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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> CALEY OILS LIMITED (IN ADMINISTRATION) AGAINST DAVID JOHN WOOD [2018] ScotCS CSOH_42 (20 April 2018)
URL: http://www.bailii.org/scot/cases/ScotCS/2018/[2018]_CSOH_42.html
Cite as: [2018] ScotCS CSOH_42, [2018] CSOH 42
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OUTER HOUSE, COURT OF SESSION
CA19/16
[2018] CSOH 42
OPINION OF LORD CLARK
In the cause
CALEY OILS LIMITED (IN ADMINISTRATION), Bishop’s Court, 29 Albyn Place, Aberdeen
AB10 1YL and EWEN ROSS ALEXANDER and GORDON MALCOLM MACLURE, both of
Bishop’s Court, 29 Albyn Place, Aberdeen AB10 1YL, the Joint Administrators thereof
Pursuers
against
DAVID JOHN WOOD, residing at Bedewood House, Cullen, AB56 4XN
Defender
Pursuer: D Thompson QC; Davidson Chalmers LLP
Defender: Party
20 April 2018
Introduction
[1] In this action, the pursuers, as the joint administrators of Caley Oils Limited (“the
Company”), seek recovery of certain sums from the defender, who is the sole director of the
Company. The joint administrators were appointed on 20 August 2015. The first sum sought
is £295,119, said by the pursuers to be the total sum of money loaned by the Company to the
defender and not repaid. The second sum sought is £150,000, made up of two payments by
the Company to the defender on 12 August 2015. This second sum is claimed on two
separate grounds: firstly, that the payments constituted unfair preferences for the purposes
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of section 243 of the Insolvency Act 1986 (“the 1986 Act”); and, secondly, that in making
payment of these sums to himself, the defender acted in breach of his duty at common law
to have regard to the interests of the Company’s creditors.
Procedural history
[2] In terms of substantive procedure, the procedural history of the case can be summed
up as follows. Following a debate on 24 August 2016, decree de plano was granted by the
Lord Ordinary who heard the debate, for payment by the defender to the pursuers of
£280,116 (the sum then sued for), and the pursuers were awarded the expenses of process.
The defender reclaimed. The Inner House allowed the defender time to lodge a minute of
amendment. By interlocutor dated 3 May 2017 the defender’s minute of amendment was
allowed to be received, the pursuers were given time to lodge answers and the interlocutors
of the Lord Ordinary granting decree de plano and awarding expenses were recalled.
Following adjustment of the minute and amendment and answers the case was once again
appointed for debate and a motion for summary decree, enrolled by the pursuers, was
continued to be heard on the same day as the diet of debate. On 3 November 2017, the case
called before me for the diet of debate and on the pursuers’ motion for summary decree.
Having considered the note of argument lodged by the defender, who is a party litigant, it
became apparent to me that factual matters of potential relevance to his defence were raised
in the note but not in the pleadings. I also formed the view, after hearing from the defender,
that he wished to explain further his position on certain matters. I therefore granted a
motion by the defender, which was opposed by the pursuers, to discharge the diet of debate
and to allow him to lodge a further minute of amendment. The pursuers were allowed to
lodge answers to the minute of amendment, if so advised, and both parties were allowed a
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period of adjustment. On 8 December 2017, I allowed the summons and the defences to be
amended in terms of the minute of amendment and answers, as adjusted. On the unopposed
motion of the pursuers, a debate was fixed and the pursuers’ motion for summary decree
was continued to the same diet. In view of the fact that there was to be a motion for
summary decree in which material other than the pleadings could be considered, and that
the defender was a party litigant who might well wish to explain his position more fully
than was set out in his pleadings, I considered it appropriate that both parties be given the
opportunity to lodge any documents and affidavits to be relied upon at the hearing. I also
made orders as to the exchange of documents. Documents and affidavits were lodged. The
hearing took place on 31 January 2018. The defender expressed certain concerns about
documents not having been made available by the pursuers but following an explanation by
senior counsel for the pursuers, in particular as to the matters to be relied upon in relation to
the allegation of insolvency, the defender was content to proceed.
The pursuers’ case in outline
[3] In their pleadings, the pursuers make a number of detailed averments setting out
specific points about the financial position of the Company and aver that as at 12 August
2015 the Company was insolvent. These averments relate to debts due by the Company to
its principal creditor, ASCO UK Limited (“ASCO”). The pursuers’ position, in relation to the
debate, was in short that the defender had made no relevant averments in his defences in
respect of the pursuers’ case that the sum of £150,000 was paid to him by the Company
when the Company was insolvent or verging upon insolvency, and that he acted in breach
of fiduciary duty as director of the Company by making such payment without considering
or having regard to the interests of the Company’s creditors. Separately, the pursuers
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argued that the defender’s averments to the effect that a payment of £100,000, made by
Impact Trading Limited to the Company on 28 November 2013, was a payment made on his
behalf, were irrelevant. In respect of the motion for summary decree, the pursuers
contended that the defender had no defence to the claim for repayment of the £150,000. It
was accepted by the pursuers that the remaining issues (which concerned the first sum
claimed and the claim in respect of the £150,000 sum based on section 243 of the 1986 Act)
should be determined, if so required, at a proof before answer.
The defender’s averments
[4] In the defences, as amended, in response to the primary points raised by the
pursuers about alleged insolvency of the Company and the payments totalling £150,000, the
defender’s main averments can be summarised as follows. The payments to him on
12 August 2015 were in fact repayments by the Company of sums due by the Company to
him. They fell within the permitted scope of section 243(2) of the 1986 Act and therefore
were legitimate. The repayments were within the normal course of business of the Company
for the purposes of that provision. There was a clear precedent established over a period of
years showing that there was a normal practice by the defender to make short-term
advances to the Company on the basis of an informal arrangement that the Company would
repay the advances as soon as funds were available. The sums which made up the £150,000
paid by the defender to the Company were payments made in good faith by him as short-
term advances to assist cash flow. The defender was not required to make any such
payments.
[5] The Company was at no point insolvent, including when it entered administration.
In any case, ASCO was about to take over the Company (by exercising rights under a share
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pledge agreement). It was within the parameters of the normal course of business in such
circumstances for the defender to be repaid monies owed to him under his loan account. The
fact that the Company was not insolvent at the point of administration was reflected in the
return to creditors which had been achieved, which was said to be “of a percentage to debt
ratio hard to find even when studying many thousands of insolvencies or administrations
and the comparative yield to creditors”.
[6] The Company was not outwith payment terms agreed with ASCO. The Company
was paying invoices from ASCO within the same period as it had done consistently for three
years. At no point did ASCO put the Company’s account on stop, until eight days before
administration, despite the same pattern of payment over three years. It was inconceivable
that the monies due to ASCO (which were consistently in the region of, and often in excess
of, £7m) were overdue for three years and that an organisation such as ASCO had failed to
take notice or take any action during that time period. The fuel supply agreement with
ASCO had no specific terms on payment and therefore the implied position was that the
existence of three years of precedent established the terms on which demands for payment
could be made. ASCO was making unreasonable demands verbally to the Company
whereby payments effectively totalling some £7 million had to be made in order to bring the
account balance down to around £3 million. This was while ASCO was simultaneously
refusing to release securities to enable a finance facility to be put in place by the Company.
