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OUTER HOUSE, COURT OF SESSION [2008] CSOH 134 |
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CA18/08 |
OPINION OF SIR DAVID EDWARD (Sitting as a Temporary Judge) in the cause KEITH VEITCH Pursuer; against PAUL ANTHONY DICKENS Defender: ________________ |
Pursuer:
Delibegovic-Broome; MacRoberts
Defender: Macpherson, Solicitor Advocate; Brodies
[1] Under section 243
of the Insolvency Act 1986 ("the 1986 Act"), which applies to
"which has the effect of
creating a preference in favour of a creditor to the prejudice of the general
body of creditors, being a preference created not earlier than 6 months
before the commencement of the winding up of the company".
Such a preference is commonly referred to as an unfair
preference.
[2] As
Bell explains (Commentaries, 7th edition,
Vol. II, page 193), the law on unfair preferences is based on a
notional distinction between public bankruptcy (in this case the commencement
of winding up) and constructive bankruptcy which is deemed to have occurred at
an earlier date (in this case six months earlier). Under section 243, a transaction is
struck at as an unfair preference unless it can be brought within one of the
exceptions set out in subsection (2).
The first three are relevant here:
(a) transactions in the ordinary course of
trade or business;
(b) payments in cash for debts due and
payable, except where there is collusion,
(c) transactions involving reciprocal
obligations (nova debita), except
where there is collusion.
Except in so far as it is necessary to prove
collusion, it is not necessary for the person challenging a transaction to
prove the motive for it
[3] The
pursuer is liquidator of New Alba (Redwood House) Limited. A special resolution for the voluntary winding
up of that company was passed on
[4] In
this action the pursuer (hereafter "the liquidator") challenges as unfair
preferences two transactions entered into by the company on 12 July and
24 August 2006 respectively and therefore within the period of
6 months of constructive bankruptcy.
There is no doubt as to the occurrence of the transaction on
[5] The
defender is a chartered surveyor and experienced property developer. He was the sole director and shareholder of
the company which was set up as a "single purpose vehicle" for the development
of Redwood House, a villa in the Merchiston district of Edinburgh. At the material time he was also director and
shareholder of a number of other companies, notably New Alba Limited, now
renamed Ablawen Limited (New Alba spelt backwards). The names of some of his other companies
included the words Alba or New Alba and some of them appear to have been single
purpose vehicles for particular property developments.
Procedural
Background
[6] The action was initially raised in name,
first, of New Alba (Redwood House) Limited and, second, of the pursuer as
liquidator of that company. As the
company itself was neither a creditor nor the liquidator, it did not have title
to raise an action under section 243(4).
The Summons was amended on
[7] The
liquidator did not obtain sanction from the creditors or from the Court to
raise the action. By a Petition
presented on
[8] The
action was transferred to the
[9] The
pursuer's conclusions in relation to the transaction on
1. For a
declarator that on 24 August 2006 New Alba (Redwood House) Limited ("the
company") created a preference in favour of the Defender by transfer of £270,750
into an account of the Defender's with Clydesdale Bank plc, Account
Number 80100495, which preference prejudiced the general body of creditors
under and in terms of section 243 of the Insolvency Act 1986.
2. For payment
by the Defender to the Pursuer, as the liquidator of the Company, of the sum
of [£270,750 with interest].
It will be seen
that the transaction challenged is a payment by bank transfer by the company to
the defender. The preference is said in
the pleadings, though not in the conclusion, to have been a preference in
favour of the defender as a creditor of the company.
[10] The conclusions in relation to the
transaction on
1. For a declarator that on 12 July
2006 the Company created a preference in favour of the Defender by reducing the
sale price of the plot number 3 at Redwood House, Edinburgh, sold to Mr Laurie
Dempster thereby reducing the Defender's cautionary obligation to Mr Dempster,
which preference prejudiced the general body of creditors under and in terms of
section 243 of the Insolvency Act 1986.
2. For payment by the Defender to the
Pursuer, as the liquidator of the Company, of the sum of [£10,000 with
interest].
Again, the
conclusion proceeds on the hypothesis that the preference was a preference in
favour of the defender himself, in this case expressly as cautioner.
[11] The pursuer now seeks
·
Summary decree on the
basis that the pleadings disclose no stateable defence, or
·
Decree de
The defender seeks Proof before Answer on the ground
that the issues between the parties cannot be resolved without ascertainment,
or at least clarification, of the facts.
The Facts
[12] In this section I set out the facts so far
as they can be gleaned from the pleadings and productions, most of which have
been produced or compiled by the liquidator from the papers handed over to
him. A number of these are copies of
letters that bear to have been signed by the defender as "Managing Director"
but without the letterhead or any other indication of the company on whose
behalf he was writing.
[13] Three
of the persons to whom such letters were sent were investors in the Redwood House
project: Mr J. Goold, Mr Laurie
Dempster and Ms Maureen Blyth.
Ms Blyth was resident in
[14] On
"Residential
Development - Redwood House, Edinburgh
New Alba Limited, in
conjunction with the Clydesdale Bank plc, will provide approximately 90%
of the purchase price of the site, professional fees, interest charges and any
other costs associated with the development.
We in turn are looking for Private Investors to provide 10% of the
aforementioned costs associated with the development.
In return, the Private Investors will receive the development
costs return (currently 26%) plus a 7.5% return on their entire
investment ie initial return plus profits x 7.5%
e.g.
a) Initial Investment 100,000
b) Net return @26% 26,000
c) 7.5% bonus _ 9,225
Total return 135,225
The net return is guaranteed
at 25% and it is envisaged the project will complete in Spring 2005.
