British
and Irish Legal Information Institute
Freely Available British and Irish Public Legal Information
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> DONALDA THERESA SWEENEY IN RELATION TO THE WINDING UP OF WEST LARKIN LTD [2020] ScotCS CSOH_9 (14 January 2020)
URL: http://www.bailii.org/scot/cases/ScotCS/2020/2020_CSOH_9.html
Cite as: 2020 GWD 4-63, [2020] ScotCS CSOH_9, [2020] CSOH 9
[New search] [Printable PDF version] [Help]
Page 1 ⇓
OUTER HOUSE, COURT OF SESSION
[2020] CSOH 9
P517/19
OPINION OF LADY WOLFFE
In the Note
DONALDA THERESA SWEENEY
Noter
For an order in terms of rules 1.56 and 7.21 of the Insolvency (Scotland) (Receivership
and Winding Up) Rules 2018 in relation to the winding up of
WEST LARKIN LIMITED
Petitioner: O’Brien; TLT LLP
Respondent: Sandison QC; Currie Gilmour & Co
14 January 2020
Background
Liquidation of the Company
[1] On 12 December 2018 this Court directed that West Larkin Limited (“the Company”)
be wound up and it appointed Alexander Iain Fraser as interim Liquidator (“the
Liquidator”). The Company was placed into liquidation on the petition of the first
respondent, Amanda Urquhart. The second and third respondents, respectively the
Company and the Liquidator, have not lodged answers to this Note. Accordingly, I shall
refer to the first respondent as “the Respondent”. For completeness, I should record that
after the debate in this Note (which is hereinafter referred to as “Note 1”), I heard a debate in
Page 2 ⇓
2
a note presented by another member of the Sweeney family, namely by one of the Noter’s
sons, Joseph Sweeney. I shall refer to those proceedings as “Note 2”.
The judgment debt
[2] The Respondent was a creditor of the Company by virtue of an award of expenses in
her favour in an earlier litigation in this Court (concerning entries on the share register of the
Company) to which the Company and the Noter were also parties (“the share register
litigation”). It was explained in submissions that, while technically a party to that action, the
Company played no active part in the share register litigation. The Respondent’s position
was that the Noter had been the sole cause of the expenses in that litigation (see Answer 22).
Notwithstanding this factor, the Respondent obtained an award of expenses against the
Company as well as the Noter on a joint and several basis in the sum of £38,140.31 (“the
judgment debt”), with interest at 8% per annum from 2 August 2018 until payment. A charge
served on the Company shortly thereafter expired without payment and the Company was
placed in liquidation on the Respondent’s petition.
[3] It was also explained by way of background that the Company’s principal asset was
a parcel of land which had been the subject of dispute between two families, the Urquharts
and the Sweeneys, for several decades and which dispute had been productive of a number
of legal proceedings.
The Noter’s payment of the judgment debt
[4] In about mid-January 2019, a few weeks after the Company was put into liquidation,
the Noter’s agents wrote to the Respondent’s agents offering to pay the judgment debt. This
offer was declined and renewed repeatedly over the ensuing months, though the
Page 3 ⇓
3
Respondent’s agents finally accepted payment of the judgment debt after presentation of
this Note in June 2019 (see Statements 8 to 22 of the Note).
Rights of relief inter se co-obligants subject to a joint and several decree
[5] The Respondent resists the Noter’s demand for an assignation because she
anticipates that the Noter may seek to recover the sum she (the Noter) has paid to the
Respondent to satisfy the judgment debt. It is an example of a situation in which a person
(here, the Noter) seeks to recover a payment made by it to a third party (ie the Respondent)
pursuant to a common liability (ie the Noter as co-obligant with the Company for the
judgment debt). I shall refer to this as the Noter’s “right of relief” against the Company qua
co-obligant. (It may be contrasted with a right of indemnity, whose foundation is
contractual rather than restitutionary).
[6] On the facts of this case, the Noter may or may not seek repayment of a pro rata
contribution from the Company for a share of the judgment debt (and which, in the case of
two co-obligants, is be presumed to be equal shares). Given the liquidation of the Company,
the Noter would need to make a claim in the liquidation, in place of the Respondent, qua
creditor of the judgment debt. If that claim were accepted, even if not in its entirety, the
Noter would enjoy the rights available to a creditor to participate in the liquidation of the
Company, including exercising a vote and (if her claim is accepted for this purpose) drawing
a dividend.
The orders the Noter seeks
[7] As a consequence of the payment the Noter has made, and which the Respondent
has finally accepted, the Noter asserts:
Page 4 ⇓
4
1) that she is entitled to an assignation in terms of rule 7.21(4) of the Insolvency
(Scotland) (Receivership and Winding Up) Rules 2018 (“the Insolvency Rules”);
2) if the Respondent refuses, her refusal constitutes ”a failure to comply with any
requirement of the Rules” for the purposes of rule 1.56(1)(a) of the Insolvency
Rules and the court should rectify this; and
3) that, in alternative to (1), the court should grant an assignation in the terms set
out in the schedule to the Note.
The Respondent’s response to the orders the Noter seeks
[8] The Respondent argues:
1) that the Noter is not entitled to any order under rule 7.21;
2) that the Noter’s reliance on rule 1.56 is inept, as the Noter’s refusal was not the
kind of failure or error falling within the scope of that rule. That rule was
directed to curing technical deficiencies, not altering substantive rights; and
3) that in any event, even if an assignation was due, the terms of the Noter’s
assignation went further than any assignation she was entitled to in law.