ASCO had acted in a completely unreasonable manner. The likelihood of long-term funding
being obtained was non-existent in the absence of any security being available to a new
lender. Interim funding may well have been achievable, was it not for the unavailability of
security. ASCO had also acted unreasonably in forcing or at least pressurising the Company
to produce management account figures during a very short timescale of a few hours. The
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Company’s creditors would all have been paid in due course. There was no risk to creditors
at the date of the two payments totalling £150,000. The Company was solvent. ASCO at this
point was taking over the Company as shown in discussions during meetings with, and in
emails from, the Chief Executive Officer and Chief Financial Officer of ASCO. The plan was
for ASCO to trade the Company as a going concern alongside ASCO.
[7] ASCO had made no formal demands for payment prior to administration. The first
communication or mention of administration which was imparted to the defender was when
he was told the administrators had been appointed. ASCO was under severe financial
pressure and was forced to take irrational action and exercise authority under the securities
it held which resulted in the Company being put into administration. ASCO had financial
and cash flow difficulties. ASCO’s refusal to release the securities they held meant that
ASCO was complicit in the failure of the Company by acting in an irresponsible manner.
The defender would not have risked depositing £150,000 of his own money into the
Company’s bank account had he believed or had reason to suspect that the Company was at
risk of entering administration. In any event, even if a state of insolvency had existed the
two payments totalling £150,000 would still be permissible under the insolvency legislation.
As the Company was solvent and the defender had no prior knowledge of the prospect of
administration, the defender could not have acted differently in regard to payments to and
from his loan account with the Company and therefore the two payments totalling £150,000
were legitimate and correct. The pursuers’ arguments and averments should be dismissed as
they were based upon false assumptions that the Company was insolvent.
[8] On the secondary matter raised by the pursuers, the defender avers that the £100,000
paid by Impact Trading Ltd to the Company on or around 28 November 2013 was a
payment made from funds due to the defender by Impact. It was the defender’s usual
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practice to make inter-company payments rather than routing payments through his
personal bank account. This was a practical way of doing things. In Answer 6, the defender
makes further averments to the effect that the sum of £100,000 paid to the Company by
Impact did not feature in the relevant ledgers, covering the Company’s dealings with
Impact, as a payment of a debt due by Impact.
Submissions for the pursuers
[9] In summary, the pursuers’ submissions were as follows. It was apparent from the
defender’s averments that he admitted having caused the Company to make two payments
to him, of £50,000 and £100,000, on 12 August 2015. While those payments were
challengeable in terms of section 243 of the 1986 Act, the pursuers were content to reserve
argument on that question to a proof before answer, if indeed enquiry was ultimately
required in respect of that part of the claim.
[10] However, the making of such payments to the defender, on the effective eve of the
administration of the Company, gave rise to an obvious breach of the duties which a
director owed to the general body of creditors of the Company. Reference was made to the
detailed averments on behalf of the pursuers to the effect that the Company was insolvent at
the time when the payments were made. It was plain that the Company was insolvent or at
least on the verge of insolvency at that time. The defender did not suggest that if the
Company was insolvent or verging on insolvency the duty founded upon by the pursuers
was not owed by him.
[11] The defender made repeated averments that the Company was “not insolvent” either
at the time he caused the Company to make the payments or, indeed, when it entered
administration some eight days later. The defender made averments about the percentage to
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debt ratio in the return to creditors which had been achieved following upon administration.
Those averments were obviously irrelevant since they had no bearing on the question of
whether the Company was insolvent at the material time. The averments by the defender as
to the Company not being insolvent were also materially lacking in specification.
[12] The defender further averred that the credit period agreed with the Company’s
principal creditor, ASCO, was not exceeded. This was plainly without foundation. Firstly,
the averment appears to contradict the later averments by the defender that no payment
terms were agreed with ASCO. Secondly, the fuel supply agreement with ASCO plainly
made reference, at clause 1.4, to ASCO’s terms and conditions. These required payment
within a specified period. The defender made averments about implied terms and the
existence of the three-year period of precedent establishing the terms on which any
demands made by ASCO for payment should be based. But there was no agreement, other
than the terms of the fuel supply agreement. More fundamentally, the pursuers had made
detailed averments concerning the dealings between the Company and ASCO which had
not been properly addressed in the defender’s pleadings. The court was entitled to proceed,
and should proceed, on the basis that the pursuers’ averments were well-founded and that
the defender had no proper answer to them. The averments to the effect that ASCO’s
conduct was unreasonable were also irrelevant.
[13] Further, the averments that ASCO was, at the time of the payments to the defender
which are the subject of challenge, taking over the Company following discussions during
meetings and emails with the Chief Executive Officer and Chief Financial Officer of ASCO,
were irrelevant and materially lacking in specification. They were nothing to the point so far
as the questions of whether the Company was insolvent, and whether it was in the interests
of the creditors of the Company as a whole that payments to the defender be made, were
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concerned. The averments that ASCO was under severe financial pressure and was forced to
take irrational action were also irrelevant and materially lacking in specification. They did
not provide any proper basis for a finding that the Company was solvent at the relevant
time or that ASCO was demanding payment of sums which were not in fact due to be paid
to it.
[14] In relation to authority, reference was made to Bell, Commentaries, ii 170:
“… from the moment of insolvency a debtor is bound to act as the mere trustee, or
rather as the negotiorum gestor, of his creditors, who thenceforward have the
exclusive interest in his funds”.
In the normal course, a company director owes duties to the company rather than to anyone
else. However, the position changes when the company becomes insolvent or close to
insolvency, when the interests of creditors become pre–eminent. Reference was made to
Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] BCC 885, 906, in which,
having referred to West Mercia Safetywear Limited v Dodd and another [1988] 4 BCC 30, 33 per
Dillon LJ, it was said by Leslie Kosmin QC, sitting as a deputy High Court judge, that:
“Where a company is insolvent or of doubtful solvency or on the verge of insolvency
and it is the creditors’ money which is at risk the directors, when carrying out their
duty to the company, must consider the interests of the creditors as paramount and
take those into account when exercising their discretion.”
[15] In the present case the defender made no averments whatsoever to the effect that, in
so far as the payments totalling £150,000 to him were concerned, he ever considered the
interests of creditors, let alone determined that it was in the best interests of creditors that
such payments be made to him. It was in any event difficult to conceive how it could ever be
said that it was in the interests of the Company’s creditors as a whole that the defender
should cause the Company to pay him £150,000 in the circumstances.
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[16] The pursuers had set out at some length the financial problems which were facing
the Company at the relevant time. These included the Company’s inability to make a
payment to ASCO on 7 August 2015, the Company’s failure to make any payments to ASCO
in August 2015, and the Company’s account with ASCO being placed on stop on 12 August
2015. There were also averments about the Company’s payments to the defender and an
unrelated company under his control in the days leading up to administration. These
averments plainly established the state of actual insolvency of the Company by the time of
the making of the two payments to the defender on 12 August 2015. In that regard reference
was made to sections 122 and 123 of the 1986 Act. All of these averments by the pursuers
were met simply by a general denial and the defender did not make any relevant averments
to explain his position regarding the financial position of the Company. This was uncandid.
