Scottish Sheriff Court Decisions

SHERIFFDOM OF GRAMPIAN HIGHLAND AND ISLANDS AT PETERHEAD

Peterhead September 2011 Sheriff Mann

Act: Gibb

Alt: Mr Milne as Shareholder of the Company

The sheriff having resumed consideration of the foregoing petition Finds (1) that the amount of the share capital of BODYCHELL RECYCLING LTD paid up or credited as paid up does not exceed £120,000 (2) that the said company is unable to pay its debts; Therefore SUSTAINS the first plea in law for the Petitioners; DISMISSES the pleas in law for the Company and for Mr Gordon Milne; ORDERS that the said Company having its registered office at Bodychell, Memsie, Fraserburgh, Aberdeenshire AB43 7DB be wound up in pursuance of the Insolvency Act, 1986; Nominates and Appoints Gordon MacLure, Bishop's Court, 29 Albyn Place, Aberdeen to be the interim liquidator of the said company with the usual powers, all in terms of said Statute and of Law; Reserves meantime the question of expenses and appoints parties to be heard thereon within the Sheriff Court House, Queen Street, Peterhead on 14 October 2011 at 9:30am.

Sheriff Philip Mann

Note/

Note

1. Background

1.1 This is an application on behalf of the Commissioners for Her Majesty's Revenue and Customs ("the Petitioners") to wind up Bodychell Ltd ("the Company") under Section 124 of the Insolvency Act 1986 ("the 1986 Act"). The case called before me for proof on 15 August 2011, proof having been assigned by the interlocutor of a brother Sheriff dated 21 June 2011. By that same interlocutor the Sheriff had allowed Mr Gordon Milne, referred to in the interlocutor simply as "Mr Milne" and whose address (according to the averments in the record) is Bodychell, Memsie, Fraserburgh, to enter the process as a shareholder and ordained him to lodge defences within 14 days with a period of adjustment thereafter.

1.2 When the case called on 15 August 2011 the Petitioners were represented by Mr Gibb, solicitor. Mr Milne appeared as a party litigant. Mr Milne had, by that time, lodged answers but no record had been made up. I allowed a brief adjournment to allow Mr Gibb to have a record prepared and lodged.

1.3 At the outset of the hearing before me both parties indicated that they intended not to lead any witnesses. There was no formal renunciation of probation and no joint minute agreeing any facts. Accordingly, this being a proof, I was constrained to proceed on the basis of such facts as might be established by reference to the record, to admissions made therein and to any concessions made in submissions. This led me to observe that the Petitioners' case seemed to depend largely upon the certificate under Section 25A of the Commissioners for Revenue and Customs Act 2005 ("the 2005 Act") which had been lodged by the Petitioners; and to query whether I could take cognisance of it if it were not spoken to by a witness. I allowed Mr Gibb a further short adjournment to consider the point. Mr Gibb then referred to the cases of Inland Revenue Commissioners v Findlay McClure 1982 SLT 417 and Advocate General v Ronald George Shepherd (reported at www.scotcourts.gov.uk/opinions/mcc0507.html) and submitted that there had been no challenge to the section 25A Certificate either by the Company or by Mr Milne. The Petitioners were, therefore, entitled to rely on the Certificate in the absence of its being spoken to by a witness. Mr Milne maintained that I was not entitled to look at the section 25A Certificate if it was not spoken to by a witness. I allowed the hearing to continue without expressing a concluded view on that point and on the basis that I would determine it in the course of this judgement. Parties were content to proceed on that basis. This matter is dealt with at paragraph 4.2 of this judgement

1.4 It will be observed that Mr Milne was allowed to enter the process as a shareholder. The purpose of his entering the process was to protect himself, rather than the company, from the consequences of a winding up. I would have expected Mr Milne to have made averments with that in mind but his Answers clearly bore to be made on behalf of the Company. They commenced with the words "The Respondent Company Craves the Court" and they then set out a number of craves all of which were said to be "sought as remedies by the Respondent Company". The Company was not represented at the hearing before me. Mr Milne had no right of audience except as a party litigant in his capacity as a shareholder. This is confirmed in the Opinion of Lord Hodge at paragraph [8] in his judgement in the case of Her Majesty's Secretary of State for Business and Regulatory Reform for an order to the wind up UK Bankruptcy Limited [2009] CSOH 50 and in the related case Secretary of State for Business, Enterprise and Regulatory Reform v UK Bankruptcy Ltd 2011 S.C.115, which followed upon Lord Hodge's reference to the Inner House. Mr Gibb, in fairness to him, did make a preliminary point that Mr Milne's Answers should be refused but, in the event, he did not insist upon that and he made no motion for summary decree or the like. Accordingly and despite the fact that Mr Milne's pleadings appeared to be made on behalf of the Company, I was of the view that as a party litigant in his own right as a shareholder of the Company he was at least entitled to seek to persuade me in submission that the Petitioners' case had not been made out.

