Scottish Sheriff Court Decisions

MCMAHON MCFADYEN & CO v. BUCHANAN CLOTHING CO LTD and LACK LTD [1999] ScotSC 4 (23rd March, 1999)

The Sheriff Principal having resumed consideration of the appeals Refuses same; Adheres to the interlocutors of the Sheriffs dated 29 October 1998, 30 November 1998 and 9 December 1998 complained of; Finds the defenders and appellants liable to the pursuers and respondents in the expenses of the appeals, Allows an account thereof to be given in and Remits same when lodged to the Auditor of Court to tax and to report; thereafter Remits the cause to the Sheriff to proceed as accords.

NOTE:

In this action the pursuers sue for £25,000 on an agreement or undertaking which they aver was entered into on 3 August 1998 for payment of that sum in full settlement of any indebtedness owed to them by the defenders in respect of fees for services rendered in the past. On 4 August 1998 a cheque was written by the first defenders in that amount but countermanded on 5 August 1998 and the present action was commenced on 15 August 1998. On 17 September 1998 a motion for recall of arrestments was refused and on 17 November 1998 leave to appeal that refusal was also refused. On 30 September 1998 a provisional liquidator was appointed to the second defenders who became an interim liquidator on 29 October 1998 (the same person). On 29 October 1998 two motions came before the sheriff which were opposed. One was for summary decree and the other for the defenders to be ordained to find caution within fourteen days in such amount as the court might think fit. Summary decree was not granted but the defenders were each ordained to find caution for expenses in the amount of £3,000 within fourteen days. At that hearing it appears there was discussion of caution in the sense of consignation of the principal sum sued for, summary decree and caution for expenses: only the last of these was ordered. At that hearing the pursuers were represented by Mr Rew and the defenders by Ms McGregor who had instructions to represent the first defenders fully on all matters but the second defenders only to the extent of seeking a continuation of the motions against them on account of the appointment one month earlier on 30 September 1998 of a provisional liquidator whose appointment to be interim liquidator was stated to the sheriff to be now "imminent" (and in fact happened on 29 October 1998). The continuation was sought apparently in order to allow the provisional/interim liquidator time to consider his position and issue full instructions but was refused and Ms McGregor then intimated her withdrawal from acting for the second defenders. It appeared from information placed before me at the appeal by both parties that the sheriff gave an early intimation that consignation of the principal sum sued for was not viewed favourably by him and discussion then took place of the motion for summary decree. Having decided not to grant summary decree the sheriff then invited Mr Rew to address him on caution for expenses. To this Ms McGregor replied in opposition on the first defenders' behalf but not by this stage on the second defenders' behalf: the practical effect was that the sheriff heard what was to be said in opposition to caution for expenses but whether Ms McGregor would have said anything different, additional or more effective on behalf of the second defenders had she perceived herself to be still acting for them at that stage is not known. The sheriff ordained both defenders to find caution for expenses and made provision in his interlocutor for a Rule 24 diet some three weeks later in respect of the second defenders whose agent had withdrawn from acting. Thereafter on 18 November 1998 leave to appeal was sought but refused, but the competency of now submitting to review the interlocutor of 29 October 1998 ordaining the finding of caution for expenses is not in dispute in light of subsequent events and the decision in McCue v Daily Record and Sunday Mail 1998 SLT 983. At a much later date (during January 1999) the sheriff was asked by me to furnish a note relative to his interlocutor of 29 October 1998 when it became known that the present appeal was to be directed against it, which he duly did.

On 30 November 1998 the case called before a temporary sheriff who was asked to grant decree by default against the second defenders who had entirely failed to obtemper the interlocutor of 29 October 1998 ordaining them to find caution for expenses. He did so and, although his interlocutor of 30 November 1998 is now under challenge as part of the more fundamental appeal against the interlocutor of 29 October 1998 upon which it depended, it is not suggested that he himself erred in any way in pronouncing decree by default as he did on 30 November 1998, it being accepted that any sheriff doing so in the position in which he then found himself acted entirely reasonably.

