understood. Regrettably, matters have not progressed as fast, or as economically, as might have been hoped. A hearing has been fixed for early January 2010 to resolve the remaining disputes. I heard parties in October with a view to disposing of certain issues and identifying what required still to be resolved at that hearing. This Opinion sets out my decisions on the points argued on that occasion.

[2] The effect of the Interlocutor of 2 April 2008, coupled with that of 2 May 2008, was to sist the liquidation and restore the company to its shareholders and directors before the determination of the Noters' application made by Note (No.37 of Process) (i) to have their outlays and remuneration fixed and (ii) to be released and discharged from liability for their acts and omissions in the winding up and otherwise in relation to their conduct as interim and, subsequently, Joint Liquidators; and to permit that application to proceed thereafter. The Noters were ordered to submit an account of their intromissions and their claim for outlays and remuneration. A Reporter (Mr Colin Hastings) was appointed to examine and audit the account of the Noters' intromissions for the period from 14 October 2004 to the date of the sist, and to report thereon; to suggest a suitable sum for outlays; and to report what in his opinion was a suitable remuneration for them for that period. The Auditor of Court was also appointed to report on what in his opinion was a suitable sum for their outlays and remuneration. That has all now been done, after considerable delays and false starts which, in fairness to the Respondents (Mr and Mrs McNamara), I should say were not principally of their making.

[3] The liquidation lasted from October 2004 until it was sisted on 2 May 2008. It is not surprising, therefore, that the Noters' claim for remuneration should be high. They have claimed £358,339.25 plus VAT. The Reporter and Auditor have concluded that the claim is too high. In their Reports (respectively, Nos.197 and 199 of Process) they concur in recommending that the appropriate sum for the Noters' remuneration is £265,000.00 plus VAT, or £304,750.00 inclusive of VAT. Both the Noters and the Respondents challenge these recommendations in the Reports of the Reporter and the Auditor.

[4] In addition, the Noters' law agents' (McGrigors') account of expenses has been taxed in the sum of £206,317.14. The Noters seek to recover this sum as an outlay. The Respondents do not challenge the amount awarded at taxation, which was as between the Noters and their law agents, but (for reasons which I shall attempt to explain later in this Opinion) wish to question the extent to which the Noters should be entitled to recover that sum as an outlay in the liquidation.

The next stage - determination of the Noters' application

[5] The matter now comes before the court on the Noters' motion (intimated on 3 July 2009 pursuant to para.7 of the Interlocutor of 2 April 2008, as varied by a further Interlocutor of 11 June 2009) for approval of their outlays and remuneration and for their release and discharge. A number of documents have been lodged in support of and opposition to the motion. The following documents were lodged in accordance with the Interlocutor of 11 June 2009 (paras.4 and 5):

(i) for the Noters, a "Statement for the Noters ..." (No.207 of Process) in which they make submissions on a number of matters, and in particular set out the basis on which they disagree with the recommendations of the Reporter and the Auditor as to their remuneration;

(ii) for the Respondents,

(a) a "Statement of Objections" (206)

(b) "Objections to Former Liquidators' Choice of Solicitor" (208)

The following additional documents were lodged pursuant to the Interlocutor of 27 July 2009 (paras.1, 2 and 3):

(iii) for the Respondents, an "Addendum" to the "Statement of Objections" (210), providing further specification of the points raised under the heading "Reclaim of Losses" in that document;

(iv) for the Noters, "Answers for the Noters ..." to the Respondents' documents at (ii) and (iii) above (211); and

(v) for the Respondents, "Answers by the Respondents" to the Noters' Statement at (i) above (212)

In light of these very detailed Statements and Answers, I considered it necessary to invite parties' proposals as to further procedure. Both parties lodged Notes of Proposals,

(vi) that for the Respondents being No.213 of Process, and

(vii) that for the Noters being No.214 of Process.