1.5 It was against the foregoing background that the hearing proceeded.

2. Submissions on behalf of the Petitioners.

2.1 Mr Gibb relied on the ground set out in section 122(1)(f) of the 1985 Act, namely that the Company was unable to pay its debts. To be able to succeed on that ground he had to establish one or other of the matters set out in section 123 of the Act. He founded upon Section 123(1)(e) in terms of which a company is deemed to be unable to pay its debts if it is proved to the satisfaction of the court that it is unable to pay its debts as they fall due.

2.2 Mr Gibb indicated that the Petitioners relied on the section 25A Certificate. The certificate referred to a schedule which set out various debts, including amounts, ranging from £1,916.71 to £5,250, due under determinations made by the Commissioners in terms of Paragraph 36 of Schedule 18 of the Finance Act 1998. By paragraph 39 of that schedule these determinations had effect for enforcement purposes as if they were self-assessments by the Company. The Company could have made the relevant returns which would have superseded the determinations. The Company had not done so. This process was not the appropriate process to determine the liability of the Company (Lord Advocate v McKenna 1989 SLT 460).

2.3 Mr Gibb referred to a passage in "The Law of Corporate Insolvency in Scotland" third edition page 96 where it was pointed out that Dillon LJ in the case of Taylors Industrial Flooring Ltd v M & H Plant Hire (Manchester) Ltd [1990] B.C.L.C 216 had said that where a company disputes a debt it must establish a substantial ground for doing so in order to avoid the winding-up petition being successful. In this case there could be no challenge to the determinations as they had not been appealed (Commissioners for Inland Revenue v Pearlberg [1953] 1 AER 388). By section 25A(1) of the 2005 Act the section 25A Certificate was sufficient evidence that the sum mentioned therein was unpaid. Under reference to the case of Re Lummus Agricultural Services Ltd [1999] B.C.C. 953 Mr Gibb submitted that the respondents had to show special reason why the court should not grant the winding-up order.

2.4 In anticipation of Mr Milne's submissions Mr Gibb made the following points.

2.4.1 The value of the Company's assets was irrelevant. In the case of Cornhill Insurance PLC v Improvement Services Ltd [1986] WLR 114 the continuation of an interim injunction taken out by Cornhill Insurance PLC (a well known insurance company with a substantial business) to stop the defendants presenting a winding-up petition in respect of a debt of £1,154 was refused.

2.4.2        There was no indication as to when a debt said to be due to the Company by a debtor would be paid. That matter had been canvassed in the Answers originally lodged on behalf of the Company in response to the Petition. Some considerable time had now elapsed and payment of that debt to the Company had still not materialised.

2.4.3 Any suggestion that the hearing should be adjourned or that the case should be sisted to allow the debt due by the Company to the Petitioner to be established should be resisted. The determinations were conclusive of the debt due and these had not been appealed. Nor had the Company lodged returns which would have displaced the determinations.

2.4.4 Any suggestion that the Petition should be dismissed under reference to the case of Purewal Enterprises Limited for an order to wind up Cathay Loon Fung Limited and another [2008] CSOH 127 should be resisted. That case could be distinguished on the basis that there, there had been a material non disclosure by the petitioning creditor regarding the true nature of the dispute. This had led to the dismissal of the petition on the basis that the true circumstances disclosed a dispute about the debt on bona fide grounds. For the reasons already advanced relative to the determinations there was no such bona fide dispute in this case.

