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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Smith v. Bridgend County Borough Council [2001] UKHL 58 (8th November, 2001)
URL: http://www.bailii.org/uk/cases/UKHL/2001/58.html
Cite as: [2002] 1 All ER 292, 80 Con LR 172, [2001] UKHL 58, [2002] 1 AC 336, [2002] 1 BCLC 77, [2002] BLR 160, [2001] NPC 161, [2002] TCLR 7, [2002] AC 336, [2001] BCC 740, [2001] 3 WLR 1347

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Smith v. Bridgend County Borough Council [2001] UKHL 58 (8th November, 2001)

HOUSE OF LORDS

Lord Bingham of Cornhill Lord Browne-Wilkinson Lord Hoffmann Lord Scott of Foscote Lord Rodger of Earlsferry

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

SMITH (ADMINISTRATOR OF COSSLETT (CONTRACTORS) LIMITED

(APPELLANT)

v.

BRIDGEND COUNTY BOROUGH COUNCIL

(RESPONDENTS)

ON 8 NOVEMBER 2001

[2001] UKHL 58

LORD BINGHAM OF CORNHILL

My Lords,

1. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Hoffmann. I am in full agreement with it and for the reasons which he gives I would allow the appeal and make the order which he proposes.

LORD BROWNE-WILKINSON

My Lords,

2. I have had the advantage of considering the speech of my noble and learned friend, Lord Hoffmann, in draft. I agree with it and for the reasons he gives I too would allow the appeal.

LORD HOFFMANN

My Lords,

3. This appeal raises two questions of general importance. The first is whether a standard condition in the Institution of Civil Engineers form of contract which allows the employer, in various situations of default by the contractor, to sell his plant and equipment and apply the proceeds in discharge of his obligations, is a floating charge which should be registered under section 395 of the Companies Act 1985. The second is the effect of a failure to register when the contractor has gone into administration but the employer has nevertheless purported to exercise the power of sale.

4. The contract, dated 28 January 1991, was for engineering works to rehabilitate an area of 141 hectares of the upper Garw valley which had been disfigured by derelict coal dumps. The employer was the Mid-Glamorgan County Council, which disappeared on a reorganisation of Welsh local government and was succeeded for this purpose by the Bridgend County Borough Council. I shall refer to both as "the council". The contractor was Cosslett (Contractors) Limited, which I shall call "the company".

5. The largest items of equipment brought on site by the contractor were two coal washing plants which were used to separate usable coal from residue. The council had advanced about £1.8 million to the company to enable it to buy the washing plants and the contract provided for repayment by way of deduction from the sums which would periodically become payable to the company over the term of the contract, which was expected to last about four years.

6. Condition 53(1) of the standard ICE conditions has a definition of "plant" and 53(2) provides that all plant, goods and materials owned by the contractor "shall when on the site be deemed to be the property of the employer". In this case, however, the parties had amended the definition of plant to include a specific reference to the coal washing plant:

"Constructional plant" has its own definition in condition 1(1)(o):

That seems easily wide enough to accommodate the washing plant and so it is not clear why they needed a special mention in condition 53(1). Perhaps the draftsman of the amendments did not notice that constructional plant was a defined expression. In any event, I do not think that it made any difference.

7. Clause 53(2), which, as I have said, provided that the contractor's plant goods and materials should, when on site, "be deemed to be the property of the employer", was amended to add "The washing plant must be owned by the contractor or by a company in which the contractor has a controlling interest". This condition was observed. The washing plant was at all times owned by the company.

8. Also relevant are conditions 53(6) and (7):

9. Thus the status of being deemed to be property of the employer attached to plant etc when it was brought onto the site and ceased to attach when, subject to the consent of the engineer, it was removed from the site.

10. The condition which gives rise to the present dispute is 63(1):

11. After about two years of operating the contract the company found that selling the recovered coal was not as profitable as it had expected. In the summer of 1993 it told the council that it appeared to be heading for insolvency and would not be able to carry on with the contract. On 4 August 1993 it abandoned the site and on 6 August the engineer gave a certificate to that effect in accordance with condition 63. On 12 August the council gave 7 days notice of its intention to enter upon the site. It found another contractor, Burrows Brothers (Sales) Limited ("Burrows") and entered into a provisional agreement under which they started work at the end of August, using the company's washing plant.

12. On 8 September 1993 the company went into administration. Mr Ian Clark was appointed administrator. He demanded the immediate return of the plant or payment of a substantial hire fee for its use. When the council replied that it was entitled under condition 63 to use the plant, Mr Clark said that the condition was an unregistered floating charge and void against him under section 395(1) of the Companies Act 1985. On 22 November 1993 he commenced summary proceedings under section 234 of the Insolvency Act 1986 for delivery up of the washing plant.

13. On a date in January 1994, while the proceedings under section 234 were pending, the council replaced the provisional arrangements under which Burrows had been employed with a "continuation contract" for the completion of the works. One of the terms of that agreement was that when the works had been completed, Burrows would become owners of the washing plant and could remove and dispose of it.