In their Note of Proposals, the Noters submitted that there should be a debate on a number of issues arising out of the Respondents' Objections. I allowed a Debate, which took place over 4 days in late October 2009. Given the voluminous nature of the parties' Statements and Objections, I required parties to lodge Notes of Argument, Lists of Authorities etc. relative to the points to be debated, and also ordered the Noters to intimate and lodge an Agenda identifying the points to be debated and where and how they featured in the other documents. This was done. The relevant documents are as follows:

(viii) Agenda prepared by the Noters (220)

(ix) Note of Arguments for the Noters (221), and

(x) Note of Arguments for the Respondents (222)

In addition, during the course of the debate, the Respondents put in further documents summarising parts of their argument. I am grateful to parties for the care which they have taken in the preparation of these documents, which have enabled the issues to be focused and clarified, and the arguments to be presented in a relatively ordered fashion.

The issues raised at debate

[6] The issues raised at debate were identified in the Agenda and respective Notes of Arguments. They were grouped in the Agenda under the following headings:

(1) issues relating to the status of the respondents in these proceedings;

(2) issues relating to the conduct of the Noters as joint liquidators in the course of the liquidation;

(3) issues relating to the conduct and remuneration of the Noters' law agents.

The Agenda also identified two other matters to be raised at the hearing:

(4) disclosure of documents; and

(5) the Noters' application for interim payment.

I shall deal with these in turn below.

Issue (1) - the status of the respondents in these proceedings

[7] In their Note of Objections [206], the Respondents raise points concerning the Noters' remuneration and the account of the law agents, McGrigors. They also raise questions as to the conduct of the Noters in their capacity of joint liquidators, alleging that losses were caused to the Company by various breaches of fiduciary duty committed by the Noters. These allegations are amplified in the Addendum [210]. The topic is dealt with in both documents under the heading "Reclaim of Losses". The general tenor of the complaints is that the Noters should not be released and discharged from liability from their acts and omissions in the winding up and otherwise in relation to their conduct as interim and, subsequently, joint liquidators, but should be required to account for their various breaches of duty.

[8] The Noters' objection to this line of argument is essentially one of competency or locus. In their Note of Arguments, they raise a number of questions about the locus of the Respondents in these proceedings. These include questions as to whether the Respondents are entitled to represent the Company in these proceedings; whether certain losses allegedly attributable to the Noters' conduct of the liquidation are losses to the Company or to the Respondents as shareholders; whether the Respondents are entitled to claim in respect of any loss to the Company, or any loss to themselves which is reflective of loss to the Company; whether on the sist of the liquidation the Respondents ceased to be contributories in terms of the Insolvency Act 1986 and, in consequence, ceased to have any locus in these proceedings; whether either the Company or the Respondents are be entitled to bring an application under s.212 of the Insolvency Act 1986; and whether the Noters owed, and, if so, were in breach of, any duty to the Respondents as shareholders/contributories.

[9] As Mr Connal QC, who appeared for the Noters, developed his argument, it seemed to me that the point which the Noters were taking was based on a misunderstanding of what the Respondents were seeking to do, and of the circumstances in which the issues were presently before the court.

[10] The position, so it seems to me, is this. In their Note [37], the Noters sought to bring the liquidation to an end and to have their claim for remuneration and discharge determined. In the particular circumstances set out in my earlier Opinion, the liquidation was to be sisted and the Company returned to its shareholders and directors. I took the view, contrary to the initial views of the Noters, that the sooner the liquidation was sisted the better. Accordingly the liquidation was sisted on the basis that the Noters' claim for remuneration and discharge would be determined subsequently. It was made clear that neither party was to be prejudiced by this course. In other words, the rights of the parties in the arguments as to remuneration and discharge would be the same as they were or would have been had the liquidation not been sisted. In the course of argument, Mr Connal QC expressly accepted that this was the intent behind, and effect of, the interlocutor of 2 April 2008.

[11] On this basis, it is necessary to consider the position of the Respondents prior to the sist of the liquidation. Mr Connal accepted that prior to the sist, Mr and Mrs McNamara were contributories. They may also have been creditors, but in light of the company being returned to them once the liquidation was sisted, their application to determine this was also sisted. That does not matter. The important point is that in the arguments before the court at this stage, they are entitled to assert such rights as would have been open to contributories had the liquidation not be sisted.