New Alba (Redwood House) Limited is a "stand alone"
company and I suggest holding a monthly meeting when the various payments to
contractors and professionals will be approved and cheques should be signed by
three members of the consortium comprising:
1. Malcolm Macpherson Non
Executive Chairman
2. Kenneth Reid Project
Manager/Architect
3. Paul Dickens Managing
Director
Following these meetings a
bi-monthly cost and marketing report will also be issued to the consortium
members."
[15] On
"Redwood House
As you know we are moving
along apace with the above development and are hoping to settle in the next few
days. The Clydesdale Bank plc will be
funding the project and they have asked that funds from Private Investors be in
place prior to the actual date so that the transaction goes through on the day
of settlement.
To this end I would be grateful if you would forward your
investment of £50,000 to the Clydesdale Bank as noted below:
Clydesdale Bank plc
Account Name New Alba (Redwood House) Limited
Sort Code 82 62 33
Account number 500 398 55
I will of course keep you
fully appraised of the progress by way of regular reports and correspondence
and of course as soon as the marketing suite is completed will be in touch so
that you may examine the proposals and plans first hand.
Finally, I would like to take this opportunity to thank
you for your interest in the development and indeed in New Alba Limited."
[16] New
Alba (Redwood House) Limited had two current accounts with the Clydesdale Bank,
Morningside Road Branch, Edinburgh: the
Development Loan Account (number 040093) and the Business Current Account
(number 039855). The liquidator's
summary of movements on the Business Current Account (annexed to 6/32 at
page 5) shows that on
[17] On
"I have enclosed a copy of the development analysis
for your information. You will see the
return quoted as 25% and this is guaranteed. However if the return exceeds 25% the
return will be increased accordingly.
(No change if it falls below 25%) e.g. £260,000 - a 25% return
on completion of the project would equate to a £65,000 dividend."
[18] On
"Investment in Redwood House
I very much appreciated the tour of the property
earlier today and I am sure this will be a very successful development. I have taken instructions from Maureen
regarding the investment of £260,000 which she made to the company on Friday
and I have enclosed a draft letter for your attention in this connection.
I
should be grateful if you would have the letter prepared on the company headed
paper, sign this as the Director and return to me. I will send this to Maureen and retain a copy
for our file. If you would like to
discuss any aspect of the letter with me, please let me know."
The
draft letter referred to is not amongst the productions, but the liquidator's
summary of movements on the Development Loan Account (annexed to 6/32 at page 10)
shows that £260,000 was received from Maureen Blyth on
[19] On
"I acknowledge the investment made by Ladon Properties
Limited in the sum of £260,000.
In
relation to the investment return, as previously advised, this will be a
guarantee (sic) sum of 25%
equating to at least £65,000 on your investment. While your investment is unsecured, should
the project fail to deliver the anticipated return, I can confirm that I will
personally guarantee to meet any shortfall.
I trust that you will find this to be acceptable.
....
In
the meantime, I would like to thank you for the unsecured loan and look forward
to you sharing in our success."
[20] By an exchange of letters dated 21
and 22 February and 7, 10 and 14 March 2006 (6/15 to 6/19)
between solicitors acting respectively for New Alba (Redwood House) Limited (sellers)
and Laurie Dempster and Ann Graham (purchasers), missives were
concluded for the sale of Plot 3 Redwood House.
[21] The missives initially provided for a
purchase price of £765,000 with the proviso that "Provided there is no
delay in settlement by the Purchaser the Price shall be reduced by the sum of £10,000
as an investor's incentive". The price
finally agreed was £775,000 subject to the same proviso with the insertion
of the word "unreasonable" before "delay".
[22] By the summer of 2006 the Redwood
House development was almost complete but considerably over time and over
budget. According to the liquidator's
table of plot sales (6/12), the sales of plots 1-6 were
completed on various dates between 12 and 28 July and the sales of
plots 7 and 8 on
[23] In particular, the liquidator's table
shows the sale of plot 3 (the Dempster plot) as having been completed for
a price of £775,000 on
[24] There is no explanation anywhere in the
papers of the discrepancy between the agreed purchase price of £775,000
(less £10,000 "investor's incentive") and the sum of £733,217.12 paid
on
[25] On
[26] Hunter & Clark also had an outstanding
claim for extension of time and were seeking Architect's Instructions for
additional works. On
"Being aware of our Clients financial position on this
Contract my primary concern for some time now has been to see the removal of
the contentious valuation items before Practical Completion but, for some
reason, this has not transpired and we are now in the situation I was trying to
avoid; having completed the contract and having a backlog of disputed valuation
issues; the danger being that, now having sold all the properties, the Client
decides to liquidate the Company and we are left high and dry. Unfortunately this has happened to us in the
past so I'm now very nervous when this situation is allowed to occur as I'm
sure you will understand."
[27] On 22 and
[28] On
[29] Following that transaction, the sum
standing at credit of the Development Loan Account as at
[30] Nothing daunted, on
"New Alba (Redwood House) Ltd -
We write in relation to the above project and the
Contract entered into between New Alba (Redwood House) Ltd and Hunter &
Clark Ltd dated
Under
Clause 24.2 of above mentioned Contract we formally give notice to Hunter
& Clark Ltd of New Alba (Redwood House) Ltd's intention to deduct
liquidated and ascertained damages from monies due under Clause 30.1.1.1. As per Clause 30.1.1.4 New Alba (Redwood
House) Ltd proposes to withhold £48,576.36 from the Interim Certificate
Number 14 value of £69.505.00 for liquidated and ascertained damages.
