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Cite as: [2001] ScotSC 6

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WILLIAM DOW (POTATOES) LIMITED v. WILLIAM DOW [2001] ScotSC 6 (13th February, 2001)

SHERIFFDOM OF SOUTH STRATHCLYDE DUMFRIES AND GALLOWAY

A861/99

		JUDGMENT OF SHERIFF PRINCIPAL J C McINNES, QC
		in the cause
		WILLIAM DOW (POTATOES) LTD
		Pursuers and Respondents
		WILLIAM DOW
		Defender and Appellant

Act: Craig, Messrs Munro & Liddell

Alt: McColl, Advocate, Messrs Russell & Aitken

AIRDRIE: 13 February 2001

The Sheriff Principal having resumed consideration of the cause allows the appeal; ordains the defender to find caution in the sum of Ł5,000 for the expenses of the counterclaim within fourteen days of the date hereof under certification that if he fails to do so the counterclaim may be dismissed and the principal action may proceed; remits to the Sheriff to proceed as accords; finds no expenses due to or by either party in respect of the appeal; certifies the cause as suitable for employment of junior counsel.

NOTE:

Introduction

1.1 The pursuers and respondents are a limited liability company which is a wholly owned subsidiary of William Dow (Holdings) Limited. Prior to the sequestration of the defender and appellant the shares in William Dow (Holdings) Limited were almost wholly owned by the defender. According to the pursuers he "ran and managed the pursuers and attended to their financial affairs". He admits that he had a duty to attend to the financial affairs of the pursuers. The pursuers allege that between 31 December 1996 and 6 May 1998 the defender appropriated company monies to the extent of Ł12,693.87. In this action they seek an order that the defender pay that sum to them with interest from 24 August 1998. The latter date is the date upon which the defender was sequestrated. In his defences the defender admits that he "paid certain sums to himself during his directorship of the pursuers". However he denies that he defrauded the pursuers of the sum sued for. He offers no other substantive defence to the pursuers' claim.

1.2 The defender has counterclaimed against the pursuers for payment to him of the sum of Ł325,000. The basis of this claim is an allegation that "around 1 October 1998 the pursuers wrongfully dismissed" him. In the counterclaim the defender avers that his ex-wife, Mrs Sheila Dow, "benefited personally from sums which the defender made to himself" (sic). He avers that, following his sequestration, Sheila Dow was appointed a director of the pursuers. It appears that his position is that she had previously been a director of the pursuers and that she had benefited personally from any misappropriation. The defender also alleges that on one occasion she misappropriated the sum of Ł60,000. The relevance of these averments is not immediately apparent.

1.3 The pursuers enrolled a motion (7/4 of process) asking the court to ordain the defender to find caution for expenses in the sum of Ł10,000 within fourteen days. The basis for this motion was that the defender had been refused legal aid and that his estate had been sequestrated. The motion came before the Sheriff on 2 March 2000. On 7 March 2000 the Sheriff granted the motion and ordained the defender to find caution for expenses in the sum of Ł10,000 within 14 days. In a related action against him at the instance of another subsidiary company within the same group in which identical issues arise the Sheriff also ordained the defender to find caution of Ł10,000. Against these decisions the defender has appealed. The appeals were heard together.

1.4 The Sheriff accepted that the defender could have an interest in the outcome of these actions. It was possible that he might be able to pay off his debts and free himself from bankruptcy if he were to succeed in these actions and in his counterclaims. The Sheriff pointed out that the record in each action had been closed. He was of the view that the defender's averments in each action disclosed no proper defence. He commented that the facts averred by the pursuers should be within his knowledge. He should have been able to state a relevant defence by now. He continued: "In addition, this defender has, by counterclaiming so substantially, effectively put himself in position as pursuer in each action." He was concerned that the effect of granting the motions to find caution would be that the defender would not be able to continue. He considered that the granting of the motion would have the effect of protecting the legitimate interest of the pursuers so that they would not be unduly prejudiced so far as expenses were concerned, if they were required to fight these actions to a conclusion and win them.