[12] What are those rights? The Insolvency (Scotland) Rules 1986 do not deal in terms with a liquidation which is sisted with the company being returned to its members. Nonetheless they provide some general guidance. They provide in Section C for release on the completion of the winding up. Rule 4.31 contemplates a final meeting of the creditors, with the creditors being entitled to question the liquidator in respect of any matter contained in his report and having the power to resolve against the liquidator having his release. No equivalent right to question the liquidator or resolve against him having his release is conferred on a contributory. This is presumably because that part of the Rules contemplates an insolvent liquidation, where those who have an interest in complaining about the conduct of the liquidator are creditors who have only received a dividend and not the full amount of their claim. In a solvent liquidation (by which I mean a liquidation, albeit on grounds of insolvency, which results in a surplus of assets over debts), where the creditors have been paid in full, those having an interest in complaining about the conduct of the liquidator are not the creditors but the contributories, the shareholders amongst whom the surplus will be distributed or, in this case, to whom the company is returned upon the liquidation being brought to an end. As I have said, the Rules appear to make no provision for this situation. However, section 212 of the Insolvency Act 1986 applies if, in the course of the winding up of, it appears that the liquidator has been guilty of a breach of a fiduciary or other duty to the company. That includes any breach of duty in connection with the carrying out of his functions as liquidator: s.212(2). That is the complaint that is made in the present case. Section 212(3), reading short, entitles a court on the application of a creditor or contributory to examine into the conduct of the liquidator in such a case and, if it makes the appropriate findings, to order him to repay money to the company or contribute to its assets by way of compensation for such breach of duty. There are two qualifications on this. The first is that an application in relation to a person who has acted as liquidator may only be made with leave of the court after the liquidator has had his release: s.212(4). The second is that the contributory may not make an application under this section except with leave of the court: s.212(5). It is contemplated in s.212(5) that leave may be given to a contributory notwithstanding that he will not benefit from that application. The provisions of section 212 appear to confirm that a contributory may have a legitimate interest in questioning the conduct of the liquidation. By that line of reasoning, it appears to me that the omission in Rule 4.31 of the Insolvency (Scotland) Rules 1986 for a contributory, perhaps with leave of the court, being allowed to question the liquidator with respect to matters contained in this report and to vote against his release, must be put down to inadvertence rather than deliberate policy.

[13] I would hold that the Respondents, as contributories, are entitled to question the conduct of the liquidation and to oppose the Noters having their release. If it were necessary to do so, I would grant leave to the Respondents in terms of section 212(5) of the 1986 Act to question that conduct. It would, in my opinion, be wrong to preclude those with a legitimate interest in the outcome of the liquidation from questioning the acts of the liquidators in carrying out their functions. I do not think it necessary that there are the separate proceedings in terms of section 212. I see no reason why the Respondents should not be entitled to raise their complaints in these proceedings in opposition to the Noters' motion for release.

[14] Thus understood, it can be seen that the points raised by Mr Connal QC as to competency and locus do not in fact arise for decision. I would only add that this. Although accepting that the Interlocutor of 2 April 2008 was intended to put the parties in the position that they were in prior to the sist of the liquidation, Mr Connal continued to make the point that it in some way made a difference that the Company was now back in the hands of its shareholders. When pressed, he was unable to explain how it made a difference. I do not think that it does.

Issue (2) - the conduct of the Noters as joint liquidators in the course of the liquidation

[15] A number of matters were raised under this general heading. The first concerns the test to be applied in deciding whether or not a charge for items of work in connection with the liquidation is recoverable. There was not, in fact, any significant dispute about this as I understood it. The Noters submitted that the test was not whether the work was carried out for the benefit of the Company; rather, it was whether the item of work was appropriate for the Noters to do in the performance of their obligations and responsibilities in terms of the 1986 Act and the 1986 Rules. I agree with that general formulation, though I would not wish to be held to any particular wording in the absence of seeing the specific problems which may be raised.