14. The administrator's application came before the court in December 1995, when Burrows was using the plant under the continuation contract. The council's first line of defence was that the provision in condition 53 by which the plant, when on site, was "deemed to be the property of the employer" meant that it actually became their property. The company lost all title. The judge rejected this argument. He said that condition 63 created a charge over the company's property. But he held that the charge was fixed, not floating. In his opinion condition 53(6) gave the employer an absolute right to refuse to allow any plant to be removed from site and therefore from the scope of the charge if it was immediately required to complete the works and a right to refuse in any other circumstances if it was not unreasonable to do so. This meant that the contractor did not have that freedom to deal with the assets until crystallisation which was the badge of a floating charge. As a fixed charge, it did not need to be registered. On that ground, he dismissed the application.

15. The administrator appealed. By the time the case got to the Court of Appeal in July 1997, the works had been completed and Burrows had either removed or were just about to remove the washing plants from the site. In fact they sold them to a third party for their own account. The administrator does not appear to have had much information about what was happening and the Court of Appeal was invited to deal with the appeal on the basis that the council was still exercising its right to use the plant but, for the avoidance of further litigation, to express a view about what the position would be if the council exercised the power of sale.

16. The Court of Appeal (Evans and Millett LJJ and Sir Ralph Gibson) said that one had to distinguish between the two rights which condition 63 conferred upon the employer. The right to use the plant to finish the works could not be a charge. It was simply a contractual right which continued to be exercisable whether the company was in administration or not. On that ground, the Court dismissed the appeal. On the other hand, they agreed with the judge that the right to sell the plant and apply the proceeds to discharge any debt from the company to the council was a charge. But they did not agree that it was a fixed charge. Millett LJ, with whom the other two judges agreed, pointed out that power to refuse consent to the removal of the plant, which the judge had treated as vested in the employer, was actually conferred upon the engineer. This suggested that the discretion was to be exercised independently on operational grounds and not as a method of enforcing the employer's security for the payment of money. It therefore did not give the employer such control over the plant as to create a fixed charge in advance of crystallisation.

17. The result was that the power of sale was void against the administrator under section 395(1). In the course of discussion after judgments had been handed down, counsel told the court that according to their information, the plant had been sold. Millett LJ remarked that "on our judgment, as it stands at the moment, you would be entitled to an Order 14 judgment."

18. The administrator took the judge at his word and issued a fresh writ claiming damages for conversion of its plant, followed by an application for judgment under Order 14. Judge Toulmin QC gave judgment for damages to be assessed and an interim payment of £389,000. The council appealed and the Court of Appeal (Lord Woolf MR, Ward and Laws LJJ) set aside the judgment on entirely new grounds. Laws LJ (with whom the other judges agreed) said that section 395(1) made the floating charge void against the administrator but not against the company. This meant that in cases in which the administrator had a personal cause of action (such as to recover the company's property in specie by summary proceedings under section 234 of the 1986 Act) he could disregard the charge. But the right to sue for conversion of its property vested in the company, not the administrator. The power of sale remained valid against the company and was an answer to the claim for conversion. The Court of Appeal therefore allowed the appeal and struck out the action. Against that order the administrator appeals to your Lordships' House.

19. My Lords, I shall first address the grounds upon which the Court of Appeal decided the case. They are in my view startling and unorthodox. Section 395, which can be traced back to the Companies Act 1900, (63&64 Vict, c 48), was intended for the protection of the creditors of an insolvent company. It was intended to give persons dealing with a company the opportunity to discover, by consulting the register, whether its assets were burdened by floating and certain fixed charges which would reduce the amount available for unsecured creditors in a liquidation. Whether this was a realistic form of protection and whether the choice of registrable charges was entirely logical is not presently relevant. The plain intention of the legislature was that property subject to a registrable but unregistered charge should be available to the general body of creditors (or a secured creditor ranking after the unregistered charge) as if no such charge existed.

20. When a winding-up order is made and a liquidator appointed, there is no divesting of the company's assets. The liquidator acquires no interest, whether beneficially or as trustee. The assets continue to belong to the company but the liquidator is able to exercise the company's right to collect them for the purposes of the liquidation.

21. It must in my opinion follow that when section 395 says that the charge shall be "void against the liquidator", it means void against a company acting by its liquidator, that is to say, a company in liquidation. In In re Monolithic Building Company [1915] 1 Ch 643, 667 Phillimore LJ said of a predecessor of section 395:

The last sentence shows some degree of confusion because of course the liquidator is not a successor of the company. But Phillimore LJ was quite right in saying that section 395 does not invalidate a charge against a company while it is a going concern, that is to say, when it is not in liquidation. On the other hand, once the company is in liquidation and can act only by its liquidator, there seems to me little value in a distinction between whether the charge is void against the liquidator or void against the company. It is void against the company in liquidation.

22. In Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974 a company in liquidation which had sold machines on hire-purchase brought an action against a finance company to recover hire-purchase agreements and other securities which it had charged to secure the repayment of advances. When the finance company relied upon the charge, the plaintiff replied that it was void because it should have been registered as a charge over book debts under a predecessor of section 395. The plaintiff named in the writ was the company. Mr Arthur Bagnall QC for the defendant took the preliminary point that as the liquidator was claiming that the charges were void as against him, he should have been the plaintiff. Buckley J agreed but allowed an amendment to join the liquidator as an additional plaintiff and the action proceeded.