2. Submissions for the defender

2.1 Counsel for the defender explained that the court, when granting decree of divorce, had ordered the defender to pay Ł1,200,000 to his wife. He had paid Ł200,000 but nothing thereafter. The defender had been sequestrated at the instance of his former wife on 24 August 1998. His trustee in sequestration had become involved in running the two companies which were now engaged in suing the defender. Initially the defender had been kept on by the companies but had later been dismissed, largely at the instigation of the trustee in sequestration. The trustee had refused to sist himself as a party to these actions.

2.2 In making an order that the defender should find caution within fourteen days the Sheriff had misdirected himself as to the circumstances in which a bankrupt defender could be ordered to find caution. He had misconstrued the situation in which a defender was in effect the pursuer. He had further misconstrued the defender's defences. The Sheriff had acted in breach of Article 6.1 of the European Convention on Human Rights.

2.3 It was accepted that it was a matter for the discretion of the court whether caution should be ordered. It followed that it was not an easy matter to overturn the exercise of such a discretion on appeal. An appeal court would overturn such a decision if it was "clearly wrong". See Stevenson v Midlothian District Council 1983 SC (HL) 50 at page 56. In general a defender would not be ordered to find caution. Caution should only be ordered where the interests of justice required it. See Thom v Andrew 15R 780 per Lord Young at page 782. Caution is not generally ordered where a defender has been sequestrated. See Lawrie v Pearson 16 R 62 at pages 63-64. Caution would not be ordered if the effect of ordering caution would be to cause "intolerable hardship". That was the situation in the present case. The circumstances in which a bankrupt defender may be ordained to find caution were set out in Macphail: Sheriff Court Practice, second edition at paragraph 11.55. In the present case the defender had an interest to defend the action. He had not voluntarily divested himself of his estate. The Sheriff had decided to order the defender to find caution on the basis that the defence was of doubtful merit and that the defence was such that the defender was in reality the pursuer. So far as the latter situation was concerned reference was made to Ferguson Lamont & Co's Trustees v Lamont 17 R 282 per Lord President Inglis at page 285. In the present case the defence to the action for repayment of the sums allegedly misappropriated was not intrinsically linked to the counterclaim. Before the defender could place himself in the position of a pursuer there would require to be such an intrinsic link. The defender had not admitted that the sum sued for was due. That was an essential prerequisite for an order to find caution where the defender was bankrupt. See Robb v Dickson 9 SLT 224, The Professional and Civil Services Supply Association Limited v Lawson 1913 SLT 55. Before a defender could be treated as a pursuer there required to be an admission that the pursuers' case was valid and a counterclaim which directed itself to the same contractual provisions and which had the same factual basis. Neither of these characteristics were present in this case. In these circumstances no order for caution could properly be made. Caution would not be ordered simply because a defender might be ordained to lead at a proof.

2.4 Although in Macphail it was suggested that caution may be ordered where the defence appeared to be of doubtful merit, the case of Finklestone v Smellie (1916) 32 Sh Ct Reps 244 (at page 246) showed that there must be a combination of lack of probable cause for the defence and no interest on the part of the defender in the outcome of the case. In this case the defender did have an interest to defend the action. In the defences there was no admission of the pursuers' position on record. Accordingly the defender was not in the position of a person who had no statable defence. It was accepted that criticisms could be made of his pleadings. He admitted that he had paid certain sums to himself but he denied that he had defrauded the pursuers of the sum sued for. It was difficult for the defender to make specific allegations in his defences without access to the books of the company, going back to 1996. If the pursuer had a remedy it was to seek summary decree or, if there was no relevant defence, to seek decree following a debate. If caution were to be ordered the defender could not place his defence before the court. The result of disabling him in that way could be that decree de plano would be granted, simply because he could not find caution. He had not made sufficient admissions to justify being ordained to find caution.