..."
[31] There followed a tense exchange of
correspondence between Hunter & Clark and the defender (writing or addressed
as managing director of New Alba Limited or of "Alba Residential"). The last letter of the exchange dated
15 November 2006 (6/22/53) from Hunter & Clark bears to record an
assurance given by the defender at a meeting on 13 November 2006 that "you
have now applied for a re-financing arrangement to try and honour your
commitment to Hunter & Clark and our sub-contractors on the above
Development".
[32] On 28 August a cheque (23) was
drawn on the Dickens Personal Account in favour of Mr Dempster for £40,000
and the statement of that account (6/9) shows that sum as having been
debited on
[33] At the debate before me the
solicitor-advocate for the defender summarised the payments made to the
investors as follows:
Ms Blyth £260,000 (original investment) + £65,000
(25% return) = £325,000
Mr Goold £60,000 (original investment) + £15,000
(25% return) = £75,000
Mr Dempster £40,000 (original investment) + £10,000
(25% return) = £50,000
All
these payments are vouched as having been made from bank accounts controlled by
the defender with the exception of the sum of £10,000 representing Mr Dempster's
25% return on his investment.
[34] According to the solicitor-advocate for
the defender, the figures show that a total of £440,000 was paid to the
investors, of which only £275,000 came from the funds of New Alba (Redwood
House) Limited. Mr Dickens was
therefore, he said, a creditor of that company for the balance of £169,250.
[35] The Report prepared by the liquidator for
presentation to the first meeting of creditors on
"The project ran an estimated £600,000 over
budget and was finally completed seven months late. The Director advises this was largely due to
the architects design which meant the tender was put out without sufficient
information to allow accurate bids. The
project ran considerably over budget due to deficiencies in the original
specification. The director maintains
that if the project had been costed correctly at the design stage the cost
overruns would have been avoided. The
director considers that the company has a substantial claim against the design
team for the delay and cost incurred in completing the project. The company has not been in a position to
pursue a claim due to a lack of funding.
The director attributes the company's insolvency to the losses incurred
on the Redwood House project and a lack of working capital to enable the
company to take on other development projects."
[36] According to the Statement of Affairs
prepared by the defender as director (
Maureen Blyth £31,000
Paul Dickens £128,249
Hunter & Clark £21,450
New Alba Limited £91,083
[37] According to the liquidator's estimated
statement of affairs as at
Paul Dickens £174,250
Hunter & Clark £558,363
New Alba Limited £18,000
[38] On 9 May 2007, in response to a
letter from the liquidator which is not produced, the defender, writing from his
home address, wrote a letter (6/31) to the liquidator including the
following statements in the second and third paragraphs (emphasis added):
"I fully respect and understand your duties as
appointed Liquidator for the above company [New Alba (Redwood House) Limited],
and hopefully I can clear up the issues raised in your letter. The
money you refer to of £270,750 was my personal money from the sale of some
property and transferred into that account to enable me to pay the Private
Investors back.
All the investors have been paid in full
from a mixture of Redwood sales and my own money; you will also see from
the attachment of all the correspondence sent to investors for their
records. The final property at Redwood
was sold in July and we, at that time, were not aware of the potentially huge
claim the contractors were going to put in, (some 800k over and above what
they had already been paid). When the investors were repaid, there were
no significant outstanding creditors or bills."
[39] On
"I am having a little difficulty confirming the
statement made in paragraph 2 of your letter. I enclose for your information an extract of
the company's accounting records. I can
find no trace of the sum of £270,750 being paid by you to the company to
enable the private investors to be paid back.
My review of the company's accounting records indicates that following
receipt of the proceeds from the sale of plot 8 on
I am
also having a little difficulty reconciling your statement that at the time the
investors were repaid 'there were no significant outstanding creditors or bills'. I enclose for your information an aged
creditors analysis extracted from the company's accounting records. You will note that if you exclude [certain
debts], there were outstanding debts of £52,819."
[40] The defender's reply (6/6) was an
email dated
"The private
investors were all guaranteed a 25% return on their investments which
were as follows
1. 270,000.00
M
2. 40,000.00
L Dempster
3. 60,000.00
J Goold
A total of 370,000 plus a 25% return meaning £462,500
in total was to be returned.
This
was done as per my letter; a mixture of the last sale in Redwood and from my
own private money for the sale of a property portfolio .... The
investors were repaid by the Redwood sale of the £270,500 (sic) as well as
me making up the difference with my own money of £192,500.00. The £270,750.00 transferred to my
account to enable me to forward the money on to the investors. This totalling £462,500.00.
I
have attached the cheque stubs for J Goold and L Dempster for your
attention. M Blyth's money was sent
direct to her bank account, J Goods (sic) was paid into his account at Adam
& Co. On no account was the 270,500.00
(sic) paid into my account, used by
me, not a penny.
Turning
to the outstanding creditors at the time, I was truly unaware of their status,
and the only time we become aware of the seriousness of the 'potential debt'
was when the contractor intimated a claim in the region of an additional 700k. Rightly
or wrongly, my view was that the investors had lent me money to take part in
the development, and I paid them back as soon as I could."
[41] By letter dated
"... I note that in relation to the loan from Maureen Blyth
you personally guaranteed repayment. I
should be obliged if you would confirm that this was also the case in relation
to the loans from L Dempster and J Goold.
I
should also be obliged if you would clarify the sums received by the company
and repaid to the private investors. The
company's records indicate that a loan of £260,000 was received from
Maureen Blyth and not £270,000 as indicated in your email of
22 May. With the return of 25%
the amount repaid to her would amount to £325,000 which is supported by
the payments detailed in the bank statements which you forwarded. I note
the loan from Laurie Dempster is £40,000.