Scope of Debate
[9] In the course of submissions it was agreed that, if the court were minded to grant an
assignation in the terms sought by the Noter, the court should put the case out By Order as it
was likely that the terms of an assignation could be agreed. Accordingly, I need only note
parties’ submissions in respect of the Noter’s orders under rule 7.21(4) and rule 1.56 of the
Insolvency Rules. I note the terms of those rules in the next two paragraphs.
Page 5 ⇓
5
The Insolvency Rules
Rule 7.21
[10] So far as material, rule 7.21 of the Insolvency Rules provides:
“7.21
Liabilities and rights of co-obligants
(1) Where a creditor has an obligant bound to the creditor along with the
company for the whole or part of the debt, the obligant is not freed or
discharged from liability by [various matters are specified that are not here
relevant].
[…]
(4) The obligant may require and obtain at the obligant’s own expense from
the creditor an assignation of the debt, on payment of the amount of the
debt, and on that being done may in respect of the debt submit a claim,
and vote and draw a dividend, if otherwise legally entitled to do so.
(5) Paragraph (4) is without prejudice to any right, under any rule of law, of a
co-obligant who has paid the debt…”.
(Emphasis added.)
Parties differed as to whether the words underlined at the end of rule 7.21(4), “if otherwise
legally entitled to do so”, qualified the whole of that sub-paragraph (as the Respondent
argues) or only the phrase “submit a claim, and vote and draw a dividend” (as the Noter
argues).
Rule 1.56(1)
[11] Rule 1.56(1)(a) of the Insolvency Rules provides:
“(1) The court may, on the application of any person having an interest-
(a) If there has been a failure to comply with any requirement of the Act or
the Rules, make an order waiving any such failure and, so far as
practicable, restoring any person prejudiced by the failure to the position
that person would have been in but for the failure….”
[12] Rule 1.56(2)(a) provides that an order under this rule “can dispense with the
performance of any act in the insolvency proceedings”.
Page 6 ⇓
6
Submissions
[13] I have had regard to parties’ Notes of Argument and the volume of authorities
provided in advance of the Debate. Parties’ arguments are summarised in the following
paragraphs.
Submissions on behalf of the Noter
Assignation based on rule 7.21(4) of the Insolvency Rules
[14] Mr O’Brien, Counsel for the Noter, submitted that consequent upon the Noter’s
payment of the judgment debt to the Respondent, this case fell squarely within rule 7.21(4).
The Noter was “an obligant bound to the [Respondent] for the whole or part of the debt”:
rule 7.21(1). The Noter has made “payment of the amount of the debt”: rule 7.21(4).
Therefore, the Noter is entitled to an assignation of the debt: ibid. That was the natural
meaning of the rule. In respect of the Respondent’s arguments, to the effect that (i) the rule
only applied where the co-obligant was entitled to recover a contribution from the Company
and (ii) the Noter was not entitled to do so here, the Respondent was wrong on both points.
[15] Looking at rule 7.21(4), this had two parts: the first was that an obligant (here, the
Noter) was enabled to require and obtain at her own expense an assignation from the
creditor (here, the Respondent), on payment of the amount of the debt; and, secondly,
having done so, the Noter was entitled to submit a claim in the liquidation, and vote and
draw a dividend, if otherwise legally entitled to do so. That last phrase - “if otherwise
legally entitled to do so” - only qualified the second part of the rule. The possibility of the
Company having a defence to the co-obligant’s (ie the Noter’s) claim arose only at the
Page 7 ⇓
7
second stage. It was irrelevant to the first stage, being the Noter’s entitlement to the
assignation.
[16] In relation to the Noter’s entitlement to a contribution from the Company, this
flowed from the consequences of the joint and several decree that the Respondent had
obtained. This was expressly on a joint and several basis and, having paid the debt, the
Noter was entitled to a contribution from the Company. While in Answer 22 to the Note,
the Respondent averred that the decree was not conclusively pro rata as between
co-obligants, Mr O’Brien submitted that that was wrong. Mr O’Brien relied on
Lord Watson’s observation in the House of Lords in the case of Palmer v Wick and Pulteny-
“the sum decreed [under a joint and several debt] is simply a civil debt, and the
meaning which the law attaches to a decree constituting a debt in these terms is, that
each debtor under the decree is liable in solidum to the pursuer, and that inter se each
is liable only pro rata, or, in other words, for an equal share with the rest”.
That was so, regardless of blameworthiness (per Lord Herschel LC at 41). He submitted that
this remained a correct statement of the law, as demonstrated by Lord Hodge’s comments in
paragraph 19.
[17] The Noter had a right of relief on a pro rata basis unless some exception to the general
rule applied. None was identified. The only consideration the Respondent had advanced
was that the Company had taken no part in the share register litigation. He submitted that
that amounted to no more than saying that the Respondent might have argued for a
different award of expenses. The Noter was entitled to a pro rata contribution from the
Company. The Respondents’ arguments resisting an order under rule 7.21(4) were without
merit and an order should be pronounced.