By the time of debate, it must be assumed that the parties have said all that they wish to say
on record. Reference was made to: EFT Finance Ltd v Hawkins 1994 SC 34; Ellon Castle Estates
Company Ltd v MacDonald 1975 SLT (Notes) 66; and Albyn Housing Society Ltd v Active
Sustainable Energy Systems [2016] CSOH 110. These cases demonstrated that a basic principle
of pleadings was the need for candour on the part of the parties. If there was no candid
response to the pursuers’ averments the court could proceed on the basis the pursuers’ case
was well-founded. That was the position here. It was accordingly appropriate that decree de
plano should be granted as second concluded for.
[17] The pursuers’ alternative motion was to seek summary decree as second concluded
for on the basis that no defence to that part of the pursuers’ claim was disclosed in the
defences. Reference was made to rule 21.2 of the Rules of the Court of Session and to
defender, no relevant offer to prove that the Company was being required to pay monies by
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ASCO before they were due for payment. There were no averments that it was in the
interests of the Company or its creditors as a whole for the Company to make the two
payments in question to the defender. Summary decree should therefore be granted.
[18] Reference was also made to Charterbridge Corporation Ltd v Lloyd’s Bank Ltd and
another [1970] Ch 62, which framed the question as being whether an intelligent and honest
man in the position of the director concerned could, in the whole of the existing
circumstances, have reasonably believed that he was acting for the benefit of, in the present
case, the creditors. There was no suggestion of any such belief on the part of the defender.
[19] In the present case the court had ordered the lodging of affidavit evidence and any
documents upon which parties sought to rely. The key issues which arose from that material
concerned the terms in which any contract with ASCO was concluded, the question of
whether the Company complied with those terms, and the question of the Company’s
insolvency because of its inability to pay sums properly due to ASCO. It was clear that the
Company was aware of the issues. Reference was made to the affidavit of Wendy Lipkovics,
a former Chief Financial Officer of the Company. She stated that the defender controlled the
monies paid to creditors. She explained ASCO’s demands for payment. The sum due at the
end of June 2015 which required payment by the end of July 2015 was over £2.2 million. She
referred to an email of 7 August 2015 which stated that the Company had not been able to
make the normal weekly payment due to ASCO. Reference was made to a further email of
11 August 2015 from ASCO requesting a meeting with the defender to discuss getting the
Company’s debt down from some £7m to around £3m. Any meeting to discuss possible
arrangements involving ASCO taking over the Company took place at some point in time
after the payments to the defender had been made. There was no suggestion in any earlier
correspondence of ASCO exercising its security rights (under the share pledge) and taking
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over the Company. In short the Company was unable to pay anything to ASCO, and ASCO
was pressing for payment and for proposals to get the total indebtedness down.
[20] Next, reference was made to an affidavit from Gordon MacLure, one of the joint
administrators. He explained that by early August 2015 the Company’s outstanding balance
due to ASCO had increased to over £7m. ASCO, as the holder of a qualifying floating charge
over the Company’s assets, took the decision to appoint administrators. The Company’s
accounting records had not been properly maintained since March 2014. He explained that
in his view the Company was insolvent on a balance sheet basis. He referred to a statement
of affairs showing the sums outstanding and that payments were not being made. The
outstanding debt to ASCO at the date of the administration was £7,583,902. Ultimately,
taking into account the net assets of the Company, there was a £5.3 million shortfall to
ASCO. He was in little doubt that the Company was insolvent as at 31 July 2015.
[21] Reference was also made to the affidavit of Mark Walker, Group Chief Financial
Officer of ASCO. He referred to the fuel supply agreement and to its terms. Under that
agreement, payment was due on the twentieth day of the following calendar month after
delivery of the fuel by ASCO. He referred to delays in payment by the Company being
tolerated by ASCO but being outwith the provisions of the contract. There was no
agreement with ASCO to a different credit period. In respect of how much was outstanding
at particular points in time, reference was made to debts unpaid in July and August 2015. By
31 July 2015, sums outstanding for more than 70 days totalled more than £1 million. In
relation to discussions about exercise of the security rights held by ASCO, the meeting
which took place was on 13 August 2015, that is, after the payments to the defender had
been made. On that day, the supply of fuel from ASCO was placed on stop. There was never
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any commitment by ASCO to take over the Company’s business, which it could do by virtue
of the share pledge granted in its favour.
[22] These affidavits contradicted what the defender stated about there being an
agreement with ASCO to a takeover of the Company, said to have taken place before he
paid the money to himself. It was simply wrong that ASCO had already agreed to exercise
its share pledge rights. The evidence from the affidavits also showed the incontrovertible
fact that there was a written contract between the Company and ASCO in which actual
contractual payment terms were set out and that ASCO had been willing to tolerate
payment outwith those terms. In considering whether the Company failed to pay sums due,
it was clear that the debts were not being met. The Company was not able to make payment
of its debts as they fell due. That material made good the pursuers’ case. ASCO had no
financial difficulties and was demanding payment of sums due by the Company, but did not
get paid. The Company was insolvent and there was money outstanding, which the
Company was due to make payment of prior to 12 August 2015, but it did not and could not
pay the sums due. No alternative payment terms were ever agreed and the Company was
unable to meet its payment obligations. There were no relevant averments that ASCO
demanded sums which were not due for payment. The creditors of the Company were
plainly prejudiced as £150,000 left the Company’s assets on 12 August 2015. The pursuers
did not accept that the sums of money that the defender withdrew were truly due to him.
There was a loss to the Company. There was no suggestion that the payment of £150,000 did
not prejudice creditors.
[23] Overall, the defender’s position was manifestly irrelevant or demonstrably untrue.
The Company was actually insolvent or at least of doubtful solvency, or on the verge of
insolvency, when the defender withdrew the sums. Whether for the purposes of relevancy
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or for the purposes of summary decree, the insolvency of the Company should be taken as
established.
[24] On the subsidiary matter, the defender’s averments relating to the payment of
£100,000 by Impact Trading Limited (“Impact”) on 28 November 2013 being a payment
made on his behalf were irrelevant. The defender averred that this was a payment of sums
due to him by Impact and that it was his usual practice to make inter-company payments
rather than routing payments through his personal bank account. The pursuers made
detailed averments, supported by the defender’s loan account with Impact, showing that
there was no basis to conclude that Impact already owed £100,000 to the defender and that
when it made the payment it was discharging an existing obligation which it owed to the
defender. The pursuers had placed calls upon the defender to specify the factual basis for
his averments. These calls were unanswered. Based on the authorities as to candour
canvassed earlier, the defender’s bare assertion failed to respond adequately to the detailed
material put forward by the pursuers. There was simply nothing to show that Impact ever
owed £100,000 to the defender. This was not a matter which could properly go to proof as
there was no fair notice of any basis upon which the defender offered to prove that Impact
owed him £100,000. His unparticularised assertion was insufficient.