23. As everyone knew that the company was in liquidation and suing by its liquidator, it is hard to see what the point of this manoeuvre was, unless the defendants had omitted or been unable to obtain an order for security for costs and hoped to be able to make the liquidator personally liable. (In the event they lost, so it did not matter). But I respectfully think that Buckley J was wrong. The cause of action was vested in the company. It owned the hire-purchase agreements. It should therefore have been the plaintiff. The liquidator was causing it to sue for the purpose of realising assets to be distributed in the liquidation. The fact that he relied upon the statute to invalidate what would otherwise be a defence open to the holder of the assets does not alter the nature of the proceedings or provide a reason why he should have to expose himself to personal liability for costs.

24. I express no view on the related question, which came before Knox J in Re Ayala Holdings Ltd (No 2) [1996] 1 BCLC 467 as to whether a liquidator (or administrator) can assign the company's right to recover property free from a charge avoided by section 395. Even if I am right in thinking that the proceedings in the Independent Automatic Sales case were properly brought in the name of the company, the decision of Knox J against such an assignment can be upheld on the ground that the right of avoidance under section 395 is not in itself an assignable item of property and can be claimed only by the company acting by its liquidator or administrator.

25. This brings me to section 234 of the 1986 Act, which Laws LJ treated as the only situation in which the administrator would be able to sue in his own name and therefore be able to rely upon the fact that the charge was void against him. This section can be traced back to section 100 of the Companies Act 1862 (25&26 Vict, c 89). Originally it was confined to applications against contributories and "any trustee, receiver, banker, or agent, or officer of the company". It provided a summary procedure by which they could be required to "pay, deliver, convey, surrender, or transfer" to the liquidator "any sum on balance, on books, papers, estate, on effects, which happen to be in his hands for the time being, and to which the company is prima facie entitled."

26. In its original form, such an application was not an originating process. It was an application in the liquidation, invoking the summary jurisdiction of the Companies Court against certain persons connected with the company and in possession of its money or property. Its purpose was to enable the liquidator to carry out his statutory functions. It did not necessarily involve a determination of title. If, for example, the liquidator appeared on affidavit evidence to be prima facie entitled to property, books or records which he needed to proceed with the liquidation, the court could in its discretion order the person in possession to hand over the property and argue about ownership later.

27. Plainly, therefore, when the Companies Act 1900 said that an unregistered charge should be void against the liquidator, it was not intending to confine the scope of that provision to cases in which the liquidator was making a summary application under section 100 of the 1862 Act. The registration provisions would have had little value if they applied only to charges in favour of the persons subject to the summary jurisdiction. It is to be observed that Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974 was an ordinary action commenced by writ.

28. The scope of the summary procedure was enlarged by provisions of the Insolvency Act 1985 which are now contained in section 234 of the 1986 Act. It is now available against any person who has in his control "any property, books, papers or records to which the company appears to be entitled". It remains, however, a summary discretionary remedy, obtainable by a liquidator or other office-holder for the purpose of enabling him to carry out his functions and which does not necessarily involve any determination of title.

29. When administration was introduced by the Insolvency Act 1985, section 395 of the Companies Act 1985 was amended simply by adding the words "or administrator" after the word "liquidator". This seems to me to indicate that the section was to operate in relation to a company in administration exactly as it had in relation to a company in liquidation. An administration order did not vest any of the company's property in the administrator any more than a winding-up order vested it in the liquidator. Instead, section 14 of the 1986 Act gave the administrator powers in many respects similar to those of a liquidator over the company's property:

a

b

a

30. Paragraph 1 of Schedule 1 gives the administrator power to "take possession of, collect and get in the property of the company and, for that purpose, to take such proceedings as may seem to him expedient" and paragraph 5 confers power to bring any action in the name and on behalf of the company.

31. Ordinarily, therefore, an action brought by an administrator to assert a claim on behalf of the company should be in the name of the company. The title to the claim will be vested in the company. In the present case, for example, section 14(1) and the Schedule gave the administrator ample power to cause the company to bring an action against the council for converting its property. If the defence to such a claim is a charge which is avoided by section 395, the company will be entitled to rely upon the section. As in the case of liquidation, I consider that "void against the administrator" means void against the company in administration or (another way of saying the same thing) against the company when acting by its administrator.

32. In fact, the title given to the writ in the proceedings under appeal was headed "Between Ian Clark, the Administrator of Cosslett (Contractors) Ltd and Bridgend County Borough Council." In my view, the proper heading should have been "Between Cosslett (Contractors) Ltd (In administration) and Bridgend County Borough Council." But no one was misled about the nature of the proceedings because the statement of claim endorsed on the writ made it clear that the claim was for loss and damage suffered by the company on account of the conversion of its property. So I do not think that any amendment was necessary. On the other hand, the earlier proceedings under section 234 were at first headed "In the matter of Cosslett (Contractors) Limited and in the matter of the Insolvency Act 1986, between Cosslett (Contractors) Ltd, applicant, and Mid-Glamorgan County Council, respondent." Later the title was amended to substitute the name of the administrator for that of the company as applicant. In this case I think that second thoughts were correct.