Page 8 ⇓
8
Remedy and waiver under rule 1.56(1)(a)
[18] If the Noter was correct, then there were two means by which the court could
overcome the Respondent’s refusal to grant an assignation: (i) by dispensing with any
requirement for an assignation, so that the winding up could proceed as if the assignation
had been granted. The basis for the latter was the court’s power, by virtue of rule 1.56(1)(a)
to waive any failure (“the waiver argument”), or (ii) by directing the Respondent to provide
an assignation (the issue of its precise terms was the argument held over).
[19] The Respondent had failed to comply with a requirement of the Insolvency Rules, by
not providing an assignation. The court could accordingly make an order waiving that
failure and restoring the Noter to the position she would have been in but for that failure.
Submissions on behalf of the Respondent
[20] The Respondent’s position was that the Note was irrelevant and fell to be dismissed.
Response to Noter’s reliance on rule 7.21(4) of the Insolvency Rules
[21] Mr Sandison QC, Senior Counsel for the Respondent, argued that rule 7.21 (whether
in its current or previous forms) was intended to do no more than reflect, as a matter of
liquidation procedure, rights of relief and rights to demand an assignation from a creditor
that may arise at common law. This was the impact of the last phrase of the current
emanation of the rule. Rule 7.21, as a whole, was principally concerned with ensuring that
the rules on ranking and distribution in an insolvency were not disrupted, especially to the
detriment of the bankrupt estate, where a creditor in an insolvency has recourse to a
Page 9 ⇓
9
co-obligant: cf Scottish Law Commission, Report on Bankruptcy and Related Aspects of Insolvency
and Liquidation (Scot Law Com No. 68, 1982) (“the SLC Report”), at paragraphs 16.26-16.28.
[22] He submitted that there were a variety of situations in which co-obligations can arise.
In this case, the co-obligation arises from a liability imposed by a decree of court granted
against the Noter and the Company, jointly and severally, in respect of an award of
expenses. In that particular context, it was, he submitted, important to note three basic
principles:
(1) Any right of relief is equitable in nature. This is consistent with the basic
rationale that the right of relief is based on recompense for unjustified
enrichment: Caledonia North Sea Limited v Lothian Bridge Engineering Limited 2000
SLT 1123 at pages 1141-1145 (Lord Rodger of Earlsferry), (“Caledonia”) and
Simclar, ibid, at paragraphs 19-20;
(2) Any assignation would only carry such share of the debt as would truly be
reflective of any right of relief enjoyed by the Noter against the Company,
because the working out of any true right of relief is the sole legal justification for
the grant of any assignation (see, Bell, Principles (10th ed) paragraph 558); and
(3) The right to demand an assignation was purely equitable in nature. A creditor
was entitled to refuse an assignation where he had a legitimate interest to do so,
or even if it would be reasonably likely to involve him in inconvenience and
trouble: see McBryde, Contract (3rd ed) at paragraphs 12-101 to 12-103; Mitchell v
McKinlay (1842) 4 D 634 at page 638 (Lord Moncrieff and Lord Justice-Clerk
Boyle) (“Mitchell”), and Bruce v Scottish Amicable Life Assurance Society 1907
SC 637 at page 643-644 (Lord President Dunedin) (“Bruce”).
For these reasons, the Noter’s reliance in the Note on rule 7.21 is irrelevant.
Page 10 ⇓
10
[23] Mr Sandison submitted that the Noter’s averments were premised on the bold
assertion that she is entitled to an assignation of the entire debt paid, simply in consequence
of such payment. He submitted that the Noter had not engaged with the Respondent’s
averments or the reasons given for continuing to refuse to grant an assignation. In
particular, despite detailed averments from the Respondent about the circumstances of the
award of expenses being made, the Noter had no relevant averments to support the
propositions (i) that the Company has been unjustly enriched at all by the Noter’s payment;
or (ii) that the liability for the decree for expenses properly falls to be regarded as even
pro rata as between her and the Company, let alone that she is entitled to receive an
assignation of the entire judgment debt. Mr Sandison reiterated the Respondent’s basic
concern, articulated in averments that, in fact, the Noter has no “true right of relief” from the
Company, a proposition with which, he submitted, the Noter failed to engage, let alone to
engage relevantly and specifically, in her pleadings. The Respondent reasonably
apprehended that the grant of an assignation in favour of the Noter would not be used for
the sole purpose for which she could properly be compelled to grant such an assignation
(ie to enable the Noter to work out her true right of relief, if any, against the Company), but
to enable the Noter to attempt to direct the liquidation in a way favourable to the interests of
her family in the context of a long-standing and bitter dispute about the land owned by the
Company and forming its sole asset. That, he submitted, was a legitimate reason for not
granting any assignation. However, the Noter simply did not address this in her pleadings.
The Noter bears to take a stand on the bald assertion that she has an absolute and
indefeasible entitlement to an assignation of the entire debt. That approach was, he
submitted, wholly misconceived.
Page 11 ⇓
11
Response to the Noter’s reliance on rule 1.56(1)(a) of the Insolvency Rules
[24] Mr Sandison’s submission was that this provision was wholly procedural in nature,
and intended to deal with administrative or technical failures. Reference was made to the
SLC Report ( at paras 7.41 to 7.47 and observations in Pattison v Halliday 1991 SLT 645 at
648C to F and 649B to D (per Lord Caplan) and Thomas’s Trustee, Noter 2003 SLT (Sh Ct) 99
at 101H to 102H (per Sheriff Principal Stephen). Such a power was not, he argued, intended
to be available to alter substantive rights and obligations imposed by mandatory statutory
provisions or common law. The Noter’s proposed use of the power here, to treat her as if a
creditor had assigned her debt, was misconceived.