Submissions for the defender
[25] At the outset of his submissions, the defender accepted that what was stated in his
affidavit about a meeting with ASCO having taken place in early August 2015, about a
potential takeover, was incorrect. The meeting took place after 12 August 2015. He accepted
that there was no existing agreement with ASCO about any takeover in place as at
12 August 2015, when the sums totalling £150,000 were withdrawn. He also accepted that
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the point made in his affidavit about the director’s loan made by him being repayable when
this takeover occurred could not be maintained.
[26] The first mention of ASCO chasing money from the Company was in an email from
them on 23 June 2015. His recollection was that the £150,000 had been paid to the Company
by him in late June or early July 2015. This was therefore after the time at which ASCO was
asking for payment. If the £150,000 withdrawn on 12 August 2015 had not just been put in
by him to the Company’s account, there would have been a clear disadvantage to the
general body of creditors. All that happened on withdrawal was a restoration of the position
over a short period. There was a clear precedent over three years of him paying in such
short-term loans to the Company and the Company repaying them as soon as possible. It
was a transaction in the ordinary course of business. Nothing unusual was being done. It
was a two-part transaction; a debit and credit which cancelled each other out. There was no
detriment to creditors from that transaction. The money was put in by him simply to assist
short-term cash flow.
[27] In relation to the payment terms with ASCO, it was agreed by them that they would
provide credit as and when necessary. No specific period for credit was identified. The
general position was that the Company would pay outstanding invoices on the last day of
the subsequent month to that in which the debt was incurred. But payment within 90 days
was accepted. If ASCO had any concerns it would have done something.
[28] In general, the points made in the affidavits referred to by senior counsel for the
pursuers were accepted as well-founded and truthful. However, there were significant
concerns about the affidavit of Wendy Lipkovics. Much of it was untrue and didn’t reflect
what had in fact happened. A lot of it was also largely irrelevant. She was trying to paint a
picture which hindered the defender’s case.
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[29] The fact that the debt with ASCO was growing was something that both sides
wanted; the increase in debt was because of an increase in the value of sales. The primary
thing which impacted upon the growth of the debt was ASCO’s refusal to release the
security it had, which would have allowed for additional funding to be obtained.
Discussions about reducing the ASCO debt had gone on for some three months prior to
August 2015. ASCO simply wouldn’t agree to release of the security to allow other funding
to be raised. That placed the Company in an awkward position. The suggestion by ASCO of
reducing the debt from £7 million to £3 million over six weeks was simply impossible
without some alternative funding. No company could raise that money. It was a completely
unreasonable request.
[30] There had been three years of trading with ASCO with very little difference in terms
of payment patterns. Nothing had occurred prior to 12 August 2015 that indicated to him
that the Company was going to be placed in administration. There was a meeting with
ASCO on 13 August 2015. However apart from some of what was said about that meeting,
Mark Walker had not said anything false in his affidavit.
[31] In relation to the subsidiary point raised by the pursuers, the payment made by
Impact to the Company was on the defender’s behalf and was to expedite the movement of
funds. This was the normal procedure. There was nothing unusual in a transaction of that
nature. The defender was the sole director and shareholder of Impact. Impact owed
hundreds of thousands of pounds to him. He was entitled to make the payment by Impact,
on his behalf. It could be classed as a loan repayment by Impact to him, or as a dividend or a
loan to him; it did not matter how it was classified. Basically he took money from one
company that he owned and put it into another company as a loan. The reason why Impact
owed him £100,000 was irrelevant; it was effectively his money.
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[32] A clear defence had been set out in the documents and fair notice had been given of
what the defender intended to prove. Every transaction over the three-year period referable
to the director’s loan account and in relation to Impact would be proved. All of the
transactions were set out. The idea that the payment of £150,000 on 12 August 2015 to the
defender himself was detrimental to the general body of creditors meant that a lot of other
payments in the preceding six months, none of which had been challenged, had the same
effect. There was no difference in the net worth of the Company arising from this
transaction; sums were put in and were taken out. There was no prejudice to creditors. In
terms of section 243 of the 1986 Act, this would be regarded as payment in the ordinary
course of business of a debt actually due. It was in accordance with how matters had been
conducted over the three-year period. Short-term advances were repayable on demand
whenever the defender as director called for them. Evidence had been provided to back up
each transaction and every debit and credit. Throughout the three-year period the defender
had acted in the interests of the Company. His actions in making payments had been to help
the Company. He was under no obligation to put monies into the Company in the first
place. The kind of transaction which occurred here was quite different from those within the
case law to which senior counsel for the pursuers had referred.
[33] In seeking to understand Mr MacLure’s affidavit, it should be noted that the
Company’s trade was primarily to supply fuel to fishing vessels. This was a market which
ASCO did not wish to engage in directly but did wish to do so indirectly, in effect through
the Company. The sums due to ASCO included fuel duty and VAT. Fuel duty and VAT
were reclaimed by the Company on a monthly basis. Accordingly, the figures stating sums
said to be due to ASCO were distorted by the inclusion of fuel duty and VAT. These made
the deficit seem much worse than was actually the case.
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[34] In relation to the credit period with ASCO, the implicit terms worked to override the
written agreement. ASCO accepted the trading terms for supply at, and during, meetings. It
would provide whatever credit was needed to allow the Company to grow its business and
thus grow ASCO’s business.
Reply for the pursuers
[35] Senior counsel for the pursuers made five brief points in reply. Firstly, the defender’s
reliance on section 243 of the 1986 Act was misconceived. None of the points made about the
sums being cash payments of debts actually due in the ordinary course of business assisted
in relation to the case actually being advanced at debate. Secondly, there were matters of
factual dispute, but the extent to which Mr Wood contested the affidavit evidence was
principally in relation to Wendy Lipkovics. The essential factual propositions which had
been advanced on behalf of the pursuers were plainly not in dispute. Thirdly, in relation to
the subsidiary point about Impact, if the defender wished to make good the proposition that
Impact used its money to pay the Company on his behalf he must make averments to that
effect. It would not do to say, as he did, that it could be a dividend or loan. It was not
appropriate to have various possibilities hanging in the air. The position as pled was that the
£100,000 was owed to him and so payment by Impact to the Company discharged an
existing obligation to him, but no averments were made in support of that assertion.
Fourthly, in relation to fuel duty and VAT refunds, these had been taken into account. The
figures given in the affidavit of Mr MacLure were contained in a spreadsheet he had
produced which took into account these refunds, hence their characterisation in the
spreadsheet as an asset. Lastly, the averments which the pursuers submitted should be
excluded were identified.
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Reply by the defender
[36] The defender repeated his position that the £100,000 payment by Impact was money
due to him and it was irrelevant on what basis it was due. He could take money from
Impact as its sole director and sole shareholder.
Decision and reasons
Insolvency
[37] In his averments and submissions the defender contended that as at 12 August 2015
the Company was not insolvent. In order for the common law duty founded upon by the
pursuers to be engaged, the Company must have been, as at 12 August 2015, (to quote from
the case founded upon by the pursuers) “insolvent or of doubtful solvency or on the verge
of insolvency”. It is, in my opinion, clear from the information provided, and in particular
the contents of the affidavits of Mr MacLure and Mr Walker (which, as I have noted, were
very largely undisputed by the defender) that as at 12 August 2015 the Company was not
able to pay its debts as they fell due. ASCO was pressing for payment of sums due. The
uncontested position put forward in Mr Walker’s affidavit was that by 31 July 2015, sums
outstanding for more than 70 days, and thus well outwith the credit period, totalled more
than £1 million. The email of 7 August 2015 made clear that the Company had not been able
to make the normal weekly payment due to ASCO but said the payment should be able to
be made at the start of the next week. The sum due was in fact never paid.