[16] Next, the Noters argued that their obligations and responsibilities were statutorily based and that they were not trustees at common law. They argued that the statutory provisions relating to trustees did not apply to them. They took issue with the argument advanced by the Respondents that the Noters owed fiduciary duties to the Company and/or in connection with the carrying out of their functions as liquidators. Mr Connal pointed out that the general functions of the liquidator were to secure that the assets of the company were got in, realised and distributed to the company's creditors and, if there was a surplus, to the persons entitled to it: see s.143(1) of the 1986 Act. Although section 212 of the Act made it clear that the liquidator had some fiduciary duties, notions of trust, trustee and fiduciary duty did not arise or, at least, were over-emphasised in the Respondents' Objections. He doubted whether the "fiduciary" question added a very much in this case. I tend to agree. As I explained during the course of the Respondents' submissions, it seemed to me that the appropriate course was not to ask a general question whether the liquidators owed fiduciary duties to the Company, or to those interested in the winding up, but rather to ask what duties they owed and only then, if it became of any relevance, to consider whether those duties should be described as "fiduciary". Without prejudging anything that may follow hereafter, I think it unlikely that much will turn on the label to be attached to any duty that is established, but I would not wish to lay down any absolute rule in the abstract.

[17] A discrete issue has been raised as to whether the Noters were under any obligation to prepare annual accounts or annual returns. The Respondents complain of their failure to do so. They say that the Noters failed to keep proper accounting records, in particular VAT records, as a result of which there have been overpayments of VAT and, possibly, the incurring of a liability to the revenue authorities. Mr Connal submits that the Noters were under no obligation in this regard. I do not accept that submission. In Ayerst v C & K (Construction) Ltd. [1976] 1 AC 167 at 176-7, Lord Diplock explained the statutory scheme for dealing with the assets of a company that is ordered to be wound up. He noted that the statutory duty of the liquidator was to collect the assets of the company and to apply them in discharge of its liabilities. He went on to say:

"All the powers of dealing with the company's assets, including the power to carry on its business so far as may be necessary for its beneficial winding up, are exercisable by the liquidator for the benefit of those persons only who are entitled to share in the proceeds of realisation of the assets under the statutory scheme."

He noted that the company itself, as distinct from its members, could never be entitled to any part of the proceeds. In Smith v Lord Advocate 1978 SC 259, the Lord President (Emslie) said that the liquidator might properly be regarded as the manager of a company's affairs acting for and on its behalf. He noted that the liquidator was not empowered to trade himself, using the assets of the company; his power was to carry on the company's business. He also noted that the Income and Corporation Taxes Act 1970 made the company liable to corporation tax in respect of its business, albeit carried on by the liquidator. If the Company is liable for corporation tax whilst in liquidation in respect of the business carried on by the liquidator, it must be the liquidator who is responsible for handling its tax affairs. There is no one else.

[18] It seems to me, therefore, that if the liquidator carries on the Company's business, then he is obliged to meet all the obligations of the Company incurred in the course of that business. These obligations may be contractual, but where relevant they will include statutory obligations in respect of keeping appropriate records, submitting tax returns, accounting for VAT and the like.

Issue (3) - the conduct and remuneration of the Noters' law agents

[19] In their Objections, the Respondents allege that the Noters' law agents (McGrigors) had a "gross conflict of interest". On that basis, they contend that nothing should be recoverable in respect of the fee rendered by the law agents and approved at taxation by the Auditor. This allegation arises from the circumstances in which the winding up order was made and McGrigors appointed as solicitors by the Noters as soon as they took office. It is the Respondents' case, as I understand it, that before the winding up orders were made a sum was proffered in satisfaction of the outstanding debt owed to the petitioning creditor for whom McGrigors acted, but that, without taking instructions from their client, McGrigors refused that proffered payment and invited the court to proceed to make an order winding up the Company. As soon as the winding up order was made, the Noters were appointed as provisional and subsequently joint liquidators, and they in turn appointed McGrigors as their solicitors for the purpose of conducting the liquidation.