The copy bank statement you have forwarded indicates that this sum was
repaid to him from your personal bank account on
[42] The defender (again writing as managing
director of Alba Residential) replied by email (6/7) on
"You are indeed
correct in your assumptions and accounting .
I will try and answer them point by point.
1. Yes, all investors were guaranteed 25% return. They were sent out an identical letter as per
the one in your possession, only with changes of names and address.
2. You
are indeed correct Maureen Blyth invested 260k not 270k as per my E mail
of
3. Laurie Dempster purchased plot 7
(sic) at Redwood House, and therefore his return was 10k. This was knocked off the purchase price from
the unit he bought.
4. Therefore
a total of £450,000 was paid out. £440,000
via cheques and bank transfers and £10,000.00 discount to Laurie's
discount on plot 7 (sic) at
Redwood House."
The Pleadings as to Matters of Fact
[43] The
liquidator founded on material alterations in the defender's pleadings as to
matters of fact. These relate, first, to
the question whether the defender guaranteed the loans by Mr Goold, Mr Dempster
and Ms Blyth, and second, to the reason why the sum of £270,750 was
transferred to the defender's personal bank account on 24 August 2006.
[44] As regards the provision of guarantees,
the liquidator averred in his Summons (and continues to aver) as follows:
"Cond. 3 .... In or about January 2005 the Defender
approached Mr James Goold, Mr Laurie Dempster and Ms Maureen Blyth,
asking them to invest in the Company.
Letters dated
Cond. 4
narrates the loans made by Mr Goold, Mr Dempster and Ladon Properties
Limited.]
Cond. 5 The investors made the loans to [New Alba
(Redwood House) Limited] on the basis of the Defender's guarantee that they
would each receive a 25% return on their loans (which he referred to as "investment"). In his letter dated
[45] These averments were initially answered by
the defender as follows (emphasis added):
"Ans. 3 .... Admitted that in or around
January 2005 the defender approached Mr Goold, Mr Dempster and Ms Blyth,
asking them to invest in the [company]. Admitted that identical letters were sent to
Mr Goold, Mr Dempster and Ms Blyth, save as to name, address and
amount. The letters dated 14
and
Ans. 5
Admitted that the investors made the
loans to the [company] on the basis of the defender's guarantee that they would
each receive a 25% return on their loans. The letter dated
[46] The admissions in Answer 5 were
withdrawn by adjustments dated
"Ans. 3 ... Admitted that in or around January 2005
the Defender, as Managing Director of the
Company, approached Mr Goold and Mr Dempster, asking them to
invest in the Company. Admitted that
letters dated
Ans. 5 Admitted that the Company gave no security to
the investors in return for the making of the abovementioned loans. Admitted
that the investors made the loans to the Company on the basis of the guarantee
(by the Company) that they would each receive a 25% return on their loans. The letter from the Defender to Ms
[47] As regards the transfer of £270,750
on
"The transfer was necessary to enable the partial
repayment to be made by electronic transfer.
The [company was] unable to make an electronic transfer from [its] own
account but that facility was available for transfers from the Clydesdale
account."
[48] The explanation given in the latest
adjustments dated
"The Company transferred £270,750 to the
Clydesdale Account for the purpose of the Defender, as their agent, making
partial repayment of the sums due and payable to the investors as creditors of
the Company. The transfer was necessary
to enable the partial repayment to be made by electronic transfer. The Defender was familiar with the transfer
arrangements from the Clydesdale Bank, and arranged the transfer through that
bank for that reason. The transfer
followed a discussion the Defender had with the Clydesdale Bank. It was a transfer made between accounts
managed by the same relationship manager within the bank. That made the transfer more straightforward."
The Contentions of the Parties
[49] The
debate before me was conducted on the basis of Notes of Argument for the
pursuer and the defender dated 8 and
(1) Disposal
of the Case
[50] As indicated above (paragraph 11) the
liquidator seeks summary decree on the basis that there is no real or genuine
defence to the action. Alternatively,
the liquidator argues that the defences are irrelevant and that decree should
be granted de
[51] The defender further contends that, in
terms of Section 243(5), a "challenge" envisages an action against the
creditors - Baillie Marshall Ltd (in
liquidation) v Avian Communications
Ltd 2002 SLT 189. The action is
therefore fundamentally misdirected.
(2) The
Transfer of £270,750 on
[52] The
liquidator starts from the position that there was no debt of £270,750
owed by the company to the defender personally which would justify the transfer
of funds to him on
[53] The defender contends that he gave no
personal guarantee to the investors except Ms Blyth and in her case only
to the extent of the 'shortfall' on the "anticipated return" of £65,000
(see the letter dated 17 March 2005 - paragraph 19 above). The sum of £65,000 was paid to Ms Blyth
by the defender out of his own personal funds.
Consequently, the transaction on
[54] The defender next contends that the
payment on
[55] Next, the defender, relying on Section 243(2)(b)
of the 1986 Act, contends that the payment was "a payment in cash for a
debt which when it was paid had become payable". Payment by cheque amounts to payment in
cash. Payment by transferring funds to
an agent who receives them only to transfer them to a creditor is also deemed
to be a payment in cash - Craig v Hunter & Sons 1905, 13
SLT 525; Newton & Sons Trustees v Finlayson & Co 1928 SC 637; Whatmough's
Tr v British Linen Bank 1934
SC(HL) 51; Nordic Travel Ltd v Scotprint Ltd 1980 SC 1. In this case, there are no averments or
evidence of collusion between the defender and the investors.