2.5 In any event the ordering of caution would be contrary to Article 6.1 of the European Convention on Human Rights. See Tolstoy Miloslavsky v United Kingdom 20 EHRR 442 at paragraphs 59, 62, 63 and 66 and Aït-Mouhoub v France 30 EHRR 382 at paragraphs 31, 52 and 54. In the case of Tolstoy Miloslavsky the European Court of Human Rights had accepted that the equivalent of an order to find caution for expenses was legitimate but in that case there had been full access by the litigant to the court. There had been forty days or so of proof. In that case the caution ordered was in connection with an appeal. In Aït-Mouhoub the court had held that the very essence of the right of access to the court must not be impaired by an order to find caution. If there was to be a limitation on that right of access if must have a legitimate aim. A reasonable relationship between the means employed and the aim sought to be achieved. In that case the order to find security for the costs of the case had been pitched at too high a level, having regard to the lack of resources of the litigant. The effect of the order had been to deprive him of his right of access to the court. In the present case the defender could not find the amount of caution which he had been ordered to find. He would be deprived of his right of access to the court if the orders remained in force. His inability to find caution was a disproportionate restriction on his right of access to the court.

2.6 Alternatively, it was submitted that the court could restrict caution to the counterclaim. See Merrick Homes Limited v Duff 1996 SLT 932 at page 935. By analogy with that case it would be open to the court to order caution restricted to the counterclaim. That would not prevent the defender from defending the action. A partial recall of the Sheriff's order to find caution could be granted. However the majority of the witnesses in relation to the counterclaim were witnesses who would require to be present in court in connection with both the principal action and the counterclaim in each case.

3. Submissions for the Respondents

3.1 The circumstances in which the court would order caution for expenses had been correctly stated in Macphail, supra at paragraph 11.55. Only one of the criteria required to be present before a Sheriff would be entitled to make an order to find caution. However if more than one criterion was present they must be considered together. It was a matter for the discretion of the Sheriff to order the finding of caution when at least one of the criteria was present. In this case the Sheriff had considered the defence and the extent to which the defender was truly the pursuer. In The Professional and Civil Service Supply Association case the defender had admitted the sum sued for but claimed damages. The decision to order caution in that case had not been made simply because the sum sued for in the principal action had been admitted to be due. In any event it was not necessary that there should be such an admission before a defender could properly be regarded as the true pursuer in an action. In the present case there was a very marked difference between the sums sued for in the principal action and in the counterclaim. The facts in the principal action were different from those in the counterclaim. The defender had admitted that he had been the general manager of the pursuers and that his employment had been terminated on the ground of alleged gross misconduct. There was a clear correlation between the fraud alleged in the principal actions and the basis of the counterclaims in that both related to his employment with the pursuers. If both parties were to be successful in their respective claims the result would be that substantial sums of money would be awarded to the defender. In these circumstances the Sheriff had a discretion to exercise. In the Finklestone case, supra, at page 246 the Sheriff considered that the defence had little substance and that the defender had no interest to oppose the claim.

3.2 This was not a case in which an application to ordain the defender to find caution was made at an early stage in the case. The record had been closed. The defender had had an opportunity to plead his case fully. If, for some reason, he had been unable to do so at an early stage he could have lodged a minute of amendment. He had not done so. If he had a substantive defence he had had every opportunity to state it. In these circumstances the Sheriff was entitled to make a critical assessment of the nature and extent of the defence which the defender had pleaded. In his defence the defender had admitted that sums had been paid to him while he was a director of the pursuers. All he disputed was that he had defrauded the pursuers of the particular sum sued for. He gave no explanation in his defences for his averments in the other action to the effect that he would often interchange sums between himself and the pursuers. He made no link between those averments and the sum sued for. There was no statable defence. The Sheriff was entitled to his opinion in that respect. Because of the counterclaim he had placed himself in the position of a pursuer.

3.3 So far as Article 6.1 of the European Convention on Human Rights was concerned it was accepted in the jurisprudence of the European Court that there are circumstances in which an order for caution can properly be made. In a matter of that kind it was necessary for the court to balance the respective interests of the parties. Pursuers had rights as well as defenders. They were entitled to a degree of protection so far as the recovery of expenses was concerned. It was accepted that, if a defender had fully stated a valid defence, it would not be appropriate to order caution simply because he was impecunious. However where there was no valid case, as in this instance, the position was different. If the defender's defence and his counterclaim had any merit his trustee could have been expected to enter the action, which he had declined to do. Success in either the principal action or in the counterclaim in this case would respectively protect or enhance the assets available for distribution to creditors. Article 6.1 did not provide a sufficient basis to justify interference with the Sheriff's exercise of his discretion.

