OUTER HOUSE, COURT OF SESSION

 

[2012] CSOH 55

 

P 229/12

 

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD HODGE

 

in the Note

 

PAUL JOHN CLARK and DAVID JOHN WHITEHOUSE, joint administrators of Rangers Football Club plc

Noters:

 

for

 

Directions

 

 

 

ннннннннннннннннн________________

 

 

 

Noters: Sellar, Q.C.; Ower; Biggart Baillie LLP

Respondents: Clancy, Q.C.; O'Brien; Burness LLP

 

23 March 2012

 

[1] This is an application by the administrators of Rangers Football Club plc ("Rangers") under paragraph 63 of Schedule B1 to the Insolvency Act 1986 ("the 1986 Act") for directions. The Respondents are two limited liability partnerships registered in England, namely Ticketus LLP and Ticketus 2 LLP (hereinafter collectively "Ticketus").

[2] The administrators have applied for directions as to whether they can be prevented from terminating contracts which Rangers entered into with Ticketus by which it sold to Ticketus large numbers of season tickets for seats in the Ibrox stadium in each of the seasons from 2011-2012 to 2014-2015.

 

Background

[3] Rangers operates an association football club and is a member of the Scottish Football Association and the Scottish Premier League. It has encountered serious financial difficulties, including substantial claims by HM Revenue and Customs (HMRC"). As a result the Board of Rangers resolved that they should seek the appointment of administrators on the ground that Rangers was or was likely to be unable to pay its debts as they became due.

[4] When the initial appointment of the administrators was discovered to be invalid, Rangers applied to the court for a retrospective appointment and by interlocutor dated 19 March 2012 the court appointed the Noters as administrators of Rangers with effect from 14 February 2012, which was the date of their purported appointment. In its petition for the making of an administration order Rangers referred to a debt of over г9 million due to HMRC and stated that as at 14 February 2012 it was unable to pay its debts as they fell due for payment. When seeking the retrospective administration order on 19 March Mr Sellar QC for Rangers confirmed that that inability remained.

[5] In the petition seeking the administration order it was stated that the purposes of the administration are (a) rescuing Rangers as a going concern, or (b) achieving a better result for Rangers' creditors as a whole than would be likely if it were wound up without first being in administration. To achieve either of those purposes the administrators consider that two options are realistically open to them, namely (i) a subscription of new shares in Rangers and a sale of the present majority shareholding combined with a company voluntary arrangement between Rangers and its creditors ("a CVA") under Part 1 of the 1986 Act or (ii) a sale of the business and assets of Rangers, again combined with a CVA.

[6] Ticketus operates a business of buying and selling tickets for, among others, sporting events. The two contracts with Ticketus, which I discuss below, in summary involve the sale by Rangers to Ticketus of season tickets and an agency arrangement by which Ticketus is to receive the income flow from the sale of the season tickets. On or about 9 May 2011 Ticketus paid г20,300,912 for the first tranche of the season tickets which covered the seasons 2011-2012, 2012-2013 and 2013-2014. On or about 21 September 2011 Ticketus paid a further г5,075,213 for the second tranche of season tickets, which covered the seasons 2013-2014 and 2014-2015. I am informed that the expected income flow from the sale of the season tickets is likely to represent about 60% of the cash flow of Rangers in those seasons. Accordingly, the sale of that income flow is likely to have a significant effect on what interested parties may bid for the majority shareholding in Rangers or for that company's business and assets.

[7] The administrators issued a Memorandum of Offer inviting expressions of interest in acquiring either the majority shareholding in Rangers or most of its business assets. The Memorandum of Offer issued on 14 March 2012 invited interested parties to assume that "no future revenue needs to be committed to Ticketus" both in the context of a CVA and a trade sale of Rangers' business and assets. The administrators issued a revised Memorandum on 16 March 2012 which contained a third option of a CVA in which the arrangements with Ticketus continued to have effect.

 

[8] The administrators urgently seek the directions of the court to assist them in processing the responses to their Memorandum of Offer.

