Scottish Sheriff Court Decisions

SHERIFFDOM OF GLASGOW AND STRATHKELVIN AT GLASGOW

[2016] SC GLA 79

A827/14

JUDGMENT OF SHERIFF S REID Esq

in the cause

MACALLANS, SHEENA DIANE ADAM and IAN GRANT

Pursuers & Real Raisers

against

W BURRELL HOMES LIMITED

First Defender

and

BRIAN ANTHONY MCCARDLE

Second Defender

and

DOMINIC MARTIN SWEENEY

Third Defender

Act: No appearance

First Defender: No appearance

Second Defender: Young, Advocate instructed by Complete Clarity Solutions, Glasgow

Third Defender: Stevenson, Russells Gibson McCaffrey, Glasgow

GLASGOW, 15^th November 2016.  The sheriff, having resumed consideration of the cause, ex proprio motu in terms of Rule 40.16 of the Ordinary Cause Rules 1993, Finds that the adjusted claim of the second defender (no. 15 of process) and the adjusted claim of the third defender (no. 18 of process) upon the fund in medio are incompetent; Repels the said claims; Reserves the issue of expenses meantime; Appoints parties to be heard thereon at a case management conference before Sheriff Reid on a date to be hereafter assigned. 

SHERIFF

NOTE:

Summary

[1]        This action of multiplepoinding has now spawned two debates, each raising separate issues of competency.

[2]        In the first debate, I adjudicated upon the competency of the action itself. The issue in dispute in the second debate concerns the competency of the second and third defenders’ claims upon the fund in medio, in particular whether they qualify as “riding claims” in the context of a multiplepoinding.

[3]        The background is set out more fully in my earlier judgment dated 22 June 2015. The pursuers, a firm of solicitors, acted for the first defender, W. Burrell Homes Limited (“the company”) in the sale of heritable property owned by the company.  That sale generated net free proceeds of £229,000.  It is not in dispute that that sum of money, now constituting the fund in medio, was and remains properly due and payable to the company. The second and third defenders are the co-directors of, and equal shareholders in, the company.  They have fallen out.  As a result, the company is in a state of paralysis.  There being no joint and unequivocal instruction from the company’s directors regarding disbursement of the sale proceeds due to the company, the pursuers commenced this action seeking inter alia judicial authority for the consignation of the fund in the hands of the sheriff clerk at Glasgow.

[4]        An issue then arose as to the competency of the action. It was argued that there was no double distress because all parties acknowledged that the fund in medio was due to the company. Following debate, I concluded that the action was competent, principally because the pursuers qua trustees were entitled, by means of a multiplepoinding process, to be relieved of their obligation to hold the fund, and to obtain a judicial discharge. 

[5]        I also opined that, esto the pursuers did not hold the fund qua trustees, the action remained competent because, properly understood, there were at that stage competing claims upon the fund.  I analysed those competing claims as comprising conflicting asserted rights of the second and third defenders, as co-directors of the company, to manage, control and direct the distribution of the fund in medio.

[6]        That said, even at the stage of that first debate, an alternative basis of claim to the fund in medio was foreshadowed in the pleadings.  It was articulated in the following terms in the second defender’s adjusted defences (item 11 of process):-

“Esto the second defender as a director of the first defender has no claim on the funds in medio (which is denied) the second defender as a private individual is owed funds by way of loans to the first defender (directors’ loans) and accordingly has a claim on the funds in medio”.

In this alternative formulation, the second defender’s interest in the fund was founded upon his capacity as an alleged creditor of the company.

[7]        Claims were subsequently lodged by the second and third defenders upon the fund in medio. Each claims as a creditor of the company et separatim as a co-shareholder in the company. Preliminary pleas were taken to the relevancy and specification of these competing claims. Accordingly, the action proceeded to a second debate.

[8]        No claim has ever been lodged by the company itself to any part of the fund.

[9]        At the second debate, a discussion evolved concerning the competency of the claims.  Having considered the parties’ careful submissions, I have concluded that the claims of the second and third defenders are indeed incompetent and fall to be repelled. That is because, principally, they do not constitute direct claims upon the fund in medio and they do not qualify as riding claims in the context of a multiplepoinding.  I explain my reasoning below.

Submissions for the second defender

[10]      At the outset of the (second) debate), counsel for the second defender, acting in the proper discharge of his duties to the court, expressed concerns regarding the competency of both claims.  He acknowledged difficulties in analysing the claims as anything other than purported “riding claims”. Reference was made to The Royal Bank of Scotland v Stevenson (1849) 12 D 250; Home’s Trustees v Ralston’s Trustees (1834) 12 S 727; Gill’s Trustees v Patrick & Ors (1889) 16 R 403; Canning v Glasgow Caledonian University & Ors 2016 SLT (Sh Ct) 56; Clark’s Executor v Clark 1953 SLT (Notes) 58.