3.4 It may be competent for the court partially to recall an interlocutor such as this and to restrict the order to find caution to the counterclaim. Had the defender in this case raised the counterclaim as a separate action it was very likely that the Sheriff would have ordered him to find caution for expenses. If the court took the view that caution should be restricted to the counterclaim it would be appropriate to order the defender to find caution in half the sum ordered by the Sheriff.

3.5 However there was no basis for interfering with the decision of the Sheriff. There was a high test to be met before a court, on appeal, would substitute its own view for that of the Sheriff: see Macphail, supra at paragraph 18.111. None of the criteria which would justify such interference were to be found in the present case. The Sheriff had not exercised his discretion wrongly. The appeal should be refused.

4. Decision

4.1 As a general rule a defender who is bankrupt is not ordered to find caution. The defender in this case has been sequestrated. That is because a defender has been brought into court by a pursuer and is entitled to defend the claim made against him. There are exceptions to that general rule. One of these is where the defender is virtually the pursuer in the action. Macphail suggests that a defender may be ordered to find caution where the defence appears to be of doubtful merit. The relevant law, outlined by counsel for the defender and summarised above, was not substantially disputed on behalf of the pursuers. Earlier decisions are helpful in setting out guidelines which can assist the exercise of a judge's discretion. In these decisions there is no clear authority for the proposition that a bankrupt defender may be ordered to find caution simply because the defence is patently weak. Sometimes defences are advanced which are not and could not be an answer to the claim. In such cases, if the defender is intent on insisting in them, it may be appropriate to consider caution.

4.2 Although the counterclaim bears a relationship to the principal action in this case, in that the dismissal of the defender for gross misconduct as is alleged by the pursuers may be based on the allegations that he misappropriated funds, the two claims are markedly distinct in other respects. The pursuers seek repayment of the sums which they allege were fraudulently misappropriated by the defender. The defender seeks an award of damages for breach of contract following the termination of his employment with the pursuers. So far as the principal action is concerned the defences do not appear to raise matters of substance. They amount to little more than a denial of the allegation that the defender misappropriated the sum sued for. But the defender, on the face of it, would be entitled to put the pursuers to proof of their allegations. The fact that he has been sequestrated should not deprive him of the opportunity to require them to do that. If the defence is so lacking in substance that it would not justify a proof, that can be determined either in the context of a motion for summary decree or at debate. It would be inappropriate to reach a concluded view on the relevancy, still less on the merits, of the defence as pleaded in the context of a motion seeking to have the defender ordained to find caution. If there had been no counterclaim in this case the justification for ordering the defender to find caution would be at best very limited. It appears from the Sheriff's note that, without the counterclaims, he would not have ordered the defender to find caution.

4.3 If there is a justification for an order to find caution in these two actions it must arise from the nature of the counterclaims and their effect on the principal actions, given the state of the defences. In this action and in the related action the combined total of the sums sued for is of the order of Ł54,000. The combined total of the sums sued for in the counterclaims exceeds Ł1,000,000. The counterclaims could have proceeded as separate actions.

4.4 It has been the common, and probably the invariable, practice of the court where caution is ordered to order caution for the expenses of the action as a whole and not to allocate any caution ordered as between the principal action and the counterclaim. That may be the only appropriate form for such an order where the subject matter of both the principal action and the counterclaim is nearly the same or where the two are inextricably linked. In an action in which the defender admits the pursuer's claim but counterclaims any order for caution made after such an admission is truly an order to find caution in respect of the counterclaim. See, for example, The Professional and Civil Service Supply Association Ltd, supra. The issue has arisen in this case as to whether it is competent to make an order for caution in relation to the counterclaim alone where there is no such admission.

