Scottish Sheriff Court Decisions

in the cause

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GLASGOW, 29 October 2002.

The Sheriff Principal having resumed consideration of the cause refuses the appeal and adheres to the sheriff's interlocutor dated 25 June 2002; finds the petitioners liable to the respondents in the expenses occasioned by the appeal and remits the account thereof when lodged to the auditor of court to tax and to report thereon.

[1] On 11 February 2002 the petitioners presented an application to the court seeking an order to wind up the respondent company under the provisions of the Insolvency Act 1986. The petition narrated that the respondents were indebted to the petitioners in the sum of £244.62; that a letter of demand requiring payment of that sum had been sent to the respondents on 30 January 2002, and that the respondents had failed to pay. The petition proceeded to aver that the respondents "are deemed to be unable to pay their debts". It also contained a bald averment that "a striking off notice was previously issued against the company".

[2] The respondents lodged answers to the petition. In these answers the respondents averred that the demand of 30 January 2002 was the "first correspondence" received by them from the petitioners. They went on to say that this demand:

They further averred that they were able to pay their debts as they fell due and in particular were able to pay a debt to the extent of £244.62. They averred that they disputed the debt.

[3] A hearing was assigned for 25 March 2002. On that date it would appear that the sheriff was informed that the debt had been paid and, although his Note does not specifically say so, that the petition could be dismissed. He was invited to rule on the question of expenses. The sheriff expressed a reluctance to do so. He reminded parties of the passage in the second edition of Macphail on Sheriff Court Practice, para 14.65 which is in the following terms:

In that situation the hearing was continued until 19 April on which date a joint minute was submitted in which parties' agents concurred in stating to the court:

Thereafter the sheriff heard extensive argument on both sides. That argument went well beyond the issue of expenses. It touched on issues of competency, as well as appropriateness, of a petition for winding up based on an assertion of a low level debt.

[4] Having taken the matter to avizandum, on 25 June 2002 the sheriff pronounced an interlocutor dismissing the petition and finding the petitioners liable to the respondents in the whole expenses of process. He issued a Note in terms of which he concluded that

He proceeded to hold:

On the issue of expenses he had this to say:

[5] The petitioners have now appealed on the matter of expenses. Their agent acknowledged the reluctance of an appellate court to interfere in a matter of this nature but contended that there was a point of principle involved and that there had been a miscarriage of justice. The sheriff, it was argued, had attached more weight to the level of the debt than to the agreed set of circumstances, notably (1) that the debt was paid on the day of the hearing despite answers denying that it was due; (2) that the joint minute acknowledged the existence of a request for payment before the demand letter of 30 January; (3) that a striking of notice had been issued but was not proceeded with; (4) that the company was dormant and (5) a series of demands set out in a note of adjustments for the petitioners which had been lodged prior to the hearing on 19 April 2002, but had not been proceeded with.

[6] In developing this argument the agent for the petitioners referred, amongst other authorities to Re Nowmost Co Ltd [1996] 2 Butterworths Company Law Cases 492. That was a case in which a winding up order was sought on the basis of a balance of £1,677 due in respect of a judgment obtained against the respondent company. On the day of the hearing of the petition counsel for the petitioner indicated that the debt had been paid five days previously. He asked that the petition should be dismissed with an order for the petitioners' costs. The father of one of the directors of the company appeared and made some representations in that respect, and the petition was dismissed with no costs awarded. In setting aside that decision on appeal and awarding costs to the petitioners Lindsay J said this (at p 496D):

[7] The sheriff, it was argued, had allowed himself to be distracted by the fact that the debt was for less than £750. The fact that in terms of Section 123(1)(a) of the Insolvency Act 1986 a company was deemed unable to pay its debts if it failed to pay a debt exceeding that level following service of a demand in prescribed form was neither here nor there. The fact that the respondent company had failed to pay a debt of a less amount on demand but had proceeded to do so immediately before the hearing of the petition, pointed to the debt being due and a consequent inability to pay at the time of presentation of the petition. Although the English courts would not grant an order on the unsupported petition of a creditor for less than £750 in the absence of special circumstances (see Palmer's Company Law 25th ed. para 15.213) there was authority for the view that the courts in Scotland would not adopt a similar position: J Speirs & Co v The Central Building Co, 1911 SC 331. The reservation in the footnote in Palmer to the effect that this authority should not be followed in Scotland was not justified.