[20] Mr Connal's account of what had happened differed in two particular respects, namely: first, as to whether there was any real offer made on behalf of the Company at the time which could have been accepted, and, secondly, as to whether McGrigors acted without instructions from their client. He disputes that there was any action by McGrigors which would disqualify them acting subsequently for the Noters.

[21] I cannot, of course, resolve the factual dispute between parties as to what happened at the hearing when the winding up order was made. I have to say, though perhaps my view is coloured by hindsight and the knowledge of the disputes to which the liquidation has given rise, that I think it regrettable that the Noters should have appointed as their solicitors a firm which had been involved on behalf of the petitioning creditor and was perceived by those representing the Company to have acted with animus towards the Company and towards them as individuals. However, that does not mean that, once the winding up order was made, and McGrigors were instructed by the Noters to act on their behalf, McGrigors had a conflict of interest. The interest of the Noters was to get in, realise and distribute, so far as necessary, the assets of the company. The liquidation was a solvent liquidation (in the sense I have described), and all creditors were paid. In the particular circumstances of this case there was no possible conflict between the interests of McGrigors in their capacity of acting for the petitioning creditor, and their interests as agents acting on behalf of the Noters. Accordingly, it seems to me that the averments of conflict of interest are irrelevant and I shall not allow them to be taken further.

[22] This is not the end of the matter, however. The Respondents wish to challenge recovery by the Noters of all or part of McGrigors' fees as part of their outlays. Those fees have been taxed, as between the Noters and McGrigors, pursuant to para.6 of the interlocutor of 2 April 2008. The amount found due on taxation is £206,317.14. In para.6 of the Interlocutor it was made clear that the taxation as between the Noters and McGrigors was without prejudice to the right of the Company to argue about how much, if any, of the fees payable to McGrigors should be recoverable by the Noters as part of their outlays. Mr Connal correctly pointed out that this reservation of the right to argue about recoverability mentioned the Company but not the Respondents. The distinction between the two in that paragraph was not intentional. But in any event a taxation between the Noters and the law agents could not bind other parties whether the reservation was there or not. The taxation simply determines as between the Noters and their law agents the amount to be paid to the law agents by way of fees for the work carried out on the instructions of the Noters. It may or may not be the case, for example, that some of the work instructed was unrelated to the proper conduct of the liquidation. If that were the case, the mere fact that the fees for that work were recoverable by the law agents as a result of a taxation as between the Noters and the law agents would not mean that they could be recovered as an expense, or outlay, of the liquidation.

[23] The question is whether or not the Respondents should be allowed to question the recoverability of these fees. Mr Connal submits that they have no right to make any representations in this regard. He refers to section 53 of the Bankruptcy (Scotland) Act 1985, as rendered applicable, with amendments, to corporate insolvency by Rules 4.16, 4.32 and 4.68 of the Insolvency (Scotland) Rules 1986. As he points out, however, that section provides little guidance. Section 53(2) provides for the taxation of all accounts in respect of legal services incurred by the liquidators. Once taxed, the fees payable for such legal services may be claimed by the liquidators as outlays. At the end of each accounting period, in a case (as here) where there is no liquidation committee, the court fixes the amount of the outlays and remuneration payable to the liquidators: see s.53(3)(a)(ii). In terms of s.53(6), the liquidator, the Company and any creditor may appeal to the court against that determination. It is not clear whether that appeal would be to the same court which fixed the amount of the outlays and remuneration payable to the liquidators on an ex parte basis; or to the Inner House. I suspect it would be the former. However, as Mr Connal submitted, we are not at that stage yet. We are currently at this stage of the court making a determination under s.53(3)(a)(ii). If that is right, the section and the Rules are silent as to who, if anyone, is entitled to make representations. I do not see why the court should not hear representations by anyone having an interest. S.53(6) identifies the Company and the creditors as parties entitled to make representations at the appeal stage. Earlier in this Opinion I have expressed the view that the Rules do not make provision for a liquidation of a company which is in fact solvent and where the contributories have the overriding interest in examining the conduct of the liquidation. Just as I consider that in such a situation Rule 4.31 should be read as entitling contributories to question the liquidators and resolve against their having a release, so also I consider that contributories should be entitled to appeal under s.53(6) as applied to liquidations. In the unusual circumstances of this case, where an inter partes hearing has already been arranged, I see no reason why the two stages, the determination under s.53(3)(a)(ii) and the appeal under s.53(6) should not be compressed. I therefore propose to allow the Respondents to make representations as to the legal fees claimed by the Noters as outlays.