[38] On the defender’s own account of matters, the only way of obtaining finance to stop
the debt growing would have been for ASCO to release its security so that it could be used
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in security for further funding from elsewhere. It was, however, clear to all involved that
ASCO would not release the security.
[39] In relation to payment terms, it is correct that historically ASCO had tolerated delays
in payment by the Company, even though these had resulted in sums being paid outwith
the terms of the contract. The defender submitted that ASCO had agreed that it would
provide credit as and when necessary and that no specific period for credit was identified.
But no real basis was presented for concluding that the terms of the fuel supply agreement
had ever been altered so as to give this different, and indeed unspecified, credit period from
that stated in the agreement. The defender did not contend that the fuel supply agreement
was not binding on the Company. In relation to the fuel supply agreement, he averred:
“It has no specific terms within it therefore under implied terms as held under Scots
law, the existence of three years precedent established the terms on which any
demands for payment should be based.”
However, the defender accepted as accurate the points made in Mr Walker’s affidavit, which
included his explanation of the true position on the credit period as agreed in the express
terms of the fuel supply agreement. I was not addressed by the defender as to how the test
for implication of terms could be met, but it is trite law that an implied term cannot
contradict an express term. In any event, he had in his averments wrongly (as I took him to
concede) proceeded upon the basis that there were no express terms on when payments fell
due. The defender has no relevant case that ASCO was seeking payment earlier than the
payment terms agreed between it and the Company.
[40] The defender’s averments about ASCO acting in an unreasonable manner are of no
relevance and in any event do not fit with Mr Walker’s undisputed evidence in his affidavit.
The defender’s averment that the fact that the Company was not insolvent at the point of
administration was reflected in the return to creditors which had been achieved, was simply
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not vouched or developed. It provides no relevant basis for a defence. It was plainly
contradicted by the affidavit material, which he accepted. There was no suggestion of a full
return of debts due to creditors which, on the clear evidence of Mr Walker, as accepted by
the defender, was in any event impossible.
[41] Nothing was put forward by the defender which would allow me to conclude that he
had a relevant case that the Company was solvent as at 12 August 2015. It was plainly
unable to pay its debts to ASCO as they fell due and so was insolvent for the purposes of
section 123(1)(e) of the 1986 Act. There is no basis for concluding that this was a result of
merely temporary cash flow issues. The amount due was substantial. Mr MacLure stated in
his affidavit that following administration there was a £5.3m shortfall to ASCO.
Mr MacLure’s position, that the Company was also balance-sheet insolvent (for the purposes
of section 123(2) of the 1986 Act), was not contradicted by the defender and indeed he
accepted the contents of Mr MacLure’s affidavit as true. I therefore also accept
Mr MacLure’s position on insolvency. As to the defender’s knowledge of the situation, his
position that there was never any mention of the possibility of the Company being placed in
administration is of no direct relevance. The important point is that he was aware of the debt
to ASCO and of the fact that the Company was unable to pay it as and when it fell due. Any
reasonable person in his position must in any event have been aware of the true financial
situation and that insolvency proceedings might well occur. I therefore conclude that the
Company was not merely of doubtful solvency or verging upon insolvency but that it was
actually insolvent as at 12 August 2015 and that this was something the defender knew or at
least ought to have known about. I base these conclusions on the facts and circumstances as
clarified by the documents and affidavits and as accepted by the defender in his
submissions. I am not therefore resolving a factual dispute but simply proceeding on the
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basis of the admitted facts and circumstances. The defender’s assertions that the Company
was not insolvent on 12 August 2015 require to be viewed in the context of his submissions,
and admissions, and accordingly are irrelevant.
Directors’ duties
[42] The defender contended that the £150,000 he received on 12 August 2015 was a sum
due to him by the Company, which was paid in the ordinary course of business, and that
there was no prejudice to the general body of creditors. He explained the background to
similar short term payments by him to the Company and these being repaid in return. I have
set out his averments and submissions in summary above.
[43] The duties of company directors were codified in the Companies Act 2006.
Section 170(3) of the 2006 Act provides that the general statutory duties replace the common
law rules and equitable principles from which they are derived. Section 172(1) provides that
it is the director’s duty to act in the way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole. Section 172(3)
specifies that the duty to promote the success of the company for the benefit of the members
as a whole is subject to any enactment or rule of law requiring directors to consider or act in
the interests of creditors of the company. There is no doubt therefore that section 172(3)
preserves the common law position and makes no alterations to it. The defender did not at
any stage contend that the pursuers’ position as to the nature and extent of the common law
duty was incorrect.
[44] As I have noted above, the pursuers’ case based upon the common law duty is an
alternative to the claim under section 243 of the 1986 Act, which deals with unfair
preferences. That section applies to preferences created in favour of a creditor in prejudice to
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the general body of creditors, not earlier than six months before the commencement of, in
the present case, administration. Such a payment to a creditor could of course be to a
company director to whom a debt was due, but the scope and effect of the provision is much
wider as it applies, subject to section 243(2), to payments to any creditor.
[45] There are other statutory provisions of relevance to actions against directors. These
include the provisions which appear under the heading “Penalisation of directors and
officers” in sections 212-214 of the 1986 Act. These sections are restricted to winding up and
do not apply to administration. Section 212 provides for a summary remedy against
directors who have committed a misfeasance or breach of any fiduciary or other duty to the
company. Sections 213 and 214 deal respectively with fraudulent trading and wrongful
trading. In relation to remedies open to administrators, section 246ZA and 246ZB of the 1986
Act add, respectively, remedies based on fraudulent trading and wrongful trading, in
essentially identical terms to sections 213 and 214, with effect from 1 October 2015.
However, there is no provision for the remedy under section 212 being available to
administrators.
[46] The fact that no remedy is available to an administrator under section 212 is of no
particular consequence for present purposes. Section 212 does not establish any new species
of wrong but provides merely a summary remedy: it is a framework within which
proceedings can be brought in respect of inter alia breach of fiduciary duty, but it does not
restrict proceedings for breach of duty to an application under that section.
[47] In passing, and by way of contrast, I note that under section 214A of the 1986 Act
where withdrawals of property (including money) from a limited liability partnership have
been made by a member of the LLP within two years of winding-up, the member can be
required to restore the property if, inter alia, it is shown that he knew or ought to have
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concluded that at the time of the withdrawal the LLP was insolvent and that there was no
reasonable prospect of it avoiding insolvent liquidation. I mention this provision simply to
further illustrate the somewhat varied approach in the statutes to the rights of recovery, on
insolvency, against those involved in corporate entities. It also illustrates that a claim based
upon a statutory provision may require the satisfaction by a pursuer of criteria which are
not, as I shall discuss further below, required to be met at common law.