Discussion
The Respondent’s invocation of unjustified enrichment to resist the Noter’s right of relief
[25] I consider first Mr Sandison’s submission that the principles of unjustified
enrichment apply. As I understand his argument, he relied on the proviso at the end of rule
7.21(4) as the basis for invoking this principle. Generally, in order to succeed in an action
based on unjustified enrichment, one party must show that the other party from whom
payment is demanded has been (or potentially has been) enriched at the claimant’s expense.
The party seeking to reverse that unjustified enrichment must also show (i) that the
enrichment by the prospective defender was unjustified, ie that there was no legal obligation
to benefit the defender, and (ii) that it is equitable to compel the defender to make payment
to the claimant to reverse that unjustified enrichment.
[26] In this case, the question of unjustified enrichment potentially arises between the two
co-obligants subject to the judgment debt, namely the Company and the Noter.
Accordingly, the party asserting unjustified enrichment must show that, as between the
Page 12 ⇓
12
Company and the Noter, the burden of paying the Respondent qua creditor rests in whole,
or at least in part, on the Noter such that it would make it unjust for the Noter to be relieved
of this whole (or partial) liability to the creditor (ie the Respondent) by reason of her
payment to the creditor.
The context in which disputed right of relief arises in this case
[27] As noted at the outset, the Noter was rendered liable, on a joint and several basis
with the Company, for the expenses in the share register litigation. The Respondent chose to
enforce this solely against the Company, as she is entitled to do (for the reasons explained by
Lord Young in the Inner House in Wick and Pulteny-Town Steam Shipping Co Ltd v
Palmer (1893) 20 R 275 at 285 (“Wick and Pultney-Town” and reported as Palmer in the House
of Lords). The Company having failed to satisfy the civil debt constituted by that decree, the
Respondent served a charge on the Company and, upon its expiry without payment, put the
Company into liquidation. It was explained in submissions that the Respondent was the
principal creditor in the liquidation on the basis of the judgment debt. In that capacity, she
will potentially have significant influence on the conduct of that insolvency process.
[28] At no point, apparently, did the Respondent seek to enforce that decree against the
co-obligant under it, namely the Noter. However, as also noted above, shortly after the
Company went into liquidation the Noter repeatedly tendered payment to the Respondent
qua creditor in respect of the judgment debt until that payment was ultimately accepted. As
a consequence of that payment, the Noter invokes rule 7.21(4) requiring the Respondent to
assign her claim (ie in respect of the judgment debt) to her. The practical effect, if that is
granted, is that if the Noter herself makes a claim in the liquidation, the Noter will achieve a
like position as the Respondent had had qua principal creditor of the Company in the
Page 13 ⇓
13
liquidation. This forms the basis of the Respondent’s apprehension, that the Noter will (as it
was put at paragraph 14 of her Note of argument):
“attempt to direct the liquidation in a way that is favourable to the interests of her
family in the context of a long-standing and bitter dispute about the land owned by
the [Company] and forming its sole asset….This is a legitimate reason for not
granting any assignation.”
How rights of relief can arise
[29] The circumstances of the Noter’s claim for an assignation are an instance where one
party, A (here, the Noter), having paid the whole of a debt (owed by D) to a creditor, C
(here, the Respondent), seeks repayment (in whole or in part) from D (here the Company)
on the basis that D has been enriched by A’s payment to C. A right of relief may arise in
many contexts. Other instances where a third party payer may seek to exercise a right of
relief include claims by a cautioner (being the payer, A) against the principal debtor (D), or
by a cautioner against a co-cautioner (eg because the principal debtor is insolvent); an
insurer who has paid an insured and who wishes to exercise rights of subrogation, to pursue
a party whose conduct may have caused the insured’s loss, or against another indemnity
insurer in respect of the same insured risk. The extent of any right of relief in the foregoing
examples (eg of cautioner against principal debtor, or among co-cautioners, or among
different indemnity insurers or re-insurers) will, generally, be defined by the relevant
contractual terms or by the applicable statutory provisions (an example of the latter is the
ultimate liability of a drawer of a bill of exchange to the acceptor thereof). Similar rights of
relief can arise as between co-defenders found liable for separate breaches of delict
(discussed in Palmer), in which case the court’s finding of their respective degrees of fault
will inform the extent of their respective individual liabilities inter se. (Another example,
albeit arising in a different context is the provision enabling one or more joint wrongdoers
Page 14 ⇓
14
called as defenders to an action for damages for any wrongful or negligent act to seek a
contribution, by virtue of section 3 of the Law Reform (Miscellaneous Provisions) (Scotland)
Act 1940.) In the present case, a statutory right of relief of a payer co-obligant (ie the Noter)
is provided for in statutory form, in rule 7.21(4) of the Insolvency Rules.