[56] Next, the defender, relying on subsection 243(2)(c),
contends that the payment to him by the company was met by his reciprocal
obligation to pay that sum to the investors which he duly did - Nicoll v Steel Press (Supplies) Ltd 1992 SC 119.
[57] In his Note of Argument the defender,
relying on subsection 243(2)(a), contended that the payments by the
defender to the investors were made in the ordinary course of business, being
cash payments in respect of debts that were due when they fell due - Nordic Travel (supra). As to whether and when the debts were due,
this would require proof. At the debate
the solicitor-advocate for the defender conceded that he could not rely on this
argument in relation to the sum of £270,750 paid in to the Dickens
Personal Account on
[58] Finally, on this aspect of the case, the
defender contends that, in so far as there may have been an unfair preference
in favour of the defender, this cannot have been in relation to the £40,000
paid to Mr Dempster or the £75,000 paid to Mr Goold, since the
defender had given no personal guarantee to either of them. Further, his guarantee to Ms Blyth was
in respect only of the "shortfall" on the "anticipated return" (£65,000). Consequently, the sum sued for in the second
conclusion is excessive.
[59] In reply to these contentions, the
liquidator pointed to Baillie Marshall
Ltd (in liquidation) v Avian
Communications Ltd, 2002 SLT 189, and the examination by
Lord Kingarth of the authorities there cited going back to Mitchell v Rodger (supra), as showing that the term "challenge" in Section 243(5)
of the 1986 Act is to be read in a broad sense and that the action need
not be directed against creditors who ultimately benefit from the "transaction"
challenged.
[60] The letters to Mr Goold, Mr Dempster
and Ms Blyth should be construed according to their terms - Waydale Ltd v DHL Holdings (UK) Ltd (No. 2) 2002 SLT 224; City Wall Properties (Scotland) Ltd v Pearl Assurance plc [2007] CSIH 79. Their terms are clear and there is no need to
resort to special canons of construction.
In any event, even if no guarantee was given by the defender to Mr Goold
and Mr Dempster, and even if only a limited guarantee was given to Ms Blyth,
the whole sum transferred by the company to the defender must be restored - Cay's Tr v Cay, 1998 SC 780; Short's Tr v Chung 1991 SLT 472.
[61] As regards the agency defence, the
liquidator argues that section 243 provides for no exemption from
challenge on that account; that an agent
cannot in any event properly do something that his principal cannot do; and that this defence ignores the fact that, by
paying off the investors, the defender was relieved of his obligation as cautioner
or guarantor.
[62] As regards the defence under section 243(2)(a)
(ordinary course of business), the liquidator argues that a payment to the sole
director of a company in order that he can pay off investors cannot be
described as "a transaction in the ordinary course of trade or business" - Nordic Travel (supra), per the Lord
President at page 20.
[63] As regards the defence under section 243(2)(b)
(debt due and payable), the liquidator points out, first, that there was no
debt due to the defender which "had become payable", and that is the short
answer to the defender's argument.
However, even if the Court were to look beyond the payment to the
defender, the loans by the investors were not debts that "had become
payable". No date for repayment had been
set and no demand for repayment had been made.
In particular, the "return" of 25% was simply a percentage of the
sum loaned without reference to the "time value of money". There was no proper justification for the
defender to organise repayment to the investors at that time and in that
fashion. The defender's averments that
"payment was considered to be due" (Answer 10) and that "It was normal
practice to consider that such loans were due to be repaid on the sale of the
final property when that occurred" are irrelevant, or at any rate so lacking in
specification as not to merit reference to proof. In so far as it might be necessary to show
collusion, the relevant collusion would be between the company and the
defender, not between the defender and the investors.
[64] As regards the defence under section 243(2)(c)
(reciprocal obligation), the liquidator contends that a payment by a company to
a person in order that that person may pay that sum to another person cannot be
regarded as a "reciprocal obligation" for the purposes of the Act. Nothing of value was gained by the company in
return for the payment of £270,750 to the defender. On the contrary, the company's estate was
diminished as a result of the transaction - Cay's
Tr v Cay 1998 SC 780. The "consideration" given by the defender was
not "a real one and fair value" - Goudy on Bankruptcy, page 91. In any event, reduction of prior indebtedness
is in reality an old debt disguised as a new consideration and is not a novum debitum - Nicoll v Steel Press (supra). In so far as collusion may be relevant, the
relevant collusion would be between the company and the defender.
(3) The
Discount of £10,000 in favour of Mr Dempster
[65] The
liquidator relies, first, on Clause 1.2 of the missives between the
company, Mr Dempster and Ann Graham (paragraph 21 above). The "investor's incentive" there provided for
did not become "completely effectual" until the date of settlement (12 July
2006) - Craiglaw Developments v Wilson 1997 SC 356; Burnett's
Trustee v Grainger, 2004 SC
(HL) 19; Accountant in Bankruptcy v Orr 2005 SLT 1019. The liquidator relies, further, on the
statement in the defender's email of
[66] The defender's position is that there was
no personal guarantee by the defender of any debt due to Mr Dempster. The company received value in respect of the
discount in favour of Mr Dempster in that the company's debt of that
amount to Mr Dempster was paid off in return.