4.5 Ordinary Cause Rule 19.4 provides that the Sheriff may deal with a counterclaim as if it had been stated in a separate action and may regulate the procedure in relation to the counterclaim as he thinks fit. Clearly the Sheriff will be required to deal with a counterclaim in that way where, for example, the principal action has been abandoned or decree de plano has been granted. However that Rule is not restricted to a situation such as that. In principle there would appear to be no reason why caution should not be required to be found in relation to a counterclaim alone, even in cases other than those in which it is no longer necessary for the court to reach a decision on the merits of the principal action. The number of cases in which that will be appropriate will no doubt be small. But it is not difficult to envisage a case in which a counterclaim, which is not inextricably linked with the principal action, may appear to amount to an abuse of process. In such a case it may be that a Sheriff would consider that the procedure in relation to the counterclaim should be dependent on the party counterclaiming finding caution for the expenses of it. In relation to a counterclaim the party counterclaiming is usually in a position equivalent to that of a pursuer. It is apparent from the pleadings in these counterclaims that the defender wishes to pursue a number of matters which appear to arise out of his relationship with his former wife, matters which have little or nothing to do with the merits of the principal actions. If the defender has reasonable prospects of success either in his defence to the principal actions or in relation to the counterclaims it is significant that his trustee has not applied to become a party to either of them. On the basis of the defender's pleadings it is at least possible that he sees his counterclaims as an opportunity to settle scores with his former wife, to secure a financial benefit for himself or to cause her financial detriment, without financial risk to himself. If that is so he should not be assisted to impose that risk on the pursuers. In these circumstances, in my opinion this is a case in which it is appropriate to ordain the defender to find caution in connection with the counterclaim.

4.6 So far as Article 6.1 of the European Convention on Human Rights is concerned the position is that an order to find caution will not necessarily lead to an infringement of the human rights of the party so ordered. Caution can act as a limitation on the right of access to the courts. Where caution is ordered the court must be satisfied that the limitation which that order implies does not restrict or reduce the access in such a way or to such an extent that the very essence of that right is impaired. Such a restriction must pursue a legitimate aim and there must be a reasonable and proportionate relationship between the means employed and the aim sought to be achieved. It is accordingly a matter of degree as to whether, in a particular case, the order in question impairs the very essence of that right. See Tolstoy Miloslavsky, supra at paragraph 59 and Aït-Mouhoub, supra at paragraph 52.

4.7 In the present case the requirement to find caution in the sum of Ł10,000 in each action, which the defender cannot comply with because of his sequestration, appears to prevent him from pursuing such defence as he may have to the principal actions. It is at least arguable that his right of access to the courts would be impaired in relation to his defence to these actions as a result of the order to find caution in each of them. But it is not clear that Article 6.1 of the Convention would be infringed by an order to find caution in these cases. The defender has not put forward a clear or detailed defence. His defence lacks candour and is almost wholly restricted to making the pursuers prove their case.

4.8 The same considerations do not apply to his counterclaims. In relation to them the defender is intent on pursuing claims for very substantial sums. In his counterclaims he appears to wish to raise a number of issues which would require extensive investigation and which would be likely to incur considerable expense for both parties. If he wishes to pursue these matters it is not unreasonable that the pursuers should have some reassurance that, in the event of their success, they would be able to recover at least a substantial proportion of the expense to which they will have been put by the defender by raising these claims. In these circumstances I am of opinion that it is not unreasonable to require the defender to find caution in respect of the counterclaims only.

4.9 I infer from the opinion of the sheriff that, if it had occurred to him that it was competent to do so, he would have been content to order the defender in these cases to find caution for the expenses of the counterclaims only. In the unusual circumstances of these cases, leaving aside for the moment the human rights concern, I am persuaded that it is justifiable to restrict the order for caution accordingly. The human rights concern would be very substantially met by the course of action which I have adopted. The amount at which caution should be fixed in that event was discussed during the hearing of the appeals. Although the agent for the defender suggested a lower sum, it was, I think, generally agreed that it would be appropriate to order the defender to find caution in the sum of Ł5,000 in relation to each of the counterclaims. Had he raised the counterclaims as separate actions there is little doubt that he would have been ordained to find caution. The sum of Ł5,000 appears to be reasonable.

5. Expenses

5.1 It was agreed that expenses should follow success if one side was wholly successful in the appeal. However if the court took the view that caution should be restricted to the counterclaims the defender moved for an award of expenses in his favour. It can be said that both parties have had some success in these appeals. I have found no expenses due to or by either party. Counsel for the defender moved the court to certify the cause as suitable for the employment of junior counsel. The agent for the pursuers adopted a neutral attitude to that motion. In my opinion these causes merit the employment of junior counsel and I have certified them accordingly.