Restitutionary basis for rights of relief
[30] The position in Scots law as to the legal basis for a right of relief has been long-settled
(at least from the time of Stair), to be an obligation in recompense (or “unjustified
enrichment” in modern usage). As Stair explained:
“From the natural obligation of recompense doth arise the obligation of relief,
whereby, when many persons are obliged in solidum, and thereby liable conjunctly
and severally, payment or satisfaction made by one for more than his own share doth
oblige all the rest pro rata, although there be no conventional clause of relief, nor any
law or statute, but the natural obligation of recompence; for he who paid, not only
for himself, but for others, is not presumed to do it animo donandi.” (Emphasis
added). Inst I viii.9
See also Bell’s Principles, section 62. That this is the legal basis for rights of relief is affirmed
by Lord President Rodger (as he then was) in Caledononia at 1141F, where he referred to “the
obligation of relief based on unjustified enrichment [which] arises among co-cautioners and
other co-obligants in a joint and several obligation” and, a little further on, after
distinguishing between a right of relief and a right of indemnification, he reaffirmed “that
the obligation of relief is similar in each case (unjust enrichment)” (ibid at 1141G-H)
(emphasis added). It may be helpful to consider the practical stages by which a right of relief
is worked out.
Page 15 ⇓
15
Stage 1: Securing A’s entitlement to seek payment from D
[31] In the examples or rights of relief above (in para [29], there are generally two discrete
stages required to enable A to secure payment from the true debtor, D (ie as the principal
obligant or as a co-obligant with A), and for whom A has paid (in Stair’s formulation)
“more than his own share” to D’s creditor, C. The first step involves putting A into the place
of C so that he can exercise particular rights. With typical erudition, Lord Rodger traced the
early procedural device of constituting A as the procurator in rem suam of C (see Caledonia, at
p 1139L) as a form of subrogation, and the later use of an assignation (eg in favour of a
cautioner) consequent upon the cautioner paying the creditor of the principal debtor. In the
latter instance, the common law recognised that upon payment the cautioner had a right of
relief against the principal debtor and which “arises de jure without any formal assignation
by the creditor” (eg per Gloag and Irvine, Law of Rights in Security at 796-797, cited with
approval by Lord Rodger in Caledonia at 1141E-F). Lord Roger traced this back to the
benficium cedendarum actionum under Roman Law, which entitled the cautioner to demand an
assignation from the creditor in exchange for payment of the debt (see page 1142G-K/L, and
his citations inter alia of Bell’s Principles at paragraphs 255, 268). As it was explained by Lord
Chancellor Westbury in Ewart v Latta (1865) 3 M (HL) 36 at 40 (“Ewart”), “the surety also,
under certain circumstances, is, when he has paid the debt, entitled to stand in the shoes of
the creditor, and to be placed in possession of all rights possessed by him against the debtor,
and that, again, is called the right of relief”.
Stage 2: Liability inter se A and D
[32] The second stage is the procedure or means by which A, in exercise of rights
acquired from C, makes good that right of relief against D. A may acquire rights from C as
Page 16 ⇓
16
procurator in rem suam (see Lord Rodger in Caledonia, cit. supra), as assignee (whether express
or de jure), or under a contractual indemnity. Recourse is against D, “for the simple reason
that the principal debtor is the person who is to bear the final responsibility of paying the
debt to the creditor” (Caledonia at 1141K-L), whom I shall refer to as “the true debtor”. In the
case of a cautioner who has paid the debtor’s creditor, his claim would be for total relief
against the principal debtor as the true debtor; in the case of co-obligants, the right of relief
(sometimes referred to as a right of contribution) is for payment from a co-obligant (B) to the
extent to which A has paid “more than his own share” to A and D’s common creditor (C),
and to D’s (unjustified) enrichment. (The rule of public policy precluding recovery by one
wrong-doer against another was held not to apply in respect of persons found jointly liable
in delict: Palmer, cit. supra, in the House of Lords).
Stage 3: Division or apportionment of liability inter se A and D
[33] A further question may arise, namely, the working out of the contribution by
co-obligants correctly to reflect their respective shares of liability. Generally, subject to the
express terms of any contractual term to the contrary, the presumption is that the liability is
pro rata or an equal division among the co-obligants and, there is usually no dispute as to the
liability inter se co-obligants. The same presumption, although not termed as such, operates
in relation to a joint and several decree. This further question does arise in this case, albeit in
a particular and, perhaps unusual, way: the Respondent contends not only that the
apportionment of liability for the judgment debt inter se the Noter and the Company should
not be on a pro rata basis; but that, because (it is asserted) the Noter was wholly causative of
the expenses of the share register litigation, she should be solely liable for the award of
expenses represented by the judgment debt. If that is correct, the decree should not have
Page 17 ⇓
17
been taken on a joint and several basis against the Company. I will return to terms of the
decree below, at paragraph [46]. It is for this reason the Respondent invokes the equities (as
she would have it) of the Noter’s claim, on the basis that the proviso at the end of rule
7.21(4) is the means by which the Noter works out her true right of relief. I turn to consider
the meaning of that proviso.
The proviso at the end of rule 7.21(4): ”if otherwise entitled”
[34] The Noter’s position is straightforward, even mechanical: she has paid the judgment
debt in full to the Respondent (as creditor) and by virtue of rule 7.21(4) she is entitled to an
assignation of the Respondent’s claim against the Company based on the judgment debt.