Discussion
[67] In this
section, I deal successively with the following points:
·
The defender's
contention that there is no relevant "challenge" within the meaning of section 243(5)
of the 1986 Act;
·
Assessment of the extent
to which the material (documents and averments) before me is sufficient to
determine whether a guarantee, and if so what guarantee, was given by the
defender to Ms Blyth, Mr Goold and Mr Dempster;
·
Assessment of the "transaction"
whereby £270,750 was transferred to the defender's personal bank account
on
·
Assessment of the "transaction"
involving a discount of £10,000 in favour of Mr Dempster, and whether
this was a preference struck at by section 243(1).
The defender's contention that there is no relevant "challenge"
[68] The
defender's contention, as I understand it, is that there is no relevant
challenge within the meaning of section 243(5) of the Act on the ground
that the action should be directed, not against the defender but against the
investors who were in reality the creditors preferred. In my opinion, this contention is unfounded.
[69] What the Act envisages is a challenge by
the liquidator or a creditor to a "transaction entered into by [the]
company". In this case, two transactions
are identified by the liquidator as having been entered into by New Alba
(Redwood House) Limited. As regards the
first, there is no question but that the sum of £270,750 was transferred
on
[70] Having identified the transaction in
question, it is then necessary to enquire whether (a) it had the effect of creating a preference in
favour of a creditor to the prejudice of the general body of creditors and, if
so, (b) whether that preference was created not earlier than 6 months
before the commencement of winding up.
If the Court is satisfied on these points, then it shall grant decree of reduction or for such restoration of property
to the company's assets or other redress as appropriate. The Act is silent as to the proper defender
in a challenge brought under subsection 243(5). This is natural given the range of possible
means of redress open to the Court.
[71] In the present case, there is no doubt
that the first transaction and, on the basis averred by the liquidator, the
second transaction both occurred within the period of six months prior to
winding up. That condition is therefore
satisfied.
[72] Further, if and in so far as either
transaction had the effect of conferring a preference on the defender as a
creditor of the company to the prejudice of the general body of creditors, that
condition is also satisfied. It is,
however, in dispute as to whether the transactions in question had that effect,
and that is essentially the crux of the case.
[73] Since Mitchell
v Rodger (supra), it has been
clear as a matter of law that, where a payment has been made, directly or
indirectly, to a creditor through the instrumentality of a cautioner, which has
the effect of relieving the cautioner, the trustee or liquidator can proceed
against the cautioner without necessity of proceeding against the creditor to
whom the payment was made.
[74] In my opinion, therefore, on the basis of
the case as stated by the liquidator, there is no ground on which it can be
said that there is no relevant challenge within the meaning of section 243.
Did the defender give a personal guarantee to Ms Blyth,
Mr Goold and Mr Dempster?
[75] In
approaching my assessment of the documents and pleadings, I am mindful of the
observations of Lord Rodger of Earlsferry in
·
a motion for decree de
·
a motion for summary
decree on the ground that
o
there is no issue raised
by the defender which can properly be resolved only at proof, and
o
on the facts clarified
from documents, articles and affidavits, the defender has no defence to the
action.
[76] The liquidator's primary motion is for
summary decree. Accordingly, at this
stage of the discussion, I am concerned with the question whether the
pleadings, productions and, in some instances, concessions at the bar by the
solicitor-advocate for the defender, are sufficient, without further proof, to
enable me to decide whether the defender gave a personal guarantee to Ms Blyth,
Mr Goold and/or Mr Dempster and, if so, in respect of what?
[77] In his letter of
"I note that in relation to the loan from Maureen Blyth
you personally guaranteed repayment. I
should be obliged if you would confirm that this was also the case in relation
to the loans from L Dempster and J Goold."
The
defender replied in unqualified terms by email on
"Yes, all 3 investors were guaranteed a 25% return. They were sent out an identical letter as per
the one in your possession, only with changes of names and address."
Further,
in his original Defences, the defender expressly admitted that identical
letters were sent to all three investors and also that the investors made the
loans to the company on the basis of the defender's guarantee that they would
each receive a 25% return on their loans.
These admissions have since been withdrawn, and the defender now seeks
to place a quite different construction on the letters sent to the investors.
[78] In the light of the information supplied
by the defender and the admissions that have now been withdrawn, the
liquidator's case has been stated on the basis that a personal guarantee was
given to all three investors in terms of the letter to Ms Blyth dated
17 March 2005 (paragraph 19 above).
The defender's position now is that he did not write in those terms to
either Mr Goold or Mr Dempster.
He gave a personal guarantee only to Ms Blyth and then only in
relation to any shortfall on the return of £65,000. He admits, however, under reference to the
letters dated 14 and 28 January 2005 (paragraphs 14 and 15
above), that a guarantee was given by the
company to Mr Goold and Mr Dempster that they would each receive
a 25% return on their loans (see Answer 5, quoted at paragraph 46
above). (Although we only have a copy of
a letter dated
[79] Dealing first with the admitted guarantee
to Ms Blyth, it is to be noted that the letter of 17 March 2005 was
written on paper headed New Alba Limited and signed by the defender as Managing
Director. The copy letter dated
[80] In my opinion, the letter of 14 March
2005 cannot rationally be construed as meaning that the defender's personal
guarantee extended only to any shortfall on the anticipated return of 25%
and did not extend to any shortfall on repayment of the principal sum. It may be that the defender did not
contemplate the possibility that the project would turn out so badly that the
principal loan could not be repaid in full.
But it is, in my opinion, inconceivable that a lender in Ms Blyth's
position would have been prepared to accept that, while she would be able to
recover in full her £65,000 investment return, she might be unable to
recover all or part of the principal sum of £260,000. "I will personally guarantee to meet any shortfall" must be construed as
meaning what it says.