[11]      Counsel submitted that if the claims were found to be incompetent, the appropriate disposal was to sist both claims to afford the second and third defenders the opportunity properly to constitute their claims against the first defender (the company), or, alternatively, to await the liquidation of the company.

[12]      Alternatively, if I was satisfied that the claims were competent, I was invited to dismiss the third defender’s claim and allow a proof before answer on the second defender’s claim.  Counsel challenged the relevancy of the third defender’s principal claim of £165,000.  The related averments were said to be confusing: sometimes the claim was characterised as repayment of a loan; sometimes it appeared to be in the nature of an unjustified enrichment claim.  If the claim was founded upon unjustified enrichment, it was said to have prescribed.  Either way, the third defender had failed to explain why or how the money allegedly disbursed by him had come to be paid; and, if it was a loan, the term of the loan.  There was also said to be a lack of essential specification of the computation of the £165,000 claim.

[13]      Counsel also challenged the competency of the third defender’s secondary claim to the extent that it sought an equal distribution between the second and third defenders of the residue of the fund, following deduction of the third defender’s primary claim for £165,000.  The justification for this equal distribution was said to be that the second and third defenders were the company’s sole and equal shareholders.  This secondary claim was said to be incompetent as it constituted an unlawful and unprecedented return of the company’s capital to its shareholders, outwith the proper statutory mechanism for an approved reduction in capital.

[14]      In contrast, the second defender’s claim was said to be straightforward.  It was founded upon unjustified enrichment.  Reference was made to Reid v Lord Ruthven (1918) 55 SLR 616. Relevancy and specification criticisms sought to be levelled at the second defender’s claim were dismissed.  Reference was made to Court of Session Practice (Macfadyen), F/722; Longmuir v Moffat 2009 SC 329; MRS Distribution Ltd v DS Smith (UK) Ltd 2004 SLT 631; Ocra (Isle of Man) Ltd v Anite Scotland Ltd 2003 SLT 1232; and Sim v Howat [2011] CSOH 115.

Submissions for the third defender

[15]      The third defender’s solicitor conceded a concern regarding the competency of the claims, but opposed dismissal of the claims or a sist. He submitted that, given the lengthy procedure to date, the position had “evolved” and the present claims should simply be determined on their merits.

[16]      The third defender maintained the relevancy and validity of his claim. It comprised a claim for reimbursement of a single payment made by the third defender on behalf of the company to an identified creditor, with the date and mechanism of payment being averred.  There was said to be no defence to this claim.

[17]      I was invited to dismiss the second defender’s claim. Specifically, the claim was said to lack specification of the alleged “debts” of the company that were allegedly paid by second defender; of the identities of the company’s alleged creditors; of the dates when sums were said to have been expended by the second defender on behalf of the company; of the manner in which the company’s alleged indebtedness to creditors was said to have been settled; and, in any event, of the computation of the claimed sum of £127,000 (which sum, it was noted, differed from the aggregate claim set out in the table on page 6 of the second defender’s claim).

Discussion

[18]      In my judgment, the claims of the second and third defenders are not competent and should be repelled.

What is a riding claim?

[19]      Broadly speaking, claims in a multiplepoinding fall into two categories: they may be direct claims or indirect (or riding) claims. A direct claim involves a direct nexus between the claimant and the whole or part of the fund in medio. Illustrations of direct claims are the assertion of a right of ownership of the fund; the assertion of a right of possession of the fund; an asserted right to have custody of the fund (Canning v Glasgow Caledonian University 2016 SLT (Sh Ct) 56); an asserted personal right to manage, administer or direct the disposal of the fund (Macallans v W. Burrell Homes Ltd & Ors 2015 SLT (Sh Ct) 243).

[20]      A further illustration of a direct claim is that of a creditor of a person to whom the whole or part of the fund may be due, where the creditor has executed an arrestment of the whole or part of the fund. In this scenario the creditor’s debtor may not have lodged a claim in the multiplepoinding at all. Nevertheless, provided the creditor has arrested the fund (either in execution of decree against the creditor’s debtor or on the dependence of proceedings to constitute the claim against the debtor), the creditor is entitled to lodge a direct claim in the multiplepoinding (Gill’s Trustees v Patrick & Ors (1889) 16 R 403 at 408-409 per the Lord President; and at 410-411 per Lord Shand). The diligence itself creates the requisite “nexus” (Gill’s Trustees, supra, per Lord Shand) between the creditor and the fund, entitling the creditor to lodge a claim in the multiplepoinding even absent a claim upon the fund by the creditor’s debtor.