There is no enquiry into the equities of her demand. It is the Respondent who relies on the
proviso at the end of rule 7.21(4), “if otherwise entitled”, to invoke the principles of
unjustified enrichment and to argue that, on the equities here, the Court should refuse to
order or sanction any assignation on the basis that the Noter was wholly responsible for the
expenses incurred in the share register litigation.
[35] Does the proviso permit such considerations, or does it do so at this stage?
Scope of the proviso at the end of rule 7.21(4)
[36] The origin of the right to an assignation from a creditor from a paying co-obligant is
early and well-established in the common law. See Bell Comm at ii 417 and 420, Ewart and
Harvie’s Trs v Bank of Scotland (1885) 12 R 1141 at 145 (“Harvie’s Trs”) (per Lord President
Inglis, albeit his general observation is obiter, as the decision in Harvie’s Trs turned on the
terms of the guarantee). The import of these authorities is that a co-obligant or cautioner is
not entitled to claim or draw a dividend out of the estate of the principal or true debtor,
Page 18 ⇓
18
except upon payment of the creditor’s claim and taking that creditor’s place. See also Bruce
at 643 per Lord President Dunedin and Villaswan Ltd in Receivership) v Sheraton Caltrust
limitations of the equitable and practical rule, (providing for an assignation in favour of the
person who pays the creditor) which are not here relevant). That common law rule now
finds expression in rule 7.21(4) of the Insolvency Rules. It was not suggested that the
statutory rule altered the common law on which it was based.
The rule against double-ranking
[37] The classic rights of a creditor in an insolvency process, whether bankruptcy or
liquidation, are to participate by way of vote and to draw a dividend, in accordance with the
creditor’s claim (to the extent accepted or adjudicated upon by the insolvency practitioner
for these purposes) and subject to the rules governing the ranking of claims. A creditor’s
rights can be subject to limitations.
[38] The rule against double-ranking is one of several well-established equitable rules in
Scots law in certain forms of collective insolvencies. (Other rules, including the treatment of
securities by ranking creditors and rules about catholic and secondary securities, involve
greater degrees of complexity and are not here relevant). The rule against double-ranking
only operates in some insolvency regimes. Generally, it requires as a precondition the
divestiture of the insolvent debtor of his estate and its transfer to a trustee in sequestration
(in personal bankruptcies) or to a liquidator to be applied for the general body of creditors,
after allowance for (ie deductions of the value of) securities, consequent on a ranking of their
claims. (It does not apply to private contracts of composition, because this does not involve
a universal divestiture of the insolvent.) In short, the rule against double-ranking provides
Page 19 ⇓
19
that the same debt cannot be ranked for more than once on the insolvent estate, whether by
the original creditor or by any person deriving right from him (ie such as an assignee of the
creditor). The classic description of the rule against double ranking may be found in
Mackinnon v Monkhouse 1881 9 R 393. As Lord President Inglis stated in that case (at
page 401):
“In a proper bankruptcy the debtor is completely divested of his estate, and the
trustee is completely invested in the property of that estate for behoof of the
creditors. There is, thus, a separation of interests between the bankrupt and what
was his estate. When the estate is divided among the creditors, the estate has paid
the debts so far as concerns the estate and the trustee who holds it, and of course the
estate and the trustee are discharged of each debt in consideration of the dividend
paid on it. But not so the bankrupt. He has not paid the debt. He remains
personally liable for the whole balance of the debt, beyond the dividend, unless
under the indulgent provision of the bankruptcy laws he succeeds in obtaining his
discharge. Until he obtains his discharge, he remains personally liable, and if,
through dishonesty or fraud, he never gets a discharge, his personal obligation is
perpetual, and will transmit, as an obligation, against anyone who is rash enough to
represent him.
This is the foundation of the doctrine of double ranking. The debt being paid to the
creditors by the bankrupt estate, the circumstance that that debt was secured to the
creditors by a subsidiary obligation of another party who has relief against the
bankrupt to the extent to which he has contributed to satisfy the creditors cannot be
allowed to affect the bankrupt estate, because equity intervenes to protect the other
creditors against the demand that the estate shall pay the debt, in the form of
dividend, first to the proper creditor and then to the surety claiming in relief. But for
this equitable rule the other creditors would not receive their proportionate share of
the bankrupt estate.”
[39] The prospect of multiple claims on the insolvent estate in respect of the same debt
can arise in many circumstances. One of those is where a creditor claims against his debtor’s
estate, is ranked and receives a dividend, and then secures payment of the unsatisfied
amount from a cautioner of the insolvent debtor. The cautioner cannot thereafter make a
claim on the insolvent estate for the amount the cautioner has paid to the creditor. This is
because in a collective insolvency, such as bankruptcy (and by application of statutory
equivalences, liquidation), the effect of payment of a dividend on the debt is treated in law
Page 20 ⇓
20
as equivalent to payment of the debt itself, discharging the estate of the debt (though not
necessarily the insolvent debtor). As, in this example, the insolvent estate has already paid
the creditor a dividend, the cautioner’s claim against the estate (ie for the shortfall he has
had to make good) is not permitted. If it were, the cautioner would be claiming a second
time for the same debt to the detriment of the other unsecured creditors (it was for this
reason that the cautioner’s claim in Harvie’s Trs was disbarred (see p 1146)). Accordingly, a
co-obligant’s claim will not be permitted in the event the creditor or the co-obligant has
already claimed and has been ranked in the insolvent estate in respect of the same debt.
