Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2014] CSOH 170

CA126/14

OPINION OF LORD WOOLMAN

In the cause

IGL LTD (IN LIQUIDATION AND FRASER JAMES GRAY, THE LIQUIDATOR

Pursuers;

against

(1) MALCOLM INSULATION SUPPLIES LTD

(2) WILLIAM McLAREN MALCOLM

(3) OSBORNE McLAREN MALCOLM

(4) ARCHIBALD CAMPBELL MALCOLM

Defenders:

Pursuers:  J Mackenzie, Solicitor Advocate;  Shepherd & Wedderburn LLP

Defenders:  Howlin QC;  MacRoberts LLP

3 December 2014

Introduction
[1]        The liquidator of IGL Ltd raised the present action for payment in 2009.  He sought to recover a sum of over £1 million from the defenders, who are (a) the company that has acquired IGL’s business and assets, and (b) the former directors of IGL (‘the directors’).  In 2011 the parties entered into a settlement agreement to resolve matters.  They conferred jurisdiction on the liquidator to adjudicate two claims that lay at the heart of the dispute.  He held that the defenders did owe a sum of over £1 million to IGL.  The sheriff at Dumbarton refused their appeal and they did not insist in their further appeal to the sheriff principal.  The liquidator then lodged a minute for decree in this action seeking to recover the sums in question.

[2]        The defenders contend that they are not obliged to make payment.  They argue that the liquidator’s decision is flawed, because he failed to assess the two claims in the manner specified in the settlement agreement.  There are two issues for decision.  First, did the liquidator properly construe the agreement in carrying out his adjudication?  Second, has the defenders’ subsequent conduct prevented them from challenging the claim, either by reason of personal bar, or of approbate and reprobate.

The facts
[3]        IGL was formerly known as Malcolm Insulation Ltd (‘MIL’).  It was incorporated in 1983 and provided insulation materials to the construction industry.  Over many years it obtained supplies from British Gypsum Ltd, which is an agent of BPB United Kingdom Ltd (‘BPB’).  On 30 November 2006, BPB wrote to MIL alleging that it had misused certain trade discounts.  BPB annexed to the letter a detailed analysis of its claim, which related to the period from January 2003 to September 2006 and amounted to over £1 million.  MIL denied the allegation and the parties entered into lengthy discussions to try to resolve the dispute, but without success. 

[4]        At about the same time, MIL had another potential liability relating to its tenancy obligations.  In 1986 it leased premises at Clydebank Industrial Estate from Rockspring Hanover Property Unit Trust (‘RHPUT’).  MIL served a notice of intention to terminate the lease with effect from 11 November 2006.  In response, RHPUT served a schedule of dilapidations and wants of repair notice.  It asked MIL to carry out the necessary works in terms of the lease, but MIL refused to do so. 

[5]        The directors decided that it was not viable to defend the BPB claim, given the potential costs of the litigation and the diversion of management time.  They decided to restructure the business and arranged for the following steps to take place:

a.         on 24 April 2007 MIL ceased trading and sold its business and assets to Malcolm Insulation Supplies Ltd (‘MISL’)

b.         the directors exchanged their shares in MIL for shares in MISL

c.         MIL paid a dividend of £3 million to MISL (“the Dividend”)

d.         on 3 May 2007 MIL changed its name to IGL

e.         on 9 November 2007 IGL was wound up

[6]        In May 2008 BPB raised proceedings against IGL in respect of the alleged unlawful trade discounts.  The interim liquidators asked the directors whether they were willing to fund a defence to the action, but they declined to do so.  The interim liquidators then notified BPB that they themselves were not aware of any reason to defend the claim and did not lodge defences.  BPB obtained decree in absence on 10 June 2008 for £1,009,846 plus expenses, which was subsequently extracted (“the BPB decree”). 

[7]        The liquidator raised this action to challenge the payment of the dividend.  He contended that it was unlawful at common law, because at the time MIL was unable to pay its debts as they fell due.  He also maintained that it was unlawful under statute, because it had not been prepared by reference to interim accounts, as required by Part VIII of the Companies Act 1985.  He sought to recover (i) a sum to reflect the extent to which the creditors had been prejudiced by the payment of the dividend (£1,091,680.83), and (ii) the expenses of the liquidation (£57,232.44).