 

The directions sought

[9] Initially, the administrators in their Note invited the court to make one direction, which was:

"as to whether the administrators can be prevented from causing [Rangers] to terminate, albeit in breach of their terms, the [Ticketus agreements]."

After discussion in court they have amended their Note in order to ask the court, in the alternative, to give

"a direction as to the legal nature of the rights which the agreements confer on Ticketus in respect of (i) the Company's Stadium, and (ii) the proceeds of future sales of season tickets for that Stadium;"

and

"a direction as to the legal test which is to be applied by [the] administrators or by the court in determining whether those administrators can be prevented from causing the company to terminate the agreements, albeit in breach of their terms."

 

Legislative background

[10] It is not disputed that Rangers is insolvent and that an administration order could competently be made. Paragraph 11 of Schedule B1 of 1986 Act provides:

"The court may make an administration order in relation to a company only if satisfied -

(a) that the company is or is likely to become unable to pay its debts, and

(b) that the administration order is reasonably likely to achieve the purpose of the administration."

[11] When the Enterprise Act 2002 altered the statutory regime for administration it created a sequential hierarchy of purposes in paragraph 3 of Schedule B1 to the 1986 Act, which provides:

"(1) The administrator of a company must perform his functions with the objective of -

(a)    rescuing the company as a going concern, or

(b)   achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being put into administration), or

(c)    realising property in order to make a distribution to one or more secured or preferential creditors.

 

(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.

 

(3) The administrator must perform his functions with the objective specified in sub-paragraph (1) (a) unless he thinks either -

(a) that it is not reasonably practicable to achieve that objective, or

(b) that the objective specified in sub-paragraph (1) (b) would achieve a better result for the company's creditors as a whole.

 

(4) The administrator may perform his functions with the objective specified in sub-paragraph (1) (c) only if -

(a) he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph (1) (a) and (b), and

(b) he does not unnecessarily harm the interests of the creditors of the company as a whole."

[12] Paragraph 63 of Schedule B1 empowers the administrators to apply to the court for directions in connection with their functions. It is not disputed that this court, which has jurisdiction to wind up Rangers (section 120 of the 1986 Act), is the appropriate court to give such directions.

The Ticketus contracts

[13] The contractual arrangements between Rangers and Ticketus comprise two closely connected agreements, namely the Season Tickets Agreement ("STA") and the Agency Agreement, which are both dated 9 May 2011.

[14] The STA provided for the sale by Rangers to Ticketus of season tickets to seats in the Ibrox stadium for the four seasons (clause 2.1). It provided that the sale would take place in two tranches (clauses 4 and 5). The season tickets were defined thus:

"a ticket for the Season that grants the holder access to and the right to occupy a specific seat in the Stadium at all Matches without additional charges for such access or right."

Schedules 2 and 3 to the STA defined the general location of the seats in the stadium which were to be the subject of the sale of the season tickets, and specified the numbers of seats by reference to the part of the stadium, the tier and ticket category (i.e. adult, concession or juvenile). English law governs the STA and the Courts of England have exclusive jurisdiction over it (Clause 24).

[15] The Agency Agreement is an agreement by which Ticketus, on the basis that it was owner of the season tickets which were the subject of the STA ("the STA tickets"), appointed Rangers as its non-exclusive agent in the promotion and worldwide sale of the STA tickets. It obliged Rangers to sell the STA tickets in priority over other season tickets (clause 4.1). It imposed on Rangers the obligation to pay the proceeds of the sale of the STA tickets into a designated account with Bank of Scotland plc for the sole benefit of Ticketus (clauses 3.1.17 and 5). Rangers gave Ticketus a non-exclusive royalty-free licence to use its intellectual property for the purpose of promoting and selling the STA tickets (clause 11). English law also governs the Agency Agreement and the Courts of England have exclusive jurisdiction over it (Clause 30).