[81] I therefore find that the documents cited
are sufficient, without further proof, to show (1) that the defender
personally guaranteed any shortfall in repayment to Ms Blyth, and (2) that
that guarantee extended both to the principal sum of £260,000 and to her "guaranteed"
return of £65,000 - i.e. £325,000 in all.
[82] While that finding may be sufficient to
establish that the first transaction was a preference in the defender's favour
and that the sum of £270,750 must consequently be repaid by him to the
liquidator, it is necessary, in relation to the second transaction, to
determine whether the defender gave a personal guarantee to Mr Dempster,
and a finding on that matter will necessarily apply to Mr Goold also.
[83] In my opinion, in spite of the defender's
earlier admissions, it is improbable that letters were sent in January 2005
to Mr Goold and Mr Dempster in terms identical to those of the letter
to Ms Blyth dated
[84] There are, nevertheless, significant
similarities between the letters to Mr Goold and Mr Dempster in
January and those to Mr Hay and Ms Blyth in March 2005. First, there is the same reference to a "guaranteed"
return of 25%. Second, while the
copy letters to Mr Goold and Mr Dempster dated 14 and 28 January
2005 do not show the letterhead of the original, both the terms and the tenor
of those letters suggest that they were (like the letters to Mr Hay and Ms Blyth)
written on the notepaper of New Alba Limited, not of New Alba (Redwood House)
Limited. This inference is corroborated
by the defender's statement to the liquidator (paragraph 35 above) that
New Alba (Redwood House) Limited did not commence trading until
[85] I attach significance to two further
considerations. First, in his letter of
[86] In the course of the debate, the
solicitor-advocate for the defender sought to explain various statements by the
defender to the liquidator (see, for example, paragraphs 38 and 40
above), as being attributable to a failure on the part of the defender to
"focus on differences between the companies and between a personal guarantee
and a company guarantee". If, faced with
the serious responsibility of explaining the company's affairs to the
liquidator, the defender failed to focus on differences between a company
guarantee and a personal guarantee, it seems unlikely that he was any more
precise in his earlier dealings with the investors. As the defender himself wrote to the
liquidator (see paragraph 40 above): "Rightly or wrongly, my view was that the
investors had lent me money to take
part in the development, and I paid
them back as soon as I could."
[87] Finally if, as the defender now avers, he
was under no personal obligation to pay any more than £65,000 to Ms Blyth,
it is difficult to see why, as he was eager to assert, he should have
contributed more than £100,000 of his own money to ensure repayment of all
three investors in full, including their 25% return.
[88] In the light of all these considerations,
it seems to me that the material before me is amply sufficient to establish
that the letters of 14 and 28 January 2005 to Mr Goold and Mr Dempster
are to be construed as offering a personal guarantee of repayment both of the
principal loans and a 25% return - an offer that was accepted by them in
making the loans. I cannot see that
parole evidence at proof would advance the matter in any way.
Was the 'transaction' on
[89] There
is no dispute that on 24 August 2006 the defender caused the sum of £270,750
to be transferred from New Alba (Redwood House) Limited's Development Loan
Account to the Dickens Personal Account (paragraph 28 above). Neither is there any dispute that the
defender had no claim upon the company for that amount (irrespective of
whether, even if he had had such a claim, he would have been entitled to make
such a transfer).
[90] Various explanations have been given by
the defender as to why the transfer was made:
·
that it was "my personal
money from the sale of some property and transferred into that account to
enable me to pay the Private Investors back" (paragraph 38 above);
·
that "it was transferred
to my account to enable me to forward the money to the investors" (paragraph 40);
·
that "the transfer was
necessary to enable the partial repayment to be made by electronic
transfer. The [company was] unable to
make an electronic transfer from [its] own account but that facility was
available for transfers from the Clydesdale account." (paragraph 47);
·
that "the transfer was
necessary to enable the partial repayment to be made by electronic
transfer. The Defender was familiar with
the transfer arrangements from the Clydesdale Bank, and arranged the transfer
through that bank for that reason. The
transfer followed a discussion the Defender had with the Clydesdale Bank. It was a transfer made between accounts
managed by the same relationship manager within the bank. That made the transfer more straightforward"
(paragraph 48).
[91] The solicitor-advocate for the defender
candidly accepted at the hearing that none of these explanations could be
supported. In reality, the payments to Mr Goold
and Mr Dempster were not made by electronic transfer but were made by
cheque, in Mr Goold's case more than a fortnight after the money had been
transferred to the Dickens Private Account.
It is not clear how the first payment was made to Ms Blyth (also
more than a fortnight after
[92] The effect of the transaction on 24 August
2006 was to transfer from the company's bank accounts to the defender's
personal account the whole cash assets of the company, leaving only sufficient
to cover bank interest charges (see paragraphs 27 to 29 above). In my opinion, in the absence of any credible
explanation for the transaction, that is sufficient to entitle the liquidator
to decree for repayment of the sum so transferred without it being necessary to
determine whether the transaction constituted an unfair preference struck at by
Section 243.
[93] In so far as it may be necessary to
determine whether the transaction constituted an unfair preference, there is no
doubt (and indeed the defender insists) that the whole of the sum so
transferred was applied by him towards satisfaction of the loans by Ms Blyth,
Mr Goold and Mr Dempster. In
view of my finding that the defender had personally guaranteed repayment of
their loans and their 25% return (paragraphs 81 and 88 above), the
effect of doing so was to discharge pro
tanto the defender's cautionary obligation.
The case therefore falls squarely within the ratio of Mitchell v Rodger (supra). The effect
of the transaction was plainly to prejudice the general body of creditors. The liquidator is therefore entitled to decree
in terms of the first and second conclusions.