[48] The common law duty of directors in respect of creditors is not restricted to
preferences and is therefore of broader scope than section 243. If the pursuers in the present
action are correct, then where a preference has been given to a company director there is an
alternative basis for recovery to that under section 243.
[49] Where the only case made against a company director who has allegedly received a
preference is based upon section 243, it is of course a relevant defence under section 243(2)
that the transaction was in the ordinary course of business: Liquidator of 3G Design
the director is made, based upon breach of fiduciary duty, that raises the question of
whether the director is liable to restore the amount received, notwithstanding that he could
have avoided liability in terms of section 243. The common law duty relied upon by the
pursuers is founded on a different legal basis from section 243 and is targeted at directors,
whereas liability under section 243 targets the preferred creditor, not the director who
caused the preference to be made.
[50] It is important to recognise that there are significant issues of principle arising as to
the scope of the common law duty relied upon by the pursuer and how it interacts with the
statutory provisions on preferences. For example, where a director of an insolvent company
causes a preferential payment to be made to one creditor, who is unconnected with the
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25
company, the question arises as to whether that is a breach of the common law duty by the
director who authorised the payment. If so, the further question arises as whether recovery
can be made at common law where no claim could be made under the relevant statutory
provision (section 239 in England or section 243 in Scotland). If these questions are answered
in the affirmative, then the common law duty provides a means of recovery where the
statute does not and the director can be targeted for repayment rather than the third-party
creditor. That is not the issue which arises in the present case, where the recipient of the
payment was not a third party but was the director. The issue here is a narrower one, but
still of some significance: if the preferential payment is authorised by and made to a director,
is he liable at common law to restore it to the company, even where he could invoke a
defence to the claim under the statute? An essential feature of the defender’s position in the
present case is that he has a defence to the claim based upon section 243 of the 1986 Act. He
is a party litigant and did not address the court on the legal question of how that defence
might apply to the claim based upon the common law duty. It is therefore appropriate that I
consider the authorities on whether that defence means that the common law duty will not
provide a remedy to the pursuers.
[51] So far as the common law position in Scotland is concerned, it suffices to refer to
certain authoritative observations made in a recent case, which are based upon older
authority. In Joint Liquidators of Grampian Maclennan's Distribution Services Ltd v Carnbroe
Estates Ltd [2018] CSIH 7, in the context of the law on gratuitous alienations, Lord
Drummond Young referred to the passage in Bell, Commentaries, ii 170, founded upon by the
pursuers in the present case (referred to above), and stated:
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26
“[14]…once a debtor is insolvent, his assets must be managed in such a way as to
protect the interests of his creditors. The reference to acting as a trustee or negotiorum
gestor points towards what in modern law is described as a fiduciary duty, under
which a person, in this case the debtor, must always act, in a defined area, in the
interests of another person rather than his own interests or the interests of his family
or friends. That is the general principle that underlies the Scots law of insolvency.
…
[16] The foregoing summary of the law also applies, in the case of entities with legal
personality, to those managing the entity. Thus company directors (who are
themselves subject to fiduciary duties towards the company) must ensure that in a
case of insolvency the company acts with proper regard to the interests of its general
creditors. Likewise, partners (who are subject to fiduciary duties towards the
partnership) must conduct the affairs of the partnership in such a way that the
interests of its general creditors are not prejudiced. The "creditors" in question are the
creditors as a general body.”
[52] The key elements of the common law duty are further explained in Bilta (UK) Ltd (in
and Lord Hodge JJSC at paragraphs [123] - [127], under reference to West Mercia Safetywear
Ltd v Dodd and another.
[53] The scope and effects of the common law duty stated in the English case law remain
the subject of some uncertainty, at least as regards precisely when the duty is triggered and
what is required by directors to comply with the duty (see eg Keay, Directors’ duties and
creditors’ interests, (2014) 130 LQR 443) and how it applies to preferences (see eg van
Zwieten, Director Liability in Insolvency and Its Vicinity: West Mercia Safetywear Ltd v Dodd
Revisited (January 2017), Oxford Legal Studies Research Paper No. 38/2017,
https://ssrn.com/abstract=2970913). In several cases, there has been held to be no liability for
breach of the common law duty in respect of payments authorised by directors in favour of
third parties. In Facia Footwear Ltd (in Administration) v Hinchcliffe [1998] 1BCLC 218, where
administrators sought summary judgment against directors for repayment of sums alleged
to have been improperly paid, the view was reached that, as no point had been taken about
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fraudulent preference, the act of authorising the repayment in question could not be
described as a misfeasance. In Knight v Frost [1999] BCC 819, [1999] 1 BCLC 364, it was
concluded that West Mercia Safetywear Ltd v Dodd and another was not authority for the
proposition that a director who for his own purposes caused the company to prefer one
creditor to another, outside the time period covered by the statutory provision, was liable to
replace that money at the suit of the company. In Singer v Beckett; Re Continental Assurance
Company of London Plc (in liquidation) [2007] 2 BCLC 287, [2001] BPIR 273, it was held that the
condition in section 239(5), that the company must have had a purpose of preferring one
creditor over another, was not met, and that it would be entirely wrong to use a misfeasance
action to get round the liquidator’s inability to use the statutory provision. In Re Brian
D Pierson (Contractors) Ltd [1999] BCC 26; [2001] 1 BCLC 275, it was observed that even if
there was a breach of the statutory provision, that did not necessarily mean that the common
law duty had also been breached. The judge further noted that in West Mercia Safetywear Ltd
question consisted of acts by the directors in the form of a conscious application of the
company's funds for the known purpose of preferring their own, or their associate's,
interests and so was a misapplication of those funds.
[54] In several more recent cases, where a preferential payment was made at least to some
extent in the director’s own interests, the common law duty has been held to have been
breached. In Liquidator of Cityspan Limited v Clark 2007 EWHC 751 (Ch), three repayments of
directors’ loans, made in the month prior to the commencement of insolvent liquidation
proceedings, were held to have been made in breach of the common law duty. Interestingly,
one of the repayments was made to another director, but nonetheless the director who
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(Ch) preferential payments made when the company was insolvent to the director himself,
to the parent company which he also controlled and to the bank (the debt to which had been
guaranteed by the parent company), were held to have been made in breach of the common
law duty. An application to amend the pleadings to bring in an alternative claim based upon
the statutory provisions on preferences had been refused and this case therefore supports
the view that the common law duty can provide a basis for recovery irrespective of whether
recovery under the statute is sought or available. In Cosy Seal Insulation Limited (in
payments on insolvency made to the director himself and to a related company were
breaches of the common law duty, as well as being recoverable under the statutory
provision. The common law duty was also held to have been breached in Re Micra Contracts
Ltd (in liquidation) [2016] BCC 153, when payments were made on insolvency to a related
made to directors’ loan accounts on insolvency.