[8]        After defences were lodged, the liquidator enrolled for summary decree.  He argued that there was not a substantive defence to the action.  In May 2010, Lord Hodge refused that motion in hoc statu, while reserving expenses.  Subsequently, the court fixed a proof on liability and quantum.

Proposal for extra-judicial settlement
[9]        It was against that background that the defenders’ solicitors wrote to the pursuers’ solicitors on 20 January 2011 to propose an extra-judicial settlement as follows:

“As a proof has still to be allowed in this matter, we have considered with counsel and our clients an expeditious way to resolve the issues in dispute.

As we both know, the true issues at the centre of this dispute are what sums (if any) were (i) due to or by [BPB];  and (ii) due to [RHPUT] at the time of the restructuring in 2007.

The resolution of the liquidation of IGL cannot be achieved without a determination of those issues, therefore, we are instructed to propose the following:-

1.         The liquidator will adjudicate upon the BPB and RHPUT claims in the manner envisaged by s.49 of the Bankruptcy (Scotland) Act 1985 and rule 4.16 of the Insolvency (Scotland) Rules 1986.

2.         Following such adjudications, and any appeal under s.49(6) of the 1985 Act, our clients undertake to make payment to the liquidator of the sums (if any) determined to be due in respect of the BPB and RHPUT [claims] (which in the case of the BPB claim will, for the avoidance of any doubt, be the amount (if any) adjudicated as due to BPB under deduction of the amounts admittedly due by BPB to IGL should such a deduction not be made in the adjudication of the BPB claim).

3.         The present proceedings in the Court of Session would be sisted pending the procedure outlined above.  Following payment of the sums (if any) due by our clients, the proceedings would be disposed of by way of decree of absolvitor.

4.         In addition to the foregoing, our clients would accept liability for the expenses of the present proceedings, as agreed or taxed together with the reasonable expenses of the liquidation in respect of these claims.”

[10]      The liquidator did not accept that proposal until August 2011.  During the intervening period, the parties’ solicitors had a number of further communications, but they did not alter the essential terms of their bargain.  In the course of that correspondence, IGL’s solicitors suggested that the parties should agree the procedure to be followed before the liquidator.  On 5 July 2011, the defenders’ solicitor rejected that suggestion, stating that the liquidator should “deal with matters in the manner set out in my letter of 20 January 2011.”

The Bankruptcy (Scotland) Act 1985
[11]      Rule 4.16 of the Insolvency (Scotland) Rules 1986 applies section 49 of the 1985 Act to company liquidations.  As so adjusted, section 49 provides:

49        Adjudication of claims.

(1)        At the commencement of every meeting of creditors (other than the statutory meeting), the liquidator shall, for the purposes of section 50 of this Act so far as it relates to voting at that meeting, accept or reject the claim of each creditor. 

(2)        Where funds are available for payment of a dividend out of the Company’s estate in respect of an accounting period, the liquidator for the purpose of determining who is entitled to such a dividend shall, not later than 4 weeks before the end of the period, accept or reject every claim submitted or deemed to have been re-submitted to him under this Act;  and shall at the same time make a decision on any matter requiring to be specified under paragraph (a) or (b) of subsection (5) below. 

(3)        …

(4)        Where the liquidator rejects a claim, he shall forthwith notify the creditor giving reasons for the rejection. 

(5)        Where the liquidator accepts or rejects a claim, he shall record in the sederunt book his decision on the claim specifying —

(a)        the amount of the claim accepted by him,

(b)        the category of debt, and the value of any security, as decided by him, and

(c)        if he is rejecting the claim, his reasons therefor. 

(6)        any member or contributory of the company … if dissatisfied with the acceptance or rejection of any claim (or, in relation to such acceptance or rejection, with a decision in respect of any matter requiring to be specified under subsection (5)(a) or (b) above), appeal therefrom to the Court … 

(7)        Any reference in this section to the acceptance or rejection of a claim shall be construed as a reference to the acceptance or rejection of the claim in whole or in part.