On 26 October 1998 the first defenders having obtained a prorogation until then lodged caution in the shape of a cheque (later countermanded or dishonoured) for £2,000 only, the shortfall being due it was said to misinformation from their Edinburgh legal advisers who accepted responsibility for that inadvertent mistake. On 7 December 1998 there called before the sheriff a motion of the pursuers for decree by default against the first defenders which he continued for forty-eight hours to permit the lodging of the further £1,000 required. On 9 December 1998 when the case again called before the sheriff no further caution had been lodged and he granted decree by default against the first defenders, taking the view that they had by then had ample time to lodge the requisite caution but had failed to do so. Although he makes no mention of it in his note, I was informed that on 7 December 1998 a provisional liquidator had been appointed to the first defenders at the instance of HM Customs & Excise and that on 9 December 1998 the sheriff was told of this and asked for a continuation of the motion for decree by default which he did not grant. He was told apparently that the provisional liquidator had been appointed on account of a particular debt due to the Customs and Excise but that his tenure was likely to be short-lived because funds were available (from an outside source) and being organised to clear the debt: nevertheless some time was needed in the circumstances for the provisional liquidator and the first defenders to put themselves in order.

Against the foregoing background a number of propositions were advanced and discussed at the hearing of the appeals. It was not disputed that in the events which had occurred it was competent for both the first and second defenders to appeal against the sheriff's interlocutor of 29 October 1998 (see McCue v Daily Record and Sunday Mail 1998 SLT 983). A question was raised as to whether it is competent to ordain a company defender to find caution for expenses, since s.726 of the Companies Act 1985 clearly applies only to a company which is a pursuer: I am however satisfied, following the reasoning of Lord Abernethy in Balfour Beatty Ltd v Brinmoor Ltd 1997 SLT 888 and not following that of Sheriff Principal RD Ireland QC in Rose's Trustees v Rose 1993 SLT (Sh Ct) 85, that the court is empowered at common law to require a company which is a defender to find caution for expenses just as a natural person who is a defender may be so required, applying in that situation the criteria of s.726 but those which would be applied in the case of a natural person.

The chief attack made by the appellants on the sheriff's interlocutor of 29 October 1998 proceeded on a submission that he had, as revealed by the terms of his note later supplied to that interlocutor, applied the wrong test in exercising his discretion to order the finding of caution for expenses and had thus produced an erroneous decision from which the later decrees by default had wrongly flowed. It was suggested that the correct "common law test" to be applied for the purpose was that indicated in paragraph 11.55 of Sheriff ID Macphail's Sheriff Court Practice (2nd ed) and the appeal before me proceeded on an acceptance by both sides that this was a relevant passage in the learned author's text, although I am not sure that he was seeking there to formulate a definitive "test" to be applied or that he thought his statement there to be exhaustive of all the considerations which might be relevant to deciding such a matter: rather he seems to have been giving a helpful account of the manner in which courts have habitually proceeded in the past in exercising their discretion in such a situation.

The note furnished by the sheriff to his interlocutor of 29 October 1998 was criticised in several respects. It was pointed out to me that it contains a number of mistakes or inaccuracies, which is undoubtedly true (eg wrong party referred to in line 1; not true that there was no appearance at hearing of motion for leave to appeal on 18 November 1998; comma in line 8 occurring four words too soon destroying the sense; failure to distinguish clearly between positions of first and second defenders). The chief criticism was aimed at the wording employed by the sheriff at the outset of his final paragraph which portrayed, it was said, the emphasis he had placed on an irrelevant consideration, namely the impecuniosity of the defenders. I do not think however that a note written by a sheriff in explanation of an interlocutor pronounced by him ought to be construed as if it were a conveyancing document and in addition it should be borne in mind in the present case that the sheriff was not called upon, in the events which happened, to write this note until some two and a half months had elapsed since the interlocutor was pronounced on 29 October 1998 when, albeit he must have written it with the assistance of his notebook, he may not have found it easy to recall precisely how the various considerations pertinent to his decision were weighed by him relative to one another. On a fair reading of his note and in light of what I was told at the appeal had transpired during the sheriff's hearing of the motions for summary decree and for caution I think that the sheriff is to be taken to have considered the pleadings available and formed the view that no proper defence to the pursuers' claim was yet stated but that it's inadequacy was not sufficient to satisfy him that summary decree should be immediately granted: instead he went on to consider the possibility of requiring caution to be found and in that context took account of unrefuted assertions that were made before him regarding the parlous financial state of the defenders.