[94] Lest I be thought to have overlooked the
defender's other defences, I deal with them briefly. As regards the claim that the defender was
acting as agent for the company for the purpose of making payment to Ms Blyth,
Mr Goold and Mr Dempster, no credible reason is given why it was
necessary for the defender to act as agent or intermediary in making such
payments nor, even if that were so, why the money had to pass through his
personal bank account and be held there for a matter of weeks before being paid
over.
[95] The delay in transferring money to the
investors from the Dickens Personal Account is also at least a partial answer
to the defender's claim, relying on Section 243(2)(b), that the payments
to the investors were "payments in cash for debts which when they were made had
become payable". But it is also clear,
as counsel for the liquidator argued, that no date for repayment of the
investors had been set and no demand for repayment had been made. In particular, the "return" of 25% was
simply a percentage of the sum loaned without reference to the "time value of
money" - in other words, it was not a pre-estimate of interest on the
loan.
[96] The defender avers that "payment was
considered to be due" (Answer 10) and that "It was normal practice to
consider that such loans were due to be repaid on the sale of the final property
when that occurred"(Answer 6).
These averments are hopelessly lacking in specification. It is not said who considered payment to be
due, nor in what circles it is "normal practice" to repay investors in a
project before the debts incurred in realising the project have been
satisfied. The latter proposition is, in
my opinion, inherently improbable and could not, in my opinion, be the basis of
a relevant defence.
[97] Finally, the defender's argument based on
subsection 243(2)(c) (paragraph 56 above) is, in my opinion, absurd
and it is sufficient for me to refer to the liquidator's argument in reply
(paragraph 64 above).
The transaction involving a discount of £10,000
in favour of Mr Dempster
[98] This is
the only aspect of the case that has caused me difficulty and I have seriously
considered whether it would be necessary to remit it for proof before answer.
[99] The missives for the sale of plot 3
were in favour not only of Laurie Dempster but also of Ann Graham (see
paragraphs 20 and 21 above).
They provided for a deduction from the agreed price of £775,000 of £10,000
as an "investor's incentive" provided that the price was paid without
unreasonable delay. Mr Dempster
alone was the "investor" but Ms Graham was also the beneficiary of this
stipulation. As noted above
(paragraphs 23-24), the sum credited to Mr Dempster on
[100] In his letter of
[101] In my opinion, counsel for the liquidator
was correct in arguing, on the basis of the authorities cited at
paragraph 65 above, that the reduction in price did not become completely
effectual until the transaction for the sale of plot 3 was otherwise
complete. The stipulation for a
reduction in the price of £10,000 as an investor's incentive was
conditional on the price being paid without unreasonable delay - a condition
that could not be held to have been satisfied until the price was actually
paid.
[103] The sum paid by Mr Dempster on 12 July
2006 was considerably less than the full purchase price of £775,000, and
the defender does not dispute that, one way or the other, during the six month
period prior to winding up, Mr Dempster was given credit to the extent of £10,000
in respect of the 25% return on his investment of £40,000. No person other than the defender made (or
could have made) this arrangement, the effect of which was to relieve the
defender pro tanto of his obligation
as guarantor to Mr Dempster.
[104] I therefore conclude that the transaction,
however it was effected, whereby on
Decision
[104] The
liquidator's primary motion is for summary decree in terms of his
conclusions. The test that I have to
apply was set out by Lord Rodger of Earlsferry in
"A judge who is considering a motion for summary
decree is entitled to proceed not merely on what is said in the defences, but
on the basis of any facts which can be clarified, from documents, articles and
affidavits, without trespassing on the role of the proof judge in resolving
factual disputes after hearing the evidence.
The judge can grant summary decree if he is satisfied, first, that there
is no issue raised by the defender which can properly be resolved only at proof
and, secondly, that, on the facts which have been clarified in this way, the
defender has no defence to all, or any part, of the action. In other words, before he grants summary
decree, the judge has to be satisfied that, even if the defender succeeds inn
proving the substance of his defence as it has been clarified, his case must
fail."
I would
only add that I must, of course, be satisfied that the material before me is
sufficient to entitle the pursuer to decree.
[105] In my opinion, for all the reasons discussed
above, the material before me is amply sufficient to establish the validity of
the liquidator's claims for declarator and payment, and, further, that the
defender has no stateable defence to those claims. The liquidator is therefore entitled to
summary decree.
[106] As I have noted above (paragraph 92), I
would have been prepared to grant decree in terms of the second conclusions for
repayment of the sum of £270,750 irrespective of whether the defender had
given a personal guarantee to the investors.
Further, even if the defender gave a personal guarantee only to
Ms Blyth, that is sufficient, on the authority of Cay's Tr v Cay (supra) to entitle the liquidator to decree
for the whole amount. Since, however, I
have found that the defender gave a personal guarantee to all three investors,
I shall sustain the pursuer's third plea-in-law and grant summary decree in
terms of the first and second conclusions.
[107] Further, having held that the defender was
responsible for securing a discount of £10,000 in favour of
Mr Dempster and reducing pro tanto
his liability as guarantor, I shall sustain the pursuer's fourth plea-in-law
and grant summary decree in terms of the third and fourth conclusions.
[108] In so far as it may be necessary for me to
do so, I shall repel the plea-in-law for the defender.
[109] I shall not include in my interlocutor any
finding of expenses, but it may be useful for me to indicate that, subject to
any submissions the defender may wish to make, I can at the moment see no
reason why expenses should not follow success.