The Adjudication and Subsequent Procedure
[12]      By letter dated 15 March 2012, the liquidator adjudicated the BPB claim at £949,926.05 and the RHPUT claim at £131,250.  The directors appealed his decision by lodging a note in the liquidation process in Dumbarton Sheriff Court.  It bore to be “an application in terms of section 49(6)” of the 1985 Act.  In the body of the note, the directors averred:  (a) that IGL did not owe any sums to BPB;  (b) that no useful purpose had been served by the liquidator allowing decree in absence to pass against IGL in the action at the instance of BPB;  (c) that the liquidator should not have been “influenced by the decree” when adjudicating the BPB claim;  and (d) that if he had carried out a reasonable assessment, he would have held that the BPB claim was unjustified, for example prima facie some parts of it had prescribed.

[13]      The sheriff proceeded on the basis that the correct approach in section 49(6) appeals is to “look at the matter afresh”:  Shiprow Development Co Ltd v Liquidator of Craiglair Property Co Ltd [2003] ScotSC 48 per Sheriff Principal Sir Stephen Young at para. 31.  Accordingly, he was not confined to looking at the documents available to the liquidator, but could consider further evidence about the claim.  In refusing the appeal, the sheriff held that the liquidator had required to acknowledge the BPB decree. 

[14]      The defenders’ appeal against the sheriff’s decision did not proceed.  Following further discussions, the directors compromised the RHPUT claim at the sum of £60,000.  They notified the liquidator that they no longer insisted upon the appeal in respect of the BPB claim.  Accordingly, on 19 September 2013 the Sheriff Principal dismissed the appeal.

[15]      The liquidator then lodged the minute for decree in the present action seeking to recover the sums of £949,926.05 (BPB) and £60,000 (RHPUT).  The matter came before me for a debate, which turned upon the proper construction of the settlement agreement.

Submissions
Defenders
[16]      Mr Howlin submitted that the liquidator’s decision is invalid and the parties must start the settlement process again from the beginning.  He argued that the reasonable bystander would have understood that the liquidator had to assess both claims on their merits as they stood in 2007.  The terms “adjudicate” and “adjudication” in the settlement agreement connote the idea of evaluation.  It followed that the liquidator was not entitled simply to rely upon the BPB decree.  That rendered the words “(if any)” redundant.  It did not make commercial sense for the defenders to give up their right to challenge the BPB claim.  Both parties were well aware at the time of the settlement agreement that the extract decree stood at £1,009,846, but they chose not to mention it.  The natural inference is that they intended that the liquidator should ignore it. 

[17]      Mr Howlin explained that he had not argued this point in the appeal, because the sheriff was confined to look at the matter in terms of section 49 and could not rule on the construction of the agreement reached by the parties. 

Pursuers
[18]      Mr Mackenzie contended that the settlement agreement is readily understood.  The parties agreed to compromise the action on the basis of the decision reached by the liquidator.  In carrying out the adjudication, the liquidator required to acknowledge the BPB decree.  If he had failed to do so, he would not have been undertaking an adjudication in terms of section 49.

Construction of the Settlement Agreement
[19]      The key question is a narrow one.  In carrying out the adjudication, should the liquidator have recognised or ignored the BPB decree? The principles governing contractual interpretation are well-known.  Lord Clarke of Stone-cum-Ebony set them out in Rainy Sky SA v Kookmin Bank [2011] UKSC 50;  [2011] 1 WLR 2900.  Put short, the court must construe the provisions of the contract in context and in accordance with the purposes that the contract is intended to achieve:  Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43. 

[20]      I start with the words used in the settlement agreement.  The Shorter Oxford English Dictionary offers two apposite definitions of “adjudicate”:  (a) to try and determine judicially a claim, and (b) to act as a judge in a court, a tribunal, or a competition.  If the term had stood alone, the defenders would have had a cogent argument that the liquidator required to assess the validity and amount of the BPB claim.  In this instance, however, the term does not stand alone.  The parties provided the liquidator with a further direction, which was an important one.  He was to carry out the exercise in the manner envisaged by section 49 of the 1985 Act. 