3. Mr Milne's Submissions

3.1 Mr Milne maintained that there was a bona fide dispute about the debt due by the Company to the Petitioners. This was demonstrated by the fact that the Petitioners had started off claiming a sum of £61,074.76 but now acknowledged in their final pleadings that the debt stood at £26,172.42. They had proceeded on the basis of determinations, which he conceded they were entitled to do, and a certificate, but they could not rely upon these in the foregoing circumstances. Under reference to the case of Purewal the petition should be dismissed, which failing it should be sisted so that the dispute about the debt could be resolved. He maintained that the Company's tax returns, when completed, would displace the determinations and would result in a much lower debt but he conceded that the Company was unable to have the returns prepared due to lack of funds with which to pay the Company's accountants to carry out that work.

3.2 Mr Milne maintained that the Company was a creditor of a corporate customer, referred to in his pleadings as "TWMA". They owed the Company a sum of £32,325.84. He referred to email correspondence which had been lodged in process. This confirmed that this debt would be settled if the Company could produce certain certificates from the Scottish Environment Protection Agency ("SEPA"). These certificates could be obtained by the Company if they were given time to do so but Mr Milne conceded that this depended upon the Company satisfying SEPA on certain matters. He conceded that the Company could not satisfy the SEPA requirements due to lack of funds.

3.3 Without any basis in his pleadings for doing so, Mr Milne explained that the Company owned a piece of ground which sat between other parcels of ground belonging to him as an individual. Planning permission existed for mineral extraction upon his ground and there was a possibility of his leasing his ground out for such a purpose at a significant yearly rental. Such a lease, however, depended upon the ground belonging to the Company being available for inclusion in the lease. A winding-up order would make it difficult, if not impossible, to lease his ground out.

3.4 Finally, Mr Milne maintained, under reference to valuations of land which had been lodged as productions, that the value of the Company's assets far outweighed the amount of its debts and that the Company was therefore solvent. That being the case, section 123(2) of the 1986 Act did not apply and it could not be said that the Company was unable to pay its debts.

4. Discussion and Decision

4.1 To succeed, the Petitioners must demonstrate that the Company is unable to pay its debts. A company is deemed to be unable to pay its debts if any of the circumstances set out in the paragraphs of section 123(1) of the 1986 Act pertains or if, in terms of section 123(2) of the Act, the Petitioners prove to the satisfaction of the court that the value of the Company's assets is less than the amount of its liabilities. If the Petitioners can show that any one of the paragraphs of section 123(1) applies they do not need also to establish the ground set out in section 123(2). In this regard, Mr Milne's submission is misguided. The Petitioners chose to rely on paragraph (e) of section 123(1), namely proof to the satisfaction of the court that the Company is unable to pay its debts as they fall due.

4.2 The Petitioners must first of all establish that the debt exists and that it remains unpaid. They rely on the section 25A certificate. Before I can take cognisance of it I need to be satisfied that it has been properly introduced in evidence. No witness spoke to the section 25A Certificate but its existence had been acknowledged both by the Company and by Mr Milne in several places in their respective pleadings by use of the words "The terms of the Certificate ..... are referred to for their terms beyond which no admission is made". That is sufficient to allow me to take note of the section 25A Certificate and to accept it as part of the evidence in the case.

4.3 In terms of section 25A(1) of the 2005 Act the section 25A Certificate is sufficient evidence that the sum mentioned in the certificate is unpaid. But, here there is a potential difficulty for the Petitioners because just because a sum of money is unpaid does not mean that it is due and resting owing in the first place. I pause to observe that section 25A(1) of the 2005 Act should be contrasted with the terms of Regulation 28(3) of the Income Tax (Employment) Regulations which featured in the Findlay McLure case. Regulation 28(3) provides that a certificate of a Collector "shall be sufficient evidence that the sum mentioned in the certificate is unpaid and is due to the Crown" (my emphasis). In my view, section 25A(1) does not go so far. It does not provide that the certificate is sufficient evidence that the sum mentioned is due. It is the determinations under paragraph 36 of Schedule 18 of the Finance Act 1998, not the section 25A certificate, which make the sums of money determined due to the Petitioners and payable to them as a debt. Accordingly, in order for the Petitioners to prove their case they need to prove that the determinations were made and they cannot do that merely by pointing to the section 25A Certificate.