[55] The relevant statutory provision in England (section 239) is not in the same terms as
the provision which applies in Scotland (section 243) and it is necessary to be mindful of the
differences when considering the case law. However, what in my view the more recent
English cases demonstrate is the point of principle that, as Lord Drummond Young
observed, the common law duty requires the director of an insolvent company to act in the
interests of the creditors rather than in his own interests. There is some debate about
precisely what is meant by the concept of fiduciary duty on the part of company directors,
and in particular whether it connotes only proscriptive duties (negative or prohibitory
duties, not to act in a particular manner, such as to have conflicts of interests or to make
unauthorised personal profit) or whether it includes prescriptive duties (positive or
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mandatory duties, to act in a particular manner, such as to promote the interests of the
company or to exercise powers for a proper purpose). The common law duty derived from
West Mercia Safetywear Ltd v Dodd and another could arguably be regarded as prescriptive.
Scots law would in my view treat at least some of the prescriptive duties of company
directors, including this common law duty, as fiduciary in nature (as does English law: see
Lord Toulson and Lord Hodge). However, there can be no real doubt that the (proscriptive)
duty of a director, on insolvency, not to put his own interests before those of the general
body of creditors falls to be regarded as a fiduciary duty. It is that refined version of the
common law duty, proscribing acts by the director which are in the director’s own interests
and not in the interests of the creditors, which I regard as applicable here.
[56] It is clear that section 172(3) preserves the common law position with regard to
fiduciary duty, including the principles stated in Bell, Commentaries and the law as stated in
Bilta (UK) Ltd (in liquidation) and others v Nazir and others (No 2). It also clear that, whatever
differences as to scope and effect of the common law duty one can find in the case law, such
as at what precise point before actual insolvency the duty to consider the interests of
creditors would come into operation, the common law is absolutely clear that where
insolvency has occurred, the duty plainly applies. I accept the view (see Palmer, Company
Law, 8.2625) that the duty is owed by the director to the company and not to the creditors
themselves, but on insolvency it is the creditors who have the interest in the company’s
assets. In terms of the duty I have described, on insolvency a director is obliged to take into
account the interests of creditors and cannot act so as to put his own interests before theirs
and leave the creditors in a worse position than on liquidation. The central approach to
insolvency in Scotland is to treat the creditors as a general body, as Lord Drummond Young
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explained in Joint Liquidators of Grampian Maclennan's Distribution Services Ltd v Carnbroe
Estates Ltd. Preferential payments to a director himself are very obviously against the
interests of the creditors as a general body.
[57] The defender maintains that the £150,000 paid on 1 August 2015 was in respect of a
debt actually due. The result of the payment, he says, was not to cause any loss to the
Company or to create any profit or benefit to the defender; rather the Company paid a debt
which was due and hence its balance sheet was unaltered by the payment and the defender
simply got back what was, he claims, due to him. In other words, so the argument ran (at
least implicitly), the lines of defence under section 243 can have force also in relation to the
common law claim. The view has been expressed in England that, as the duty is owed to the
company, any loss, if it is going to be recoverable by way of an action for misfeasance or
breach of duty, must be loss suffered by the company. Where the payment made by the
company is in respect of a liability, it can be said that the company’s net position is
unchanged and it has suffered no loss, albeit that the general body of creditors have suffered
a loss (see Singer v Beckett; Re Continental Assurance Co of London Plc (in liquidation)).
Similarly, where the director has been paid sums due to him, it can be contended that he has
J dealt with a claim for a breach of duty by a director where a preference was alleged. He
said:
"It seems to me that a company seeking redress in respect of a ‘preference’ to which
section 239 does not apply is likely to need to show (a) that it has suffered loss, (b)
that the director has profited (so that the ‘no profit’ rule operates) or (c) that the
transaction in question is not binding on the company."
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31
The judge went on to say that establishing the first or second of these points may be difficult.
The defender here contends that they are not established. Plea-in-law 4 for the pursuers is
that the Company has suffered loss and damage because of the payment.
[58] In my opinion, those arguments do not detract from, far less displace, the force of the
contention that the defender is liable to make repayment on the basis that he is in breach of
his fiduciary duty by putting his own interests before those of the general body of creditors.
In that regard, I rely principally upon the observations by Lord Drummond Young quoted
above and I note that in several cases in England a similar view has been reached. On
insolvency, the assets of the company are to be managed, through the medium of the
company, in the interests of the creditors. In those circumstances, it is not in my view
necessary for the pursuers to prove that the Company has suffered a loss in the conventional
sense. The funds available to the Company to meet the claims of the general body of
creditors were depleted. The director benefited, in the sense that he received payment in full.
On restoration of the sums, if it is established that he is a creditor, he can rank accordingly. It
is in my view a sufficient basis for restoration to be due by the defender that the payment
was made, on insolvency, by the Company to the director himself and that he caused the
misapplication of the funds. Plea-in-law 4 for the pursuers must be read in the context of the
duty said to have been breached: a loss was suffered in the sense that funds left the
Company when insolvent, to the benefit of the defender, against the interests of its creditors,
and hence on an improper basis.
[59] There is also consideration in the case law as to whether the test to be applied for
breach of a director’s duty is subjective or objective. There is an established principle that the
test is subjective (see eg Re Regentcrest plc v Cohen [2001] 2 BCLC 80) and hence that the
question is whether the director had an honest belief that his act or omission was in the
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interests of, in this case, the general body of creditors. In Re HLC Environmental Projects Ltd,
deputy judge John Randall QC explained that this general principle of subjectivity is subject
to qualifications arising from other cases, including that, where there is no evidence of actual
consideration of the best interests of the company, the test is an objective one based on
whether an intelligent and honest man in the position of the director could, in the
circumstances, have reasonably believed that the transaction was for the benefit of the
company (see also Charterbridge Corporation Ltd v Lloyd’s Bank Ltd and another). Having
regard to the defender’s averments and submissions, the present case falls into the latter
category. However, even if the test in this case was purely about the defender’s subjective
belief, no averment was made, and no other basis presented, supporting a contention that
the defender honestly believed the transaction on 12 August 2015 to be in the interests of the
general body of creditors.
[60] I note that there is support in the case law for the proposition that in a case of this
kind, based upon the common law duty, if a director is himself the recipient of a benefit
from the company, the burden of proof falls upon him to prove that the payment was
proper: see Re HLC Environmental Projects Ltd; Idessa (UK) Ltd (in liquidation) v Morrison
relevant averments which would allow him to discharge the burden of proof.
Conclusions on debate issues
[61] In moving that decree de plano should be granted, the pursuers relied upon the
failure of the defender to provide any substantive response to the detailed averments made
by the pursuers as to the financial position of the Company. It was submitted that this led to
the conclusion that the pursuers’ averments should be taken as having been established.
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Reliance was placed upon three cases: EFT Finance Ltd v Hawkins; Ellon Castle Estates
Company Ltd v MacDonald; and Albyn Housing Society Ltd v Active Sustainable Energy Systems.