It was declared repeatedly in submission to me that the financial standing of the defenders was "an irrelevant consideration" which should have been left entirely out of account and that the sheriff's weighing of it in the balance at all, let alone the degree of importance apparently attached by him to it, demonstrated that he had failed to exercise his discretion properly. This proposition to the effect that the defenders' financial standing was irrelevant was based entirely on the opening sentence of paragraph 11.55 in the 2nd ed of Sheriff Macphail's Sheriff Court Practice and I have to say that I do not accept it. It is noteworthy that the learned author opens his sentence with the words "as a general rule" and it seems to me that all he is saying is that normally a defender will not be required to find caution purely on account of his bankrupt status. I can well see that if a defender has been ordered by a sheriff to find caution clearly on the ground of his poverty alone then a major doubt is immediately raised as to whether the sheriff has exercised a proper discretion but I do not see that the impecuniosity of a defender must always be irrelevant or that no regard should be had to it even when some other factor is present pointing strongly toward a need to provide some protection for a party who may be pursuing a valid claim. In the present case the sheriff on the pleadings before him (writ and defences) considered the defence stated to be at best of most dubious validity and as I read those pleadings (and the updated version now contained in the open record number 12 of process) he was fully justified in coming to that view. In that situation it was in my opinion entirely proper and legitimate for him then to have regard to what was said to him without real contradiction about the financial difficulties of the defenders and indeed to attach some substantial importance thereto. The sheriff, far from basing his decision on that financial standing alone, was faced with a pursuer having an apparently good claim to payment of monies for which a cheque had been written and delivered but then countermanded and no clearly valid defence pled in answer to that claim: one might wonder why he did not elect forthwith to grant the motion for summary decree but, having decided not to do so with the consequence that the action would proceed further, it was surely pertinent then to consider what was said regarding the financial status of defenders whose dubious defence might well fail against the pursuers' apparently strong claim in deciding whether some form of security should be required for the expenses of the continuing litigation. That, from the information available including his note, is how I perceive the sheriff to have gone about the business of exercising his discretion and I do not find his approach in so doing to have been materially flawed.

In any event, looking more broadly at the sheriff's exercise of his judicial discretion and the circumstances in which an appellate court may properly interfere with his decision, it cannot be said in my view that the sheriff has here decided the matter in a purely arbitrary fashion (to adopt the phraseology of Sheriff Principal PI Caplan QC as he then was in Stewart v Steen 1987 SLT (Sh Ct) 60) or that there has been a flagrant or transparent failure in the manner of exercising his discretion. On the contrary it seems to me that the sheriff has weighed up relevant considerations, thought it wrong to go so far as immediate summary decree and chosen a middle course of giving the pursuers some security in the face of indigent defenders pleading a dubious defence: that appears to me to disclose a proper exercise of a judicial discretion not warranting interference by the Sheriff Principal on appeal.

A point was taken for the appellants that information provided by way of ex parte statements at the bar of the court is an insufficient basis for holding a company to be unlikely to be able to meet the costs of the litigation if lost: reference was made to Edinburgh Modern Quarry Co Ltd v Eagle Star Insurance Co Ltd 1965 SLT (Notes) 91. That case however was concerned with what amounted to "credible testimony", the statutory term used in s. 447 of the Companies Act 1948 (now Companies Act 1985 s.726), and so was dealing with a specific phrase employed in a statute. In the present case the question is whether a sheriff is entitled to proceed on information provided by way of submission at the bar to the effect that a company is severely embarrassed financially. In my opinion he is so entitled if he sees fit and was so entitled in this case, especially since he records in his note that this information was "not specifically refuted" on the defenders' behalf.