[21]      Contrast such direct claims with the peculiarity or “excrescence” (Thomson & Middleton, Manual of Court of Session Procedure, p. 124) that is known as the riding claim. It is indirect in nature. A riding claim is a claim at the instance of a creditor of a claimant in a multiplepoinding to be ranked and preferred upon such portion of the fund in medio as the principal claimant (that is, the creditor’s debtor) may be found entitled to. If sustained, a riding claimant is ranked and preferred upon the fund (or relevant portion) in “room and place” of the primary claimant (i.e. the creditor’s debtor) and “as a rider upon his claim” (Maclaren, Court of Session Practice, p. 674).  More than one riding claim may be lodged on a debtor’s claim, in which case the riding claims constitute a competition among themselves to be settled after it is found that the principal claimant (the creditors’ debtor) has right to the fund (Thomson & Middleton, supra, 124).

[22]      So, in contrast with a direct claim, a riding claim requires no direct nexus between the riding claimant and the fund, such as a direct proprietorial or possessory or managerial claim to, or executed diligence against, or an assignation of, the fund in medio. It has been suggested that the concept of the riding claim was first introduced as a surrogatum for such a nexus, by which mechanism the court could be alerted by creditors of primary claimants that the disputed fund should not be released (The Royal Bank of Scotland v Stevenson & Geddes (1849) 12D 250 at 252 per Lord Jeffrey). But what is certainly required of a creditor’s riding claim is the subsistence of a primary claim upon the fund by the creditor’s debtor, on the back of which the creditor’s claim can ride (Gill’s Trustees, supra, especially at 409 per Lord Mure).

[23]      There are further recognised limits to the admission of riding claims in a multiplepoinding. A riding claim must be constituted (The Royal Bank of Scotland v Stevenson (1849) 12D 250; Wilson v Young (1851) 13D 1366). An illiquid, unconstituted, disputed claim cannot be ranked as a rider.  This is intended to avoid “inextricable confusion” in a process that is already “complicated enough” without engrafting upon the primary litigation “a series of supplementary multiplepoindings” to adjudicate upon the merits of creditors’ claims (Royal Bank of Scotland, supra, at 252 per Lord Mackenzie and Lord Fullerton). 

[24]      Likewise, a riding claim must be a claim against a party (the creditor’s debtor) who himself has an entitlement to the fund in medio or part thereof. In The Royal Bank of Scotland case, a “check” was placed on what was described as the “growing evil” of claims being submitted by creditors of creditors, on the logic that “rider might be heaped upon rider, till your tower reached to heaven” (supra, per Lord Jeffrey at page 252).  In short, a riding claim must be against a party whose funds constitute the fund in medio or otherwise to whom the whole or a portion thereof is due.

[25]      Against that legal background, it may convenient to consider the nature of the claims lodged by the second and third defenders.

What is the nature of the present claims?

[26]      In their respective pleadings the second defender explicitly accepts – and the third defender implicitly accepts – that the fund in medio belongs, and is due and payable, to the company (the first defender).

[27]      The second defender claims to be a “creditor” of the company (article 7, second defender’s condescendence & claim as further adjusted to 8 February 2016). He avers that the company was unjustifiably enriched at the expense of the second defender, when, on an (unspecified) occasion or occasions sometime after August 2013, the second defender settled (unspecified) debts owed by the company to the tune of £127,918.41. For his part, the third defender also claims to be a “creditor” of the company (article 5 and plea-in-law 1, third defender’s condescendence & claim as adjusted to 11 February 2016: item 18 of process). He avers that £165,000 was “lent” by him to the company on 19 June 2009 when the proceeds of sale of a property (at Clydeford Road, Glasgow) owned by him were paid to the company’s bankers in part-payment of the company’s secured indebtedness to its bank. This is averred to be “[i]n effect…. a director’s loan”.

[28]      Interestingly, the third defender advances an additional claim. He  avers that as a “one-half shareholder” in the company (article 6 & plea-in-law 2, third defender’s condescendence & claim), he is also entitled to be ranked primo loco on a one-half share of the balance of the fund in medio, following deduction of his primary claim of £165,000. The second defender disputes this additional claim, averring that the residue of the fund is payable to the company. However, on an esto basis the second defender avers that the second and third defenders should be ranked and preferred pari passu on any residue of funds remaining after settlement of the second defender’s claim and certain specified debts owed to third party creditors (including HM Revenue & Customs). 

[29]      It will be recalled, of course, that the company has never submitted a claim upon the fund.  

Conclusion

[30]      In my judgment, the present claims are incompetent because they are neither direct claims upon the fund nor do they qualify as riding claims.

[31]      They are not direct claims upon the fund because no real or personal rights to or over the fund in medio are asserted; the fund has not been attached by diligence; and no other nexus between the claimants and the fund is averred. Ex facie the claims bear to be indirect claims, predicated upon the alleged status of the second and third defenders as creditors of the company whose funds constitute the fund in medio.