[21]      What does that provision envisage? In deciding whether to accept or reject a claim, the general principle is that he is bound to consider a judicial determination.  He must rank a creditor for the amount shown in a decree.  Otherwise there would be uncertainty and confusion.  The decree and the adjudication could arrive at different figures.  A special rule applies to decrees in absence to reflect the fact that they are pronounced without any defence having been tested.  A trustee or liquidator will only be bound by a decree in absence if he has been given an opportunity to defend the action:  McBryde Bankruptcy, 2^nd edition, para. 16-18 citing Dow v Pennel’s Tr 1929 SLT 674 and Miller v McIntosh (1884) 11R 729.  In this case the liquidator had such an opportunity, which he declined to exercise. 

[22]      I therefore conclude that, in carrying out the adjudication, the liquidator had to acknowledge the extract decree.  He had to ask the question - what debt is due to BPB? The decree supplied the answer.  Mr Howlin did not suggest that the claim was mistaken or erroneous.  He accepted that it could have been correctly stated.  I hold that if the liquidator had not acknowledged the decree, he would not have been carrying out the instructions in the settlement agreement to conduct the “exercise in the manner envisaged by section 49”.  Those key words would therefore have been deprived of meaning.  A reasonable person with the relevant background knowledge and looking at the document as a whole would not have thought that the words “(if any)” drove the interpretation..

[23]      The relevant surrounding circumstances support the conclusion I have reached about the parties’ intention.  They were in dispute over a number of issues of fact and law.  If the action had continued to a proof, each side would have incurred significant expense.  The settlement was designed to resolve matters through a more expeditious route.  If the liquidator had required to consider all the evidence and legal arguments, it is likely that the procedure before him would have been lengthy and expensive.  There would have been no significant benefit in terms of time and cost.  Mr Mackenzie informed me that the liquidator regarded the BPB decree as a relevant factor in deciding to accept the settlement proposal.

[24]      If I am wrong and the words are ambiguous, I conclude that commercial sense favours the interpretation adopted by the liquidator.  I do so largely for the reasons already discussed.  First, it would have robbed the settlement agreement of commercial utility if the liquidator had required to carry out a full assessment.  Second, the parties had an extensive right of appeal to correct any error made in the adjudication.  Third, it means that the creditors' claims in the liquidation match the amounts that the defenders are obliged to pay. 

[25]      Mr Mackenzie argued that, in substance, the defenders seek to imply the words “as though BPB held no decree against IGL” into the settlement agreement.  As Mr Howlin disavowed any such intention, the issue does not arise.  If it had, I would have held that the relevant criteria for implication are not met:  Credential Bath Street Ltd v Venture Investment Placement Ltd [2007] CSOH 208.  In particular, such a term is not required to give business efficacy to the contract.

Are the defenders prevented from challenging the adjudication?
[26]        On the argument that the defenders now advance, the liquidator’s decision is invalid.  It is therefore surprising that they did not seek either interim suspension and interdict after it was issued, or to develop their challenge on that basis before the sheriff.  I am satisfied that in failing to do so, they represented that they did not quarrel with the adjudication and the liquidator relied on that to his prejudice:  Gatty v Maclaine 1921 SC (HL) 1, 7 per Lord Chancellor Birkenhead.  The defenders should have taken their objection at the earlier stage:  Reid and Blackie, Personal Bar paras. 19-41 and 19-42.  It would be unfair to the liquidator to allow them to resist the present claim now.  The principle of personal bar is designed to penalise inconsistent conduct and prevent unfairness:  ibid para. 2-01.

[27]      By marking the appeal to the sheriff, and subsequently not insisting on it before the sheriff principal, the defenders elected to be bound by the liquidator’s decision on the settlement agreement.  The doctrine of approbate and reprobate is therefore of potential relevance:  Rankine Law of Personal Bar in Scotland p147.  That branch of the law, however, has been developed (and is more commonly applied) in the law of succession:  Reid and Blackie Personal Bar para. 8-08.  In the circumstances of a contract case, I prefer to analyse the situation in terms of personal bar.  But if required to do so, I would hold that the defenders did make an irrevocable choice and, having approbated the settlement agreement, cannot now reprobate it.

Conclusion
[28]      I propose to sustain the pursuers’ pleas-in-law in the minute for decree, to repel the defenders’ pleas-in-law and grant decree for the sums of (a) £949,926.05 and (b) £60,000.  I shall fix a by order hearing to discuss all ancillary matters, including interest, the expenses of the action, the liquidator’s fee and diligence.