4.4 In article 5 of condescendence the Petitioners aver that determinations were made under Paragraph 36. They go on to aver that notices of the determinations were issued to "the defender" (which must be a reference to the Company) on certain dates. Both the Company and Mr Milne in their answers aver that the making of the determinations is not known and not admitted. I do not think that that could be held against them as admissions because the making of the determinations would not be a matter within their knowledge. However, they both go on to aver that the issue of notice of the determinations is also not known and not admitted. Non-receipt of the notices would be a matter within the knowledge of the Company. It would also be a matter within the knowledge of Mr Milne as he was a major, if not the only, shareholder of the Company (which had only 2 issued shares) and it was clear to me from his submissions that he was controlling the Company. Neither the Company nor Mr Milne had an averment to the effect that the notices had not been received and Mr Milne did not make any such suggestion in the course of his submissions. Ordinary Cause Rule 9.7 provides that if a statement by one party within the knowledge of another party is not denied by that other party, that other party shall be deemed to have admitted that statement of fact. That is not quite the case here but, nonetheless, I think that the lack of an averment that the notices were not received, in the face of an averment that the notices were issued, debars the Company and Mr Milne from asserting that the notices were not issued. Therefore, I think that both the Company and Mr Milne must be deemed to have admitted the issue of the notices. If the notices were issued then it can be reasonably inferred that the determinations to which the notices related were, in fact, made. In any event, Mr Milne also conceded in the course of his submissions that the Petitioners were entitled to make determinations. He maintained that the determinations would be displaced by the Company's tax returns if and when made. That necessarily involved an acknowledgement that there were determinations to be displaced. At no point did he seek to suggest that determinations had not been made. Accordingly, I am satisfied that the Petitioners have also proved the establishment of the debt without the need for any witness to speak to the making of the determinations.

4.5 I dismiss Mr Milne's suggestion that there is a bona fide dispute about the debt in this case. It may be true that the debt could be reduced or adjusted if the relevant tax returns were made by the Company but that is beside the point. I accept that in the absence of appeal and in the absence of relevant returns the determinations are conclusive and thus there is simply no room for dispute. Accordingly the case of Purewal is distinguishable, as also it is distinguishable for the reasons given by Mr Gibb in his submissions.

4.6 The question, then, is whether or not the fact that a debt is due and unpaid establishes that the Company is unable to pay its debts as they fall due. The Petitioners maintain that that can be inferred from the mere passage of time since the determinations were made and intimated, in January 2009, December 2009 and February 2011, without payment. Mr Milne maintained that the Company could meet its debt to the Petitioners given a reasonable amount of time to collect a debt due to it by a business debtor. However, he conceded in submissions that the ability of the Company to collect that debt depended upon the Company providing evidence of compliance with certain SEPA regulations and that that could not be done without incurring expenditure for which there were no funds. This was reinforced by a concession that, although Mr Milne considered that the debt to the Petitioners could be reduced by production and lodging of relevant returns, there were no funds available to instruct accountants to prepare returns. In the whole matter I am satisfied that the Company is unable to pay its debts as they fall due. Accordingly, the Company must be deemed to be unable to pay its debts.

4.7 Turning now to the question whether or not I should grant the winding-up order, I reject Mr Milne's suggestion that the Petition should be dismissed because of the effect of a winding-up order on his ability to lease out his own land. Whatever the consequence of a winding-up order in that regard it is a consequence to Mr Milne as an individual not qua shareholder of the Company. That cannot provide a good reason not to grant the order sought.

4.8 I accept that section 122, by its use of the word "may", gives the court a discretion but it is a discretion that must be exercised judicially. I follow the reasoning of Park J at pages 956 (at H) to 957 (at A) in the Lummus case where he said: "I begin with the basic proposition that, although both s.122 (which uses the word "may") and s.125 give the court a discretion whether to make a winding-up order, it is well settled that, if a creditor with standing to make the application wants to have the company wound up, and if the court is satisfied that the company is unable to pay its debts, a winding-up order will follow unless there is some special reason why it should not. It is sometimes said that, in such a case, a petitioning creditor is entitled to a winding-up order 'ex debito justitiae'.

4.9 I pay no heed to Mr Milne's submissions about the capital solvency of the Company. The Petitioners have chosen not to rely on the ground set out in section 123(2) of the 1986 Act. They have chosen, instead, to rely on section 123(1)(e). If they satisfy that subsection that is enough for them to succeed.

4.10 I think that Mr Gibb's submissions based on the various authorities cited by him are well founded and for the reasons already given I am satisfied that the Petitioners have made out their case for the granting of a winding-up order. Accordingly, I have granted the order.

4.11 Parties asked that I reserve the question of expenses and I have done so. I have assigned a hearing for that matter to be resolved.