[16] The administrators' legal advisers have challenged the enforceability of the STA. It envisaged that Rangers would use the payment for the first tranche STA tickets to effect the repayment of its debt of about г18 million to Bank of Scotland plc. It was also proposed that Rangers would lend г16 million to Wavetower Limited (now called The Rangers FC Group Limited) to enable that debt to be repaid and that the bank's debt and its securities would be assigned to Wavetower Limited (Schedule 19). The administrators' legal advisers have asserted that the STA is illegal on the ground that it was an agreement for the giving indirectly by Rangers of financial assistance for the acquisition of its shares contrary to section 678 of the Companies Act 2006. The existence of this challenge is not however relevant to the directions which I have to give as I must assume at this stage that the Ticketus agreements are valid.

 

The opinion of leading counsel on English law

[17] Ticketus has obtained advice on English law from Richard Hacker Q.C. In a clear and carefully framed opinion, for which I am grateful, Mr Hacker explained that in English law the STA conferred on Ticketus "a bundle of transferable licences to occupy a defined number of seats of different types at specified future matches played at the Ibrox stadium." Those licences were irrevocable, they conferred an intermediate right which was not a property right in the conventional sense but was more than a mere personal right, and they could be enforced by the grant of equitable relief which could include an order for specific performance of the rights attaching to the tickets. In relation to the future income flow from the sale of the STA tickets he opined that the Agency Agreement vested the full beneficial title to the sums in Ticketus and left Rangers with a bare legal title, thereby protecting the funds against the insolvency of the latter.

[18] The administrators, while not taking issue with that analysis of English law, submit that it is beside the point because they assert that it is the law of Scotland that determines the proprietary effect of the STA and the Agency Agreement in the context of the administration of Rangers.

 

Private International Law

[19] English law governs the meaning of the two Ticketus agreements and it is to that legal system that the court must look to interpret those agreements. But it is Scots law that determines the nature of the proprietary rights (if any) which the agreements confer in the tickets or the stadium seats: Inglis v Robertson & Baxter (1898) 25 R (HL) 70. As the authors state in Anton's "Private International Law" (3rd ed.) at para 21.61:

"while the contractual aspects of a contract to assign corporeal moveables are governed by the law applicable to the contractual obligation, the final question of proprietary right must be determined by the lex situs."

The same approach to real rights applies in relation to heritable property in Scotland (Erskine's Institute III.2.40). In relation to incorporeal moveable property such as a debt, questions as to the assignability of the debt are determined by the legal system under which the debt arose (Anton (above) at para 12.91 ff and Strachan v McDougle (1835) 13 S 954).

[20] Mr Clancy QC for Ticketus did not dispute that statement of the general law in relation to questions of proprietary right. But he submitted that on a proper analysis it was not the law governing the trust property which was in issue. Rather the court had to look to the law which governed the trust itself. He submitted that English law allowed a trust over acquirenda, including a truster-trustee settlement, and that accordingly there was a valid trust over the income which the future sale of the tickets would achieve. He referred to the Recognition of Trusts Act 1987 and submitted that under Article 6 of the Hague Convention on Trusts, which that Act made part of our domestic law, a trust was governed by the law chosen by the settlor. Thus, he submitted, under Article 8 the validity of the trust, its construction and its effects were governed by English law. Article 11 provided that a trust created by the law chosen by the settlor be recognised as a trust and that meant in this case that the trust assets did not form part of Rangers' estate on its insolvency. He pointed out that section 1(2) of that Act extended the Convention rules to

"any trusts of property arising under the law of any part of the United Kingdom or by virtue of a judicial decision whether in the United Kingdom or elsewhere."

[21] He submitted that the derogations in Article 15 did not apply. Read short that Article provides:

"The Convention does not prevent the application of provisions of the law designated by the conflicts rules of the forum, in so far as those provisions cannot be derogated from by voluntary act, relating in particular to the following matters -

....

(d) the transfer of title to property and security interests in property.

(e) the protection of creditors in matters of insolvency.

...

If recognition of a trust is prevented by application of the preceding paragraph, the court shall try to give effect to the objects of the trust."

He submitted that the establishment of a trust did not involve a transfer of title and thus the derogation did not apply.