[24] This gives rise to some problems. It may be that some of the correspondence passing between the Noters and McGrigors attracts legal professional privilege or that for some other reason it would be inappropriate to allow the Respondents unrestricted access to the files. After some discussion, I understood parties to be in agreement with a proposal that the court should appoint a Reporter to go through the files and identify any areas where he thinks a question might arise as to the recoverability of the fees as outlays in the liquidation. When he has reported, it will be necessary to convene a further hearing to discuss how to proceed.

[25] I would not at the stage wish to define the Reporter's remit more precisely. I can envisage the possibility, for example, that there may be a question of whether or not it was reasonable to instruct McGrigors on specific matters. There may be other relevant issues. At the end of the hearing, the Respondents undertook to produce a list of points which they would wish the Reporter to consider when going through the files. Unfortunately Mr McNamara has been unwell for part of that time and he has also been engaged in other time-consuming litigation. He has not yet been able to produce that list. It seems to me that the sensible course would be to require him to produce such a list in advance of the hearing fixed for January with a view to the precise terms of the remit being determined at that hearing. Given the nature of the present dispute, I would propose to appoint a QC or very senior junior counsel as Reporter, but I will listen to suggestions on this.

Summary

[26] In the course of his submissions, Mr Connal invited me to rule that certain topics on the Respondents' Note for Future Procedure (213) should be excluded from consideration at the hearing in January. I have already dealt with item 1, which concerns of the locus of the Respondents. There is no further need to consider this matter. Items 2 and 3 concern the VAT invoice which was at the heart of the dispute which resulted in the company being wound up. That forms no part of any legitimate complaint about the conduct of the Noters in the course of the liquidation and I shall refuse to allow this to be raised. Item 4 is the complaint that McGrigors had a conflict of interest. I have dealt with this and will not allow this to be raised further in these proceedings - but for the avoidance of doubt I repeat that I shall allow some scrutiny of McGrigors' fees in the manner indicated. I shall allow the other items to proceed at the hearing in January 2010. They seem to me to raise issues which go to the Respondents' complaints about the conduct of the liquidation.

Disclosure of documents

[27] The proceedings to date have been bedeviled by complaints about documents not having been provided by the Noters. I am not in a position to know whether the orders which the court has made have been complied with. If there has not been compliance, that can be brought out at the January hearing provided it is relevant to the issues. I do not propose to make any further order at this stage.

The Noters' application for interim payment

[28] Mr Connal submitted that it would be appropriate at this stage to order an interim payment on account of sums claimed by the Noters. He asked for a very conservative amount which would take account of all the arguments raised against their claim. It seems to me that the court is not in a position to grant this application. The Noters on their own admission did not comply with the requirements of section 53 of the Bankruptcy (Scotland) Act 1985 as applied to liquidations. They seek a waiver of their failures to do so. The Act requires the liquidators at the end of each six monthly accounting period to submit their accounts of their intromissions together with their claim for outlays reasonably incurred and for remuneration. They did not submit any such documents until the end of the liquidation. Until I can grant a waiver of their failures, I cannot order any payment to them. If a waiver is not granted, they will not be entitled to recover anything. I have not yet heard argument on the question of waiver, and this is one of the matters which will be contested at the January hearing. It needs to be considered carefully. In particular, I would wish to be addressed on the question whether, had the matter being brought back before the court every six months, as the Rules require, the situation in which the parties have found themselves over the last few years might have been avoided. I shall say no more about it until I have heard argument on the point.

By Order

[29] I shall put the case out By Order for discussion of any points arising out of this Opinion. There has been correspondence between the parties on certain matters since the last hearing, and parties should be prepared to address me on these matters at the By Order hearing. This will also be the opportunity for discussing the way in which the January hearing will proceed.