A point was also taken to the effect that the motion enrolled (number 7/3 of process) did not in terms seek caution for expenses, the implication being that it was not open to the sheriff on 29 October 1998 to order the finding of such caution unless the motion sought it expressly. The sheriff had, I was told, expressed himself to be not inclined to order consignation of or caution for the sum sued for and the suggestion was that he could not then proceed within the terms of this motion to consider ordering caution for expenses. The motion craved the court simply "to order the first and second defenders to lodge Caution in such amount as the Court thinks fit" within a particular period of time and makes no mention either of expenses or of the sum sued for (the debt allegedly due). It seeks caution simpliciter and in my opinion a motion enrolled in such terms is habile to permit the granting by the court of an order to find caution either for the sum sued for or for expenses as the court may in the exercise of its discretion think fit.

With regard to the particular position of the second defenders on 29 October 1998 it was submitted to me that the sheriff in light of the information placed before him was bound to accede (which he had not done) to their motion made for a continuation of the pursuers' motion(s) in order to enable the provisional (soon to become interim) liquidator appointed to them to consider his position and issue fully considered instructions. The sheriff had been informed, I was told, that a provisional liquidator had been appointed to the second defenders on 30 September 1998 and the appointment of an interim liquidator was now imminent. The latter appointment, I was informed, in fact took place on 29 October 1998 and was an appointment of the same person who had been the provisional liquidator to become the interim liquidator. While an interim liquidator may have somewhat different powers and duties from a provisional liquidator, it appears that the provisional liquidator had already been in office for a whole month (less one day) by 29 October 1998 and must have known in advance that he was likely to become the interim liquidator soon. In these circumstances he must have had ample time to consider all aspects of his position and indeed his impending position by 29 October 1998 and, this being a matter for the sheriff's discretion, I do not see that the sheriff can be said to have acted improperly in his exercise of that discretion by refusing the motion for a continuation.

It was then submitted to me that, the second defenders' motion for a continuation having been refused and the agent appearing for them having consequently announced her withdrawal from acting further for them in accordance with her instructions, the sheriff was bound to refrain from hearing the pursuers' motion(s) any further so far as directed against the second defenders and was obliged in terms of Ordinary Cause Rule 24 to fix instead a peremptory diet not less than fourteen days ahead for the second defenders (and their liquidators) to appear and state whether or not they intended to proceed further with their defence to the action. It was stated that the terms of Rule 24 were "peremptory" and it was suggested that the sheriff was disbarred in the circumstances from granting for the time being any motion directed against the second defenders. I reject this submission as proceeding on an incorrect appreciation of the scope and purpose of Rule 24. When read as a whole it is apparent that Rule 24 is looking to and prescribing a procedure to be followed in the situation where an agent and his client for whom he has been acting in a litigation part company in circumstances where the withdrawal from acting would be unknown to the court and the other parties to the action unless specially intimated to them. The Rule prescribes a procedure for such intimation and the restoration of procedural order to the litigation. In that context the terms of Rule 24 are perhaps correctly described as "peremptory" but where the withdrawal occurs in open court with all parties present during the course of a hearing (as happened here) the position is different and it must be a matter for the sheriff's discretion to decide whether any and if so what special procedure is called for in the circumstances or whether the case can proceed without such special measures. It is in my view quite wrong to think that the hands of the court can be tied in some "peremptory" way by an agent announcing on the basis of pre-arranged instructions that he is ceasing to act from the moment at which the court decides to refuse his preliminary motion for a continuation or sist or other stay of proceedings: the courts could not possibly continue to operate with any semblance of efficiency if that were so. I should add for clarity that I do not regard this as being the same situation as that in which an agent, having parted company with his client beforehand for other reasons, appears in court and informs the sheriff that he has withdrawn from acting but appears briefly for the sole purpose of obtaining if the court thinks fit a continuation in order to allow new agents to be instructed. It may of course be and no doubt often is appropriate in such a situation as the present for the procedure of Rule 24.2 or a procedure akin thereto to be followed out but it is for the sheriff to decide as a discretionary matter that such a course should be adopted in the circumstances and he cannot be bound to do so. In the present case on 29 October 1998 the sheriff had before him, as I was informed, an agent for the pursuers and an agent with instructions to represent both defenders (the second defenders being a wholly owned subsidiary of the first defenders) who informed the court of the second defenders' present position with regard to liquidators and moved the court to continue the pursuers' motion(s) so far as directed against them until a later date. The sheriff having refused that motion, she announced her withdrawal from acting for the second defenders but remained in court on the first defenders' behalf to present all appropriate arguments in opposition to the pursuers' motions for summary decree and the ordering of caution. In these circumstances it was in my view open to the sheriff if he saw fit to proceed to deal with the pursuers' motions in respect of both defenders before going on, as the interlocutor indicates