[22] Mr Sellar in response submitted that parties could not contract out of the private international law rule that property matters were subject to the lex situs nor was it possible to circumvent by contract the rules by which in Scots law a truster, who seeks to be a trustee, transfers assets to himself in his new capacity. The derogations in Article 15(d) and (e) were engaged. Further, and more fundamentally, he founded on Article 4 of the Convention which provides

"The Convention does not apply to the preliminary issues relating to the validity of wills or of other acts by virtue of which assets are transferred to the trustee."

[23] Mr Clancy submitted that Article 4 did not apply in this case and referred to Lewin on Trusts (18th ed.) at para 11-63 where the authors argue that a transfer of assets to a trust is not a precondition for the Convention to apply to a trust. They state:

"[I]t is thought that where trusts are created by mere declaration by the owner of the original trust assets, there is no preliminary issue to be decided about the validity of any transfer, there being no transfer."

Whether or not that statement is correct in English law is not for me to decide. I note, as Lewin acknowledges in a footnote, that two other texts do not support it but assert that the lex situs applies to determine whether any property right has passed from a settlor. See Underhill and Hayton, "Law of Trusts and Trustees" (17th ed.) section 102.122, and Harris, "The Hague Trusts Convention" at p.19. But there is also support for the latter view in the Explanatory Report of Professor von Overbeck (http://www.hcch.net), which discusses Article 4 in paras 53-60. Professor von Overbeck, using the analogy of a launcher and a rocket, distinguishes between the act with legal effects which creates the trust (i.e. the launcher), which does not fall within the Convention, and the trust itself (i.e. the rocket) which does. He states (in para 55):

"Article 4 is intended to exclude from the Convention's scope of application both the substantive validity and formal validity of transfers which are preliminary to the creation of the trust."

He records (in para 57) concerns whether the words "assets are transferred to the trustee" covered the case of a declaration of trust by a truster-trustee and the unanimous view of the Special Commission that such acts were envisaged by Article 4. In the event, no change was made to Article 4 as it appears that it was thought that Article 4 when read with Article 2 covered the creation of a trust in that way. See also paragraph 43 of the von Overbeck report.

[24] I am therefore persuaded that the Recognition of Trusts Act 1987 does not have the effect of making the law chosen by the settlor the governing law of the steps needed to create the trust. Were it otherwise, the results would be startling as a settlor would be able to alienate property which he could not dispose of under the lex situs. It would create significant problems for the operation of insolvency law in the jurisdiction in which the asset was located. Additionally by virtue of section 1(2) of the 1987 Act it might be argued that a constructive trust arising from a judicial decision in one legal system would prevail over the lex situs if a foreign settlor could be identified.

[25] As I have reached this view on Article 4, it is not strictly necessary to consider Article 15. But I am inclined to accept Mr Sellar's submission that in the context of a convention which covered both civilian and common law systems it would not be appropriate to take a technical view of the concept of property in Article 15(d). It would therefore include the change in the capacity in which a person held assets if that change could have "proprietary" effects in an insolvency. He suggested that Article 15 was in this regard an example of "belt and braces" and was consistent with the thinking behind Article 4.

[26] I conclude therefore that Scots law, as the legal system under which the debts due on the sale of the STA tickets have arisen and may arise, governs the recognition of the trust which the Agency Agreement sought to create under English law.

[27] Mr Clancy also sought to support his case that he had an equitable interest in the STA tickets by reference to the law applicable to contracts. He submitted that under Scots private international law it was English law that determined the nature of the rights which Ticketus had in relation to the tickets themselves. In support of this submission he referred to the Contracts (Applicable Law) Act 1990 ("the 1990 Act") and in particular section 2(3) and Articles 3(1) and 10(1)(b) of Schedule 1 to that Act. In short, he submitted (i) that the Act applied to conflicts of law between the jurisdictions of the United Kingdom (section 2(3)), (ii) that under the Act English law governed the Ticketus contracts as the law chosen by the parties (Schedule 1 Art 3(1)), and (iii) that it followed from Article 10(1)(b), which provided that the law chosen by the parties governed performance, that the court should give effect to English law by enforcing the equitable proprietary rights which English law