33. Laws LJ described the effect of section 395 as being to confer upon the administrator "a purely adventitious potential claim in specie to recover or retain the plant" and the right to "take advantage" of the ineffectiveness of the floating charge as "nothing but statutory serendipity". I see no reason to impute such whimsical intentions to the legislature. The purpose of section 395 as originally enacted was to protect the interests of the general body of creditors. The purpose of section 395 as extended to administrators is to protect the interests of the company in administration and, if it should subsequently go into liquidation, the interests of creditors. If, on the other hand, the company emerges solvent from the administration, the secured creditor will by definition obtain payment of his debt without recourse to the avoided security.

34. In giving section 395 a narrow and arbitrary construction, Laws LJ appears to have been influenced by what he regarded as the merits of the case. He thought it was unfair that the council should lose its security over the plant when it had a cross-claim greatly exceeding the value of that security, part of which arose from the advances which had enabled the company to buy the plant in the first place. He said that if there had been no charge created by condition 63, any claim by the company for damages for conversion would "plainly" have been met by a set-off, either in equity or under rule 4.90 of the Insolvency Rules, raising the council's cross-claim. There would in his judgment have been "no answer" to such a set-off. Why should the council be in a worse position because it had taken an unregistered charge?

35. If there was indeed such a right of set-off, the argument would be a strong one. And, encouraged by the judge's remarks, Mr Moss QC, who appeared for the council, submitted that even if the charge was void not merely against the administrator personally but against the company in administration, he could still rely upon an equitable set-off. But in my opinion neither equitable set-off nor (if the company were to go into liquidation) set-off under Rule 4.90 would be available. The position under rule 4.90, which provides for a set-off arising out of "mutual credits, mutual debts or other mutual dealings between the company and any creditor", was expressly considered by Millett LJ in Manson v Smith (liquidator of Thomas Christy Ltd) [1997] 2 BCLC 161. There a director who had been held liable for misappropriating funds belonging to an insolvent company attempted to invoke rule 4.90 to set off his liability against what the company owed him on loan account. Millett LJ said "a misappropriation of assets is not a dealing". Nor is a conversion of the company's property.

36. Similarly, equitable set-off depends upon showing some equitable reason for protection against the plaintiff's demand: see Hanak v Green [1958] 2 QB 9. In my opinion a defendant could not, in the absence of a lien or other security, claim to retain an asset belonging to a plaintiff by way of set-off against a monetary cross-claim. If this were not the case, everyone would in effect have a lien over any property of his debtor which happened to be in his possession. It follows, in my opinion, that he cannot improve his security in equity by wrongfully converting the debtor's property. As Lord Uthwatt said in Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] A C 173, 203: "In a court of equity, wrongful acts are no passport to favour." To allow an equitable set-off would be to allow the council to exercise the very right which it could have exercised if the charge had been registered but which section 395 was intended to avoid.

37. Mr Moss next submitted that the council had not done any act which could be regarded as a conversion of the plant. Conversion is a tort against a person entitled to possession and when the council entered into the continuation contract which gave Burrows the right to take away the plant on completion of the works, the company had no right to possession. The council was entitled, as the first Court of Appeal held, to retain possession for the purpose of completing the works. When the works were completed and the company became entitled to possession, the council did not do anything to interfere with that right. Burrows simply removed the plant. If anyone converted the plant, Burrows did.

38. These arguments were presented to the Court of Appeal and tentatively rejected by Laws LJ. He said that if he thought on other grounds that the company should have a remedy, he-

39. I agree. The council consented to the removal of the plant by Burrows in violation of the company's right to possession. The fact that they gave such consent in advance, at a time when the company was not entitled to possession, can make no difference. The consent remained effective until the moment when Burrows took the plant. This was sufficient to amount to a conversion.

40. My Lords, in my opinion Millett LJ was therefore right in saying that on the basis of the first Court of Appeal judgment, there could be no answer to the company's claim for damages for conversion. But, in addition to attempting to support the second Court of Appeal's grounds for differing from this view, Mr Moss also challenged the original decision that condition 63 created a floating charge. He said that it was not a charge and that if it was, it was fixed and not floating.

41. On these points I can be brief because I agree with Millett LJ for the reasons which he gave. I do not see how a right to sell an asset belonging to a debtor and appropriate the proceeds to payment of the debt can be anything other than a charge. And because the property subject to condition 63 (constructional plant, temporary works, goods and materials on the site) was a fluctuating body of assets which could be consumed or (subject to the approval of the engineer) removed from the site in the ordinary course of the contractor's business, it was a floating charge: see Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454, 464.