[40] As just noted, the risk of double-ranking can arise where a co-obligant makes a claim
on an insolvent estate in respect of debt which has already been subject to a claim and
ranked. Returning to the words of the proviso “if otherwise entitled” at the end of rule
7.21(4), in my view that phrase is to preserve the application of the common law rule against
double-ranking just described. On that analysis, the proviso falls to be applied at the point
when a creditor’s claim, including one who claims by virtue of a statutory assignation
available under rule 7.21(4), is adjudicated on by the trustee in sequestration (in personal
insolvency) or by the liquidator (in a corporate insolvency). In other words, it is a rule that
comes into play at “stage 2”, as I have termed it (see para [32], above).
[41] It follows that the proviso qualifies only the latter part of rule 7.21(4): ie when the
creditor’s entitlements to vote and draw a dividend based on the creditor’s claim (and for
which different rules are applied to determine those respective entitlements). For present
purposes it suffices to conclude that the proviso does not provide a basis for a more wide-
ranging enquiry into the equities, as the Respondent would have it or to do so at stage 1.
Indeed, no case was cited to me in which an argument that could be taken at stage 2 was
used to preclude any assignation (ie at stage 1). More importantly, there is nothing to
Page 21 ⇓
21
suggest that the rule against double-ranking will be contravened; the effect of an assignation
by the Respondent in favour of the Noter is that the Noter stands in the shoes of the
Respondent in respect of the judgment debt. The Respondent’s challenge based on the
proviso to rule 7.21(4) or on the principle of unjustified enrichment fails.
Can the Court conclude ab ante that the Noter will necessarily be unjustifiably enriched?
[42] The Respondent’s argument is predicated essentially on the proposition that the
Noter is (or will be) unjustifiably enriched at the expense of the Company. It respectfully
seems to me that it cannot be said ab ante that the Noter will necessarily be enriched such as
to justify the Respondent being relieved of the statutory obligation under rule 7.21(4) from
granting an assignation in favour of the Noter of the Respondent’s claim qua creditor
holding decree for the judgment debt (even if that argument could be entertained at this
stage). The question of the Noter’s asserted unjustified enrichment which the Respondent
seeks to have answered ab ante at stage 1 is, in fact, a question which arises between the
Company and the Noter, and only if the Noter claims to be ranked in the liquidation by
virtue of the judgment debt. Assuming it is correct that the Noter was solely responsible for
the expenses in the share register litigation, as the Respondent contends, there may be scope
for unjustified enrichment if the Noter submits a claim in the liquidation – essentially,
exercising a right of relief as co-obligant under the decree – and seeks repayment (in whole
or in part what she has paid to the Respondent) from the estate of the Company. In
considering whether the Noter has been enriched at the expense of the Company, it may be
relevant to consider the particular circumstances by which the Company was rendered
liable for the expenses, which was the joint and several decree obtained and enforced against
it by the Respondent. In other words, if the Respondent is correct that the Noter has been
Page 22 ⇓
22
enriched at the expense of the Company, this flowed from the Respondent’s own conduct.
That factor may be relevant to any consideration of the Noter’s enrichment, whether it was
unjustified or whether it is open to the Respondent so to contend. I express no view on these
matters, but they do suggest that the question of whether any enrichment is unjustified may
be a question of some subtlety. As matters stand, however, that potential enrichment, which
may or may not be unjustified (and on which I express no view), has not occurred. At this
point in time, no payment has been made out of the estate of the Company toward the
judgment debt.
[43] Further, it respectfully seems to me that it is only when the Noter makes a claim
against the Company in respect of the judgment debt that the arguments the Respondent
seeks to make could competently arise (ie at stage 2). Subject potentially to the terms of the
decree, whether or not the Noter’s conduct in the share register litigation was or was not
productive of expense, which it may or may not be unfair (or unjustified) for the Company
to bear, is a matter that is properly raised (by a person having title and interest to do so) in
the adjudication of the Noter’ claim (if made) to be ranked on the Company’s estate, based
on the judgment debt in the liquidation. As matters presently stand, the foregoing
assertions were the subject only of submissions. Also as matters presently stand, the Noter
has borne the totality of the judgment debt. It is only if and when the Liquidator accepts the
Noter’s claim in respect of the judgment debt (or part of it), that, arguably, the Noter has
been enriched and, further, only arguably unjustifiably enriched, if the Company should not
have borne any share of the expenses in the share register litigation.
[44] All of these are matters for the Liquidator. In any event, it is hard to identify what
legitimate interest the Respondent has in that question in the context of the liquidation. It is
not otherwise suggested that the Respondent is a creditor of the Company, given that the
Page 23 ⇓
23
judgment debt has been paid in full to her. Prima facie, any interest she may have qua
shareholder is postponed to the adjudication on the creditor’s claims. In any event, on the
hypothesis of fact on which the Respondent’s argument proceeds, it is the Company (not the
Respondent) who would resist the Noter’s claim on this basis. Accordingly, even if I had
held that the Respondent’s challenge based on the proviso to rule 7.21(4) or on the principle
of unjustified enrichment fails was relevant, it is premature.