[8] Stated shortly the argument presented by the agent for the respondents was to the effect that the petitioners had not discharged the very heavy onus of showing that the sheriff's exercise of discretion was plainly wrong. In terms of his decision the petition was dismissed. Upon that basis the general rule that expenses followed success ought to be adhered to. The conclusion that the petitioners could not have succeeded was not an unreasonable one. They had to satisfy the court that the respondent company could not pay its debts. All that the information disclosed was that having been provided with further information requested from the petitioners, the respondents had settled a low level debt. The sheriff had taken into account the previous demands as disclosed in the adjustments but had noted that there was no invoice supporting the petitioners' claim. The other matters raised by the petitioners were irrelevant. It was of no consequence that there had been a striking off notice which had not been proceeded with since that might have been issued for any number of reasons. The fact that the company was dormant did not raise any inference that it was unable to pay. The reservation in Palmer regarding the continued application of Speirs was justified. In any event that case proceeded on the basis of an unsatisfied decree and fell to be distinguished from the present. The same could be said of Re Nowmost. The application in that case proceeded on the basis of an unsatisfied default judgment. In the instant case it could be said that both parties had been successful.

[9] Without disrespect to the thoroughness of the arguments presented at both stages, and to the attentive manner in which the sheriff dealt with a case, it seems to me that the issue is a short one. It was neither necessary, nor desirable as a matter of expediency, for the court to feel compelled to reach a view as to whether the petition would have succeeded or not. In particular this is not a situation in which the court ought to be drawn into a discussion as to whether the Scottish courts will ever grant a winding up order solely on the basis of an asserted debt of less than £750. Having said that I am very much inclined to agree with the view expressed in Palmer that the Scottish courts would be likely to follow the English practice of not granting an order for winding up on the unsupported petition of a creditor for less than £750 unless there were other circumstances. One of these would be the fact that the petition was based on an unsatisfied decree. I note that this was the position in the case of J Speirs & Co and it appears to me that the observations made by the judges in that case to the effect that a winding up order is a perfectly proper remedy for enforcing payment of a just debt were made against that background. In my view the use of petitions for winding up as a means of recovering low level debts is not to be encouraged.

[10] Other than the level of the debt the situation which faced the sheriff was far from unusual. Proceedings had been brought in respect of a debt which had been paid, thereby removing the basis for suggestion that the respondent company was unable to pay its debts. In reaching his view on expenses, the sheriff proceeded on the basis that the respondents had achieved "complete success" although he also observed that the petitioners had succeeded to the extent of obtaining payment. In my view the notion of "success" in this context is something of a misconception. On any view I agree with the submission of the respondents that there was an element of success on the part of both parties. The real questions for determination was whether the petitioners were justified in bringing the proceedings, and in particular whether they were justified in seeking to recover their debt by way of a petition for winding up. On that matter the sheriff had a wide discretion, which, as often occurs when a case has been settled, required to be exercised on the basis of relatively limited information.

[11] The factors which were before the sheriff were, first, that this was a liquidation petition based on an unconstituted debt of a very modest level. Second, the petition had been met with full answers (which cannot be said to have been merely delaying or lacking in candour) setting out that the first correspondence the respondents had received in respect of the alleged debt was on 30 January 2002. They had averred that this had been met with a request for proper details. I pause to observe that the very step of entering the process in this form must have cost as much as the debt itself. Against that, on the other hand, was the acceptance in terms of the joint minute that there had been a demand for payment prior to 30 January. The third factor was that the debt had been paid immediately prior to the hearing on 25 March. That factor, in the context of this application, is entirely neutral. Whilst on one view it may be indicative of the debt being due, it could equally be said to indicate that the underlying contention that the respondents were unable to pay their debts was unfounded. Of the other factors founded on by the petitioners I agree with the respondents' submission that the striking off notice was not relevant and the adjustments referred to do appear to have been taken into account.

[12] On the basis of that limited information it might well be said that this was a case in which justice would have been done by finding no expenses due to or by either party. This situation falls to be contrasted with that in Re Nowmost Co Ltd where there was an unsatisfied default judgment and no proper appearance on behalf of the respondent company. I am prepared to accept that in the normal case payment of a debt raises the inference that the petitioners were justified in bringing the proceedings, but the steps taken by the respondents in the absence of a proper invoice were sufficient in this case to provide a basis for departure from the normal rule. The only remaining question is whether the sheriff went too far in finding the petitioners liable in the expenses of the petition. I am by no means convinced that in doing so he went beyond the range of steps which a reasonable sheriff would take. I am strongly influenced by the level of the sum involved in this case. This was a matter which, as the sheriff pointed out, might very well have been resolved by the raising of a small claim action if litigation had to be resorted at all. It is not a case in which the circumstances justify interference with the exercise of his discretion. The appeal is accordingly refused.