[32]      But they do not qualify as riding claims in the context of a multiplepoinding because (i) the company, of which the second and third defenders claim to be creditors, is not itself a claimant upon the fund in medio (Gill’s Trustees, supra), and (ii) the claims against the alleged debtor (the company) are not constituted, liquid or admitted (The Royal Bank of Scotland, supra; Wilson, supra). 

[33]      The additional (and alternative) claims of, respectively, the third and second defenders, as co-shareholders, to a share of the residue of the fund following deduction of their own claims, are similarly misconceived.

[34]      The holding of a share in a company limited by shares confers a bundle of rights and liabilities upon the holder. The principal rights of the shareholder are the right to receive a dividend, if declared; the right to vote at meetings of members; and the right – in a winding up of the company – after payment of the company’s debts, to a proportionate part of the capital or otherwise to participate in the distribution of assets of the company, all subject to the company’s memorandum and articles of association. The principal duty of a shareholder is to contribute to the company’s liabilities, to the extent of the nominal value of the share. The articles of association constitute a contract between each member and the company.

[35]      Critically, a shareholder, by virtue merely of owning a share, does not own any of the company’s assets. They belong to the company as a separate, independent legal entity. A shareholder has no direct right to, in or over any asset of the company.  

[36]      Accordingly, viewed in the context of a multiplepoinding, a purported claim by a shareholder against a fund in medio belonging to a company is not in the nature of a direct claim at all. The present claimants, as shareholders, can aver no real right to, or personal right over, the fund; no diligence has been executed by either claimant against that asset of the company; and I can conceive of no other substantive nexus connecting the shareholders to the company’s asset. The claims must be indirect in nature, in the sense that, at best, the second and third defenders qua shareholders claim to be “creditors” of the company in some sense.

[37]      On that logic, however, the claims must fail because they do not qualify as riding claims in the context of a multiplepoinding, for the reasons previously discussed. The company, of which the shareholders claim to be creditors, is not itself a claimant upon the fund in medio; and, in any event, neither claim is constituted, liquid or admitted.

[38]      Quite apart from that basic deficiency, I doubt whether these additional/alternative claims can competently be adjudicated upon at all in the context of a multiplepoinding. The proper process by which such claims should be determined is within a voluntary or compulsory winding-up under the Insolvency Act 1986. I need not explore that issue further though.

[39]      It was submitted that, if I were to conclude that the claims were incompetent, I should exercise my discretion to sist the proceedings to afford the claimants the opportunity to seek to constitute their claim(s) against the company, if they so wished. While that option would be available to me, I have concluded that a sist is not appropriate in the circumstances.

[40]      The second and third defenders have had adequate opportunity properly to constitute their claims. This action commenced in October 2014. It was itself preceded by a separate litigation by the pursuers to recover monies (of which the fund forms part) from the second defender. Over two years and two debates later, the second and third defenders have still made no effort to constitute their claims against the company. Indeed, the issue of the competency of the directors’ claims was raised by the third defender’s agent over a year ago at a case management discussion in October 2015. No undertaking or indication has been offered by either defender that any proceedings would ever be commenced to seek to constitute his claim, or that such proceedings would commence soon. The outcome of any such proceedings, if raised, is also unclear.  I am conscious that any court action by the second or third defender against the company may not be capable of being defended on its merits anyway, as the company is presently disabled from acting, absent consensus between the two directors. That said, permission for some form of judicial authority to defend the proceedings might perhaps be capable of being sought by one or other of the directors. But all this suggests further interminable delay, increased expense, and a wearying potential complication of procedure. Meantime, the company remains paralysed. It has creditors who are not being paid. The second and third defenders alone are to blame for that breakdown in the normal functioning of the company’s affairs. Given the entrenched mutual hostility and intransigence of the second and third defenders over the preceding years, I have no confidence that the position will be resolved – and that a sist will be capable of being recalled – any time soon.  

[41]      In my judgment, the merits of the claims as lodged should be determined without further delay. Both claims are incompetent. Looking at the wider context, the appropriate disposal is formally and finally to repel both claims.

[42]      In doing so, I take comfort in observing that the pursuers and real raisers have already obtained their discharge by a preceding interlocutor. They have no further interest in the proceedings. The claimants themselves are not left without a remedy. If they persist in failing to cooperate to discharge their duties and functions as co-directors, the impasse may be broken by the presentation (by either one of them, or by a third party) of a petition for the winding-up of the company. In that event, it will be for the liquidator alone to ingather the company’s assets, including those presently held by the sheriff clerk, for distribution in accordance with the usual statutory and common law rules.