Senior counsel for the pursuers also referred to contrary views expressed in Gray v Boyd 1996
SLT 60, in which the Lord Justice-Clerk (Ross) and Lord McCluskey had observed, under
reference to the approach taken in the first two of these three cases, that to treat a general
denial as an implied admission was unsound. I note that in Marine & Offshore (Scotland) Ltd v
[62] I have come to the view that this is not an issue which I need to consider. Having
heard submissions on the facts from both parties, and having afforded them the opportunity
to refer to material other than the pleadings, it would in my view be artificial to ignore those
submissions and that material and focus only on the averments made. I do not consider that
the defender’s position at the hearing was uncandid: he explained his account of matters in
his affidavit, he frankly accepted in submissions that the meeting about some form of
takeover by ASCO had not taken place prior to the withdrawal of the £150,000 and hence
could not be relied upon, and, importantly, he also candidly accepted in submissions most
of the information contained in the affidavits sworn by Mr MacLure and Mr Walker.
[63] The approach which I take is therefore to consider the defender’s averments in the
context of the submissions, including admissions, which he made. The result of doing so is
that I reject as irrelevant the defender’s position in relation to solvency of the Company as at
12 August 2015, for the reasons given earlier. In relation to the allegation of breach of
fiduciary duty, the defender has no relevant averments, and made no case in submissions, to
the effect that he considered or acted in the interests of the creditors. In short, I accept the
pursuers’ submissions that the defender has no relevant case which could constitute a
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defence to the common law claim for repayment of the £150,000. On that basis, and on the
admitted facts and circumstances, I grant decree de plano as second concluded for.
[64] I now deal with the secondary issue at debate, the relevancy or otherwise of the
defender’s averments regarding the payment of £100,000 by Impact Trading Limited. The
defender’s position on averment is that this was a payment made to the Company from
funds due to the defender by Impact. He further avers that it was his usual practice to make
inter-company payments and that at the time of the transfer the payment was recorded in
the Company’s books as a credit to the defender’s loan account. The thrust of the pursuers’
criticism of the defender’s pleadings is that the basis upon which this sum is said to be due
by Impact to the defender is not specified; despite repeated calls, the defender had failed to
provide any such specification and the director’s loan account for Impact contained no entry
indicating any indebtedness to the defender. The pursuers aver that:
“the defender’s averments do not disclose any basis for it to be held that the payment
was not simply that which the known facts establish, namely, that it was a payment
made by Impact in partial discharge of the substantial sums which it then owed to
the Company”.
As I have noted above, in submissions the defender argued that the basis upon which the
sum was due to him was not of any significance. Impact was a company owned and
controlled by him and he could draw upon its funds.
[65] In Answer 6, the defender makes detailed averments about the Company’s sales
ledger and purchase ledger, which covered the trading account with Impact at the material
time. These showed sales and purchases, and payments and receipts. The £100,000 payment
does not feature. Had it been a payment due by Impact to the Company, the defender
contended, it would have been recorded in the ledgers.
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[66] Based on the parties’ averments and the documents incorporated therein, and their
submissions, I am not satisfied that I can at this stage take the payment by Impact to the
Company as having been established to be in respect of a debt due by Impact. Clearly, in
determining the question of whether a sum received by the Company from Impact was in
fact a payment on behalf of the defender, evidence of indebtedness by Impact to the
Company will be relevant, as will evidence of whether money in the hands of Impact was
owed to, or otherwise available to be used by, the defender. The defender’s position on
whether the sum was owed to him, or otherwise available to him, and as to the lack of
entries in the trading ledgers raise matters to be explored at proof. I am therefore of the view
that this secondary issue is one upon which evidence is required and I reject the pursuers’
contention that the defender’s averments on it should be excluded from probation.
Conclusions on motion for summary decree
[67] The principles to be applied and the test to be met in order for summary decree to be
granted are set out by Lord Rodger of Earlsferry in Henderson v 3052775 Nova Scotia Ltd. For
present purposes the key points are as follows: (i) rule 21.2 applies where the court is
satisfied that there is no defence to the action disclosed in the defences; one reason why a
court may be so satisfied is because the defences, taken pro veritate, are legally irrelevant; (ii)
the test of the relevancy of a defender's averments must mirror the test of the relevancy of a
pursuers’ averments, as laid down in Jamieson v Jamieson 1969 SLT (Notes) 11; thus, a
pursuer may be granted summary decree on the ground that the defences are irrelevant if
the judge can be satisfied, without the need for prolonged legal debate, that there is no
defence to the whole or part of the action because, even if the defender succeeds in proving
all that he avers, still his case must fail; (iii) a pursuer who seeks summary decree does not
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need to advance an argument that the defences are irrelevant since the rule is not confined to
questions of relevancy; the court is not confined to considering the defender's averments
and the rule envisages that the court may look beyond the pleadings and consider what, in
substance, each of the parties and, more particularly, the defender is saying; (iv) the rule
must not be applied in a way that would cause injustice by denying a defender the
opportunity to prove averments which could provide a defence to the whole or any part of
the claim against him; (v) a judge who is considering a motion for summary decree is
entitled to proceed not merely on what is said in the defences, but on the basis of any facts
which can be clarified, from documents, articles and affidavits, without trespassing on the
role of the proof judge in resolving factual disputes after hearing the evidence; (vi) the judge
can grant summary decree if he is satisfied, first, that there is no issue raised by the defender
which can be properly resolved only at proof and, secondly, that, on the facts which have
been clarified in this way, the defender has no defence to all, or any part, of the action. In
other words, before he grants summary decree, the judge has to be satisfied that, even if the
defender succeeds in proving the substance of his defence as it has been clarified, his case
must fail.
[68] I have already concluded, on the facts and circumstances as clarified by the
documents and affidavits and as accepted by the defender in his submissions, that the
defender has no relevant defence to the claim for repayment of the £150,000 made by the
pursuers. There is no issue raised by the defender about this claim which can properly be
resolved only at proof. In my view, his case on this part of the action must fail. Accordingly,
the pursuer’s motion for summary decree is well-founded.
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Other matters
[69] One line of defence to a claim for breach of fiduciary duty is that disclosure to and
consent on the part of the person whose interests the fiduciary is looking after would negate
any breach. In the present case, no such defence of informed consent is averred. In any
event, the defender was the sole director of the Company and any contention that he could
properly have consented on behalf of the Company, or more particularly the creditors, does
not bear scrutiny; such actings would again necessarily involve an inherent conflict of
interests.
[70] In GHLM Trading Ltd v Maroo, Newey J considered that the route to obtaining
restoration of the sums paid out in breach of duty could be lack of authority on the part of
the director concerned, and that if the counterparty (recipient) knew about this then the
contract would be void. This is not an issue I need to consider further here because the
pursuers do not seek to go down the route of lack of authority.
[71] Similarly, there is some support in the case law for the view that a payment to a
director in respect of a debt due to him at a time when the company is insolvent can be
regarded as an exercise of powers (to make payment on behalf of the company) for an
improper purpose in terms of section 171 (b) of the 2006 Act (see eg Re HLC Environmental
Projects Ltd). Again, however, that line of argument is not advanced here and I need say no
more about it.
Disposal
[72] For these reasons, I shall grant decree in terms of the second conclusion. I shall also
sustain the pursuers’ third plea-in-law and exclude from probation the passage of the
defender’s averments in Answer 6 from the sentence beginning “The pursuers’ argument is
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irrelevant…” to and including the sentence ending “…the Company was insolvent and
should be dismissed.” The case will be put out by-order to deal with further procedure. In
the meantime, I reserve all questions of expenses.