At the hearing of the appeal the agent appearing for the appellants forebore to criticise the interlocutor of 30 November 1998 whereby another sheriff eventually granted decree by default against the second defenders in respect of their failure to lodge any caution. In effect he no longer insisted in paragraph 4 of the second defenders' Note of Appeal.

Returning now to the position of the first defenders, an extension was granted on 20 November 1998 (to both defenders) of the period for lodging caution by seven days and on 26 November 1998 the first defenders lodged a cheque (countermanded or not honoured later on) for £2,000 being the wrong amount. For this error the agent for the appellants before me accepted responsibility, it being a mistake he said within his office. A motion (number 7/5 of process) was enrolled for the pursuers seeking decree in respect of this failure and it called on 7 December 1998 before a sheriff who allowed a further two days for the shortfall of £1,000 to be lodged. When the motion again called before him on 9 December 1998 he was informed (I was told by both sides appearing before me) of the fact that on 7 December 1998 there had been appointed to the first defenders a provisional liquidator in respect of a particular VAT debt for which funds were being obtained from another source and his appointment was expected to be of short duration; a further continuation was sought on the first defenders' behalf. The sheriff on 9 December 1998 granted the motion for decree by default and in his note to that interlocutor gives his reasons for doing so. He makes no specific mention of the provisional liquidator having been appointed on 7 December 1998 or of being so informed at the hearing on 9 December 1998, which is perhaps not too surprising when regard is had to the very bald terms of paragraph 4 of the first defenders' Note of Appeal, although some of the facts relative to the provisional liquidator are narrated in paragraph 2 of the first defenders' Note of Appeal to which the sheriff makes passing reference in the first sentence of his note. From the terms of his note the appropriate inference has to be that the sheriff did not take account in deciding to grant decree by default on 9 December 1998 of the fact that two days earlier, being the day on which the sheriff had allowed a further forty eight hours for the lodging of the remaining caution, a provisional liquidator had been appointed to the first defenders. The real question for the sheriff was whether to grant decree by default forthwith or whether alternatively to continue the matter further to permit the first defenders and the provisional liquidator the opportunity to put themselves in order and to lodge the further £1,000 of caution required. The appointment of a provisional liquidator on 7 December 1998 provided an obvious explanation (although not necessarily an excuse) for the first defenders' failure to produce the extra £1,000 by 9 December 1998, yet I have to infer from his note that the sheriff left it out of account in reaching his decision. It thus appears to me that the sheriff failed to take account of an important factor relevant to the exercise of his discretion in deciding whether to grant decree by default and that his exercise of that discretion was thereby flawed. That being so, it is open to the sheriff principal to consider the matter anew. Ample time including a prorogation had been given for the lodging of caution but ultimately the failure of the first defenders to lodge the correct amount of caution timeously was due not to their fault but to a mistake in the office of their solicitors. Their failure to lodge the extra £1,000 required within the further forty eight hours allowed was explained as being immediately due to the appointment of a provisional liquidator. It has to be taken however that the first defenders had themselves to blame for the fact that a VAT debt was allowed to reach the point at which HM Customs & Excise felt it necessary to obtain the appointment of a provisional liquidator. The fact of that appointment strikes me as strongly indicative of a parlous financial condition in the first defenders as at 9 December 1998 and of the improbability of their or the provisional liquidator's producing

For these several reasons the appeals are refused and their expenses will follow success in favour of the pursuers and respondents.

(Sgd) BA Kerr