42. Mr Moss submitted that in the many years during which condition 63 had been in use, no one had imagined that it created a floating charge. A requirement of registration might ruin the credit of contractors when a search revealed the existence of such charges or cause them to be in breach of covenants with lenders which prohibited the granting of charges to third parties. The parties cannot therefore be supposed to have intended to create such a charge. But the intentions of the parties, as expressed in the ICE form of contract, are relevant only to establish their mutual rights and obligations. Whether such rights and obligations are characterised as a floating charge is a question of law (see Agnew's case, at p 457). The answer to this question may come as a surprise to the parties but that is no reason for adopting a different characterisation.

43. I would also observe that the first Court of Appeal decision was reported more than four years ago and we were shown nothing to suggest that it has been the cause of any difficulties in the building or engineering industries.

44. Mr Moss also submitted that while condition 63 might create a floating charge over materials and small items of plant which were more obviously likely to come and go during the course of a four year contract, it should be construed as a fixed charge over the washing plant, which was unlikely to be removed and received a separate mention in condition 53(1) as amended. As I said at the beginning of this speech, it is not easy to guess why the washing plant was treated separately in condition 53(1). But it receives no separate treatment in condition 63, where it falls within the charge simply as an item of constructional plant. It is in my opinion impossible to construe the latter condition as creating a charge over the washing plant different in nature from that which it created over the other plant and materials brought on site. Although the washing plant was very large, it was not inconceivable that during the contract, just as it was found necessary to acquire a second plant, it might be found advantageous to replace one or both by a more efficient machine. In that case the contractor would have been entitled to withdraw the old machine from the site and the charge.

45. Finally, Mr Moss submitted that even if he was not entitled to raise an equitable set-off, any claim for conversion should be stayed pending the determination of its cross-claim. For my part, I can see no reason why there should be such a stay. It is agreed that the company is insolvent. But for the existence of these proceedings, it would no doubt have been wound up long ago. The council will be entitled to prove in the liquidation. But the claim for conversion is an asset which the administrator is entitled now to recover in due course of administration. In my opinion the judgment and interim order of Judge Toulmin QC should be restored.

LORD SCOTT OF FOSCOTE

My Lords,

46. There are, in my opinion, four main issues to be decided on this appeal.

(1) Did the terms of the ICE Conditions of Contract entered into between Cosslett and the council on 28 January 1991 entitle the council, in the events which happened, to a security interest in the two coal washing plants?

(2) If so, did that security constitute a charge that was registrable pursuant to section 395 of the Companies Act 1985?

(3) If so, and having regard to the fact that the charge was never registered but that nevertheless the two plants were sold by the council to Burrows under the continuation contract entered into between them in January 1994, did the terms of the continuation contract constitute the tort of conversion? If so, can Cosslett's administrator sue on that tort in his own name? And on what basis should the damages for conversion be calculated?

(4) On the footing that the council's security interest in the coal washing plants was void against Cosslett's administrator as a result of the failure to register it pursuant to section 395, can the council set-off against the conversion damages for which the council is liable to Cosslett the contractual damages for breach of the 28 January 1991 contract for which Cosslett is liable to the council?

47. The essential background facts relating to these issues have been set out by my noble and learned friend Lord Hoffmann and I gratefully adopt them.

48. It is, in my view, essential to keep in mind that at all material times Cosslett was the legal owner of the coal washing plants. It was so decided by Jonathan Parker J ([1997] Ch 23) and the Court of Appeal ([1998] Ch 495) in the first set of proceedings regarding the coal washing plants.

49. It is also essential to bear in mind the nature of the ICE conditions of contract. The contract between the council and Cosslett was a commercial contract in a form used widely within the construction industry. Mr Moss QC, who appeared for the council before your Lordships, stressed the importance of keeping in mind the commercial character and purpose of the ICE Conditions of Contract when construing their terms and considering their effect. I agree with him about that importance.

(1) Did the council have a security interest in the coal washing plants?

50. In my opinion it plainly did. The coal washing plants were items falling within the definition in the ICE Conditions of "constructional plant". No one has argued the contrary. Clause 63(1) of the ICE Conditions gave rights and remedies to "the employer" ie in this case, the council, in a number of specified events, one of which was that the "contractor . . . (a) has abandoned the contract . . . " That is what happened in the present case. Cosslett abandoned the contract on 4 August 1993. The contractual rights and remedies given to the Employer are triggered by the service on the contractor of a 7 day notice. The council, presumably for belt-and-braces reasons, gave two such notices. No one has suggested a valid notice was not given. The rights and remedies that follow the service of a valid 7 day notice fall into three groups.

51. As to (i), the right to enter and expel is a necessary preliminary both to the exercise of the right to use the Constructional Plant, and to the exercise of the right to sell it. As to (ii), the right to use the plant is not a security right. It was so decided by the Court of Appeal. Millett LJ said [1998] Ch 495, 508:

52. But, as to (iii), the Court of Appeal held that "by contrast the council's power to sell the plant and apply the proceeds in or towards discharge of whatever sums might be or become due from the company by reason of its failure to complete the works clearly is a security interest" (per Millett LJ at p 508).

53. In the second hearing before the Court of Appeal, which culminated in the judgment now under appeal before your Lordships, the security character of the employer's clause 63(1) right to sell the plant and apply the proceeds in discharge of sums due to it from the contractor seems to have been accepted (see paragraphs 15 and 16 of Laws LJ's judgment). But before your Lordships Mr Moss challenged the proposition. He submitted that the purpose of the power of sale was to enable the council to clear the site by disposing of plant and materials when they were no longer needed for completion of the engineering works and that the council's right to apply the proceeds of sale in or towards satisfaction of any sum owing by Cosslett was simply a contractual right of set-off and not intended to constitute equitable security. I do not agree. The power to sell was not only for the purpose of enabling the council to clear the site of plant and materials no longer needed but was, plainly, also for the purpose of enabling the council to bring into existence a fund that it could appropriate towards any debt owing to it by Cosslett. In my opinion, a contractual right enabling a creditor to sell his debtor's goods and apply the proceeds in or towards satisfaction of the debt is a right of a security character. The conclusion does not depend on the parties' intention to create a security. Their intention, objectively ascertained, is relevant to the construction of their contract. But once contractual rights have, by the process of construction, been ascertained, the question whether they constitute security rights is a question of law that is not dependent on their intentions (see Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454, 465-466 per Lord Millett).

54. The classification of the council's rights under clause 63(1) as a security right is, in my opinion, supported by the decision of the Court of Appeal in In re Garrud, Ex p Newitt (1881) 16 Ch 522. That case arose out of a building agreement between a landowner and a builder. The agreement entitled the landowner, in the event of default by the builder, to re-enter the building site and expel the builder. It provided that:

55. The issue for decision was whether the agreement should have been registered as a bill of sale. The landowner argued that although the agreement did grant "a licence to take possession of personal chattels", the licence was not granted "as security for a debt" (see section 7, Bills of Exchange Act 1854 (17&18 Vict, c 36)). The court agreed. James LJ said at p 530:

and Brett LJ explained, at p 532:

56. Clause 63(1), however, has the features that the Garrud argument lacked. First, despite the Index and the side-heading, which refer to "forfeiture", the sub-clause is not a forfeiture provision. The employer does not take the proceeds of sale in satisfaction for sums due by the contractor, but on account of sums due. If there were a deficiency, the contractor would still owe the amount of the deficiency. If there were a surplus, the employer would have to account for it to the contractor.

57. Moreover, an employer exercising a clause 63(1) power of sale would, in my opinion, have to take reasonable care to obtain a proper price (c/f Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and would not be entitled to sell to himself (c/f Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349). These obligations are not expressed in clause 63(1) but, in my opinion, have to be implied in order to provide proper protection for the contractor's interest in the items being sold and are all indicia of a security interest.

58. Accordingly, in my opinion, the council's rights under clause 63(1) included security rights over the plant and materials that were on the site when the council entered into possession after the expiry of the 7 day notice and over the proceeds of sale of any items of plant or materials that were sold.

(2) Did the council's security rights under clause 63(1) constitute a charge registrable under section 395?

59. Section 396(1) of the Companies Act 1985 specifies the types of charge that are registrable under section 395. Sub-paragraph (f) specifies "a floating charge on the company's undertaking or property". Sub-paragraph (c) specifies "a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale". The argument before your Lordships concentrated on the question whether the council's security constituted a floating, as opposed to a fixed, charge. After argument had concluded the parties were given leave to make supplemental written submissions on the bills of sale point.

60. In the first Court of Appeal hearing the court held that the security constituted a floating charge. The reasons were given by Millett LJ (see [1998] Ch 495, 510). He described the essential difference between a floating charge and a fixed charge in the following passage:

He then held that the provisions of clause 53 of the ICE Conditions enabled Cosslett to remove items of plant or materials from the site provided the removal would not prejudice or delay the completion of the works. This ability, he concluded, justified categorising the council's security as a floating charge. This conclusion does not seem to have been challenged in the second Court of Appeal hearing. Laws LJ described the categorisation of the council's security as a floating charge as "uncontentious" (see para 16 of the transcript). The conclusion has, however, been firmly challenged before your Lordships by Mr Moss. He submitted that if he was wrong in contending that the ICE Conditions did not create a charge at all, as I in common with all of your Lordships think that he was, the charge did not come into existence until a valid 7 day notice had been given under clause 63(1) and then came into existence as a fixed charge over all the plant and materials then on the site.

61. Up to a point I agree with Mr Moss' analysis, but I am not sure that it makes any difference. A charge expressed to be granted over all the assets of a company but with liberty for the company until the occurrence of some specified future event to deal with the assets in the ordinary course of its business would be a classic floating charge (see Lord McNaghten in Governments Stock and Other Securities Investment Co v Manila Railway Co Ltd [1897] AC 81, 86). The grant would vest in the grantee an equitable security interest in the assets of the company for the time being; but the interest, although existing, would remain dormant until the requisite event happened. Contrast a charge expressed to come into existence on a specified future event and then to attach to assets then owned by the company. Such a grant would not, in my opinion, vest in the grantee any immediate equitable interest in the company's assets for the time being. Mr Moss would categorise such a grant as a grant creating a future fixed charge over the assets in question, rather than as a floating charge over the company's assets for the time being. I agree with Mr Moss that a grant of the sort described would not create a traditional floating charge. And if parties want to create future charges over assets that cannot be identified until the future event happens, I do not see why, unless there be some public policy objection, they should not be free to do so.

62. However, there has never been any statutory definition of "floating charge". The definitions are all judicial ones and, in most cases, expressed in order to distinguish floating charges from fixed charges. Buckley LJ in Evans v Rival Granite Quarries Ltd [1910] 2 KB 979 said, at p 999:

This language, I think, assists Mr Moss. It suggests that a future security lacks something of the character of a floating charge. In the present case, over the period between the date of the contract, 28 January 1991, and the date of one or other of the 7 day notices given in August 1993 was there a "present" security that "presently" affected the coal washing plants? To put the point another way, did the council have any equitable interest in the coal washing plants until the service of a 7 day notice? In my opinion, it did not. Its rights over constructional plant and materials during the pre-7 day notice period were contractual operational right, not property rights. Its security rights were dependent on the occurrence of one or other of the future events specified in clause 63(1).

63. I do not think, however, that this analysis bars the clause 63(1) future security rights from constituting a floating charge for section 395 registration purposes. In my opinion, a charge expressed to come into existence on the occurrence of an uncertain future event and then to apply to a class of assets that cannot be identified until the event has happened would, if otherwise valid, qualify for registration as a floating charge. The future charge would have the essential characteristic of floating, remaining dormant, until the occurrence of the specified event. It would, I think, come within the mischief sought to be dealt with by the section 395 requirement of registration of floating charges. For the same reasons, it would also, in my view, constitute a floating charge for Insolvency Act 1986 purposes (see eg section 15(3) and section 245).

64. The conclusion that the Council's security was registrable as a floating charge makes it unnecessary to decide whether it might also have been registrable as a bill of sale; as to which see sections 4 and 8 of the Bills of Sale Act 1878 (41&42 Vict, c 31)and sections 3,4 and 8 of the 1882 Act. (45&46 Vict, c 43).

(3) In disposing of the coal washing plants to Burrows under the continuation contract of January 1994 did the council commit the tort of conversion?

65. The failure to register the charge under section 395(1) made the charge "void against the liquidator or administrator and any creditor of the company". It has been suggested that this language leaves an unregistered charge valid against the grantor company, that the clause 63(1) charge was accordingly valid as against Cosslett notwithstanding that it was void against the administrator, and that consequently the disposition by the Council of the coal washing plants did not constitute the tort of conversion. In In re Monolithic Building Company [1915] 1 Ch 643, 667 Lord Cozens Hardy MR said this of an unregistered charge:

And Phillimore LJ said:

66. The words "or administrator" were inserted into section 395(1) by the Insolvency Act 1985 (see section 109(1) Sch 6 para 10). The previous language "void as against the liquidator and any creditor" may have been derived from the Bills of Sale Acts. Under section 8 of the 1878 Act the consequence of failure to register was that the bill of sale became void "as against all trustees or assignees of [the grantor of the bill of sale] and against [any creditor levying execution]"— I have endeavoured to summarise the rather turgid language of the section. Section 8 did not make the unregistered bill of sale void against the grantor. But, on a bankruptcy or assignment for the benefit of creditors, the grantor's title to his assets would have left the grantor and passed to his trustee or assignee. The references in the Monolithic Building Company case to the unregistered security remaining enforceable while the grantor company was a going concern produce the same effect for companies pre liquidation as section 8 of the 1878 Act produced for individuals pre bankruptcy. Until bankruptcy intervened the unregistered bill of sale was enforceable against the grantor. Thereafter it was not. Until a liquidation or administration intervenes, the unregistered charge is enforceable against the grantor company. Thereafter, or until the liquidation or administration comes to an end, it is not.

67. I am, therefore, in full agreement with my noble and learned friend Lord Hoffmann that for as long as an unregistered charge is void under section 395(1) against a liquidator or administrator the charge is, for the reasons he gives, void against the grantor company in liquidation or in administration.

68. It follows, in my opinion, that the council's security rights under clause 63(1), being unregistered, have been void against Cosslett since 8 September 1993 when the administration order was made.

69. In Clerk & Lindsell on Torts, 18th ed, (2000), conversion is described as "a wide tort, covering the deliberate taking, receipt, purchase, sale, disposal or consumption of another's property" (para 14-03). Paragraph 14-08 says that "the essence of the wrong [is] the unauthorised dealing with the claimant's chattel so as to question or deny his title to it".

70. Under the continuation contract between the council and Burrows the council purported to dispose of the coal washing plants to Burrows. But since Cosslett was the owner of the plants and the council's power of sale under clause 63(1) was void as against Cosslett in administration, the disposal was, in my opinion, a clear act of conversion.

71. I would add that even if the clause 63(1) power of sale had been valid as against Cosslett, I do not think the disposal to Burrows would have been franked by the power. A sale is a disposition of property for a price. The obligation of a chargee with a power of sale is to obtain the best price reasonably obtainable. Under the continuation contract, only parts of which were available to your Lordships, it seems that the council disposed of the plants to Burrows on the footing that Burrows would be allowed a credit of £100,000 for each against its tender price for completion of the engineering works. But by a letter to the council dated 13 October 1993 Burrows estimated the residual value of the plants to be £500,000 and stated that "The £200,000 credit quoted in our tender is after making allowance for the cost of expected barren earthworks". On this evidence it seems to me impossible for the council to contend that it made a proper exercise of its clause 63(1) power of sale. If the clause 63(1) power had been valid as against Cosslett in administration, I think the position would be that the council had become a mortgagee in possession on entry on the site and, accordingly, accountable to Cosslett on the footing of wilful default for the proper value of the coal washing plants.

72. Mr Moss contended that conversion was a wrongful interference with the right of possession, that the council was entitled to retain possession of the coal washing plants in order to complete the engineering works and that the purported disposal to Burrows at a time when the works had not been completed and Cosslett did not have a right to possession could not have constituted a conversion. He argued that the eventual removal of the plants by Burrows after the works had been completed, although done pursuant to the continuation contract, did not constitute a conversion by the council for it was not done by the council.

73. I am unable to accept these submissions. The continuation contract, being a purported disposal of the plants by the council, was a wrongful interference with Cosslett's title to the plants. It was repudiatory in character and, had it been relied on in the first set of proceedings between the parties, might well have enabled Cosslett to succeed in its claim to immediate possession of the plants. The details of the continuation contract were not, however, then known and the right of the council to retain the plant pending completion of the works became res judicata as between the council and Cosslett.

74. Both the coal washing plants were removed from the site in or about June 1997. By that time they were no longer needed for completion of the works and were removed by Burrows, acting in reliance on the continuation contract.

75. In these circumstances, in my opinion, the fact that at the date of the continuation contract Cosslett did not have an immediate right to possession did not deprive the continuation contract of its effect as constituting a conversion by the council of the coal washing plants. What it did do was to postpone the date at which, for measure of damages purposes, the value of the converted plants had to be assessed. Cosslett was, and in my opinion is, entitled to damages for conversion representing the value of the plants at the date of the conversion, that is to say, January 1994. But the plants were, at that date, subject to the clause 63(1) rights of user that were binding on Cosslett. So the value should be adjusted accordingly. In practice, I imagine that the value of the plants subject to the rights of user will be equivalent to the value of the plants in their used state at the completion of the works.

(4) Set-off

76. Can the council, even if its clause 63(1) rights do constitute a security that was unregistered and therefore void, claim the benefit of equitable set-off so as to set off its contractual damages claim against Cosslett's conversion damages claim? In my opinion, clearly not. This is a case in which the parties, in clause 63(1) of their contract, have provided the council with a contractual right of set-off that, for failure to comply with applicable statutory provisions, is void against Cosslett in administration. Why should equity intervene and protect the council from its failure to comply with the statutory provisions? Similar questions arose in Orakpo v Manson Investments Ltd [1978] AC 95 and in Dimond v Lovell [2000] 2 WLR 1121 (HL). Orakpo was a moneylending case. The defendants were licensed moneylenders but, in respect of loans to the plaintiff with which the plaintiff had purchased properties, had failed to comply with the requirements of the Moneylenders Act 1927. (17&18 Geo 5, c 21). The consequence was that the loan agreements were unenforceable and so were the mortgages granted by the plaintiff to secure the repayment of the loans. The defendants claimed to be entitled by subrogation to the benefit of the vendors' liens. This House rejected the claim and Lord Salmon, at p 111, commented that he could not think "that it would be proper to apply an equitable doctrine for the purpose of enabling a moneylender to escape from the consequences of his breach of the statute . . . " Lord Edmund Davies, in answer to the question whether a court of equity should grant relief to a moneylender who was in breach of the Act, said, at p 115, that he felt compelled to answer in the negative:

77. In Dimond v Lovell a regulated consumer credit agreement relating to the hire of a car was unenforceable for failure to comply with the requirements of the Consumer Credit Act 1974. It was argued for the car hire company that it should have an unjust enrichment remedy. The argument was rejected by this House. Lord Hoffmann, citing Orakpo v Manson Investments Ltd, said [2000] 2 WLR 1121, 1131:

78. Similar reasoning applies here. If the council's clause 63(1) security is barred by section 395(1) from being enforceable against Cosslett in administration, it is no part of equity to provide, via equitable set-off, an alternative security.

(5) Title to sue in conversion

79. I respectfully agree that the plaintiff/claimant in Cosslett's conversion action ought to have been "Cosslett (Contractors) Ltd (In administration)" and have nothing to add on this point to what Lord Hoffmann has already said.

80. For all these reasons I agree that the appeal should be allowed and the judgment and interim order of Judge Toulmin QC restored.

LORD RODGER OF EARLSFERRY

My Lords,

81. I have had the advantage of considering the speech of my noble and learned friend, Lord Hoffmann, in draft. I agree with it and for the reasons he gives I too would allow the appeal.