[45] Implicit in the Respondent’s argument is the assumption that the Court may go
behind or disregard the express terms of the decree constituting the judgment debt. I
consider next whether it is permissible for her to do so. The Noter challenges this.
The joint and several decree pronounced at the instance of the Respondent
[46] The Noter’s argument on this branch of the argument is simple: the judgment debt
constitutes a civil debt enforceable on its terms and this Court cannot go behind (or
“beyond”) the decree: see Wick and Pulteny-Town Steam Shipping Co Ltd (per Lord Watson
at 285, and per Lord Trayner at p 288). In light of that authority, it is not possible, nor
appropriate, to go behind the decree. It binds the parties and this Court.
[47] The Respondent does not engage directly with that argument but seeks to elide it by
recourse to the “equities” involved in the application of the principles of unjustified
enrichment. (I have already held that the Respondent’s opposition to the Noter’s order for
an assignation is ill-founded and not consistent with the proper interpretation of
rule 7.21(4).) Is it permissible for the Respondent to disregard the decree constituting the
judgment debt?
Page 24 ⇓
24
The Respondent’s disregard of the decree constituting the judgment debt
[48] The Respondent’s basis for resisting the Noter’s order for assignation (or its
equivalent) is premised on the Noter being unjustifiably enriched. On the facts as presented
at the stage reached, this has not been established. The Noter has paid the full amount of the
Respondent’s claim to her, being the total amount of the judgment debt. The Company has,
as yet, paid nothing toward the judgment debt.
[49] However, in my view, there is a further difficulty with the Respondent’s argument.
In substance, the Respondent is inviting the Court to disregard the decree constituting the
judgment debt, ie by asking the Court in these proceedings to proceed on the basis that the
liability inter se the Company and the Noter in respect of the expenses of the share register
litigation is otherwise than appears on the face of the decree. For the purposes of this
approach, Mr Sandison relies on a sentence in Palmer (at p 285) to the effect that the court
would generally not contemplate a division other than on a pro rata basis “in the absence of
something conclusive to the contrary”. The difficulty for the Respondent is that there is
simply no material before the Court which conclusively establishes that an assignation by
the Respondent of the judgement debt to the Noter is demonstrably unjust. Absent
something “conclusive”, the Respondent’s approach to the decree constituting the judgment
debt is ill-founded. That decree is ex facie valid. It finds the Noter and the Company jointly
and severally liable to the Respondent. That decree has not been reduced or recalled. It is not
suggested that any steps will be taken to do so. At the very least the Respondent’s position
adopted in these proceedings is materially inconsistent with the position she adopted in
obtaining a decree in these terms. That factor alone may give a court pause before looking
Page 25 ⇓
25
behind the decree to enforce a liability potentially but so radically inconsistent with its joint
and several character.
[50] Approaching the matter on the application of Palmer, there is, in my view,
considerable force in Mr O’Brien’s reliance on that case. The case of Palmer is binding on me.
Nothing in Mr Sandison’s submissions persuades me Palmer can be distinguished or
disregarded. The decree falls to be construed and enforced according to its terms. Absent
that decree being modified or set aside, I am not persuaded that what the Respondent seeks
to do is in fact competent.
[51] Even if this kind of disregard of on an ex facie valid decree were competent, it is not
clear by what means the Court is to entertain or give effect to that attack. Mr Sandison did
not suggest an evidential hearing was necessary or apt to determine that matter. He did not
really grapple with this difficulty. Having secured a joint and several decree for a particular
purpose (ie to become the principal creditor in the Company’s liquidation), the Respondent
cannot simply disregard the joint and several character of decree because (by reason of the
Noter’s payment of the judgment debt and her right to an assignation thereof), its terms
have become inconvenient for the Respondent’s purposes.
Can the creditor decline on the ground of inconvenience?
[52] Finally, it is necessary to deal with Mr Sandison’s submission that a creditor whose
claim has been paid by a third party, may decline on the ground of inconvenience to assign
his claim to that third party (see para [22(3)], above and cases referred to). This submission
can be dealt with shortly. The cases of Mitchell and Bruce are both readily distinguishable. In
both of those cases the court was concerned with an assignation of the securities held by the
creditor, not an assignation of the creditor’s underlying claim against the debtor. In that
Page 26 ⇓
26
context, the question of prejudice was to another security held by the creditor called upon to
assign a security held in respect of the debt. That this rule relates to an assignation of a
creditor’s security (and not of the right to the debt it secured) is clear from the discussion by
Lord Hunter of those cases in Fleming v Black 1913 1 SLT 387 at 388. Paragraph 12-103 in
McBryde, which simply cites Mitchell, is too broadly stated to the extent it seeks to extend
the dictum beyond an assignation of a creditor’s security, to assignations of a creditor’s
claim.
The arguments in respect of rule 1.56 of the Insolvency Rules
[53] The Noter’s reliance on rule 1.565 was in essence a fall-back if she was unable to rely
on rule 7.21(4). In light of my decision on that issue, it is not necessary to address this
ancillary argument.
Decision
[54] It follows that the Respondent’s challenge to the Noter’s entitlement to an
assignation from her of the judgment debt fails. As noted above, the parties’ common
position was that the terms of the assignation were likely to be agreed. I shall put the matter
out By Order to discuss the terms of the assignation, the interlocutor and any ancillary
matter arising. I shall reserve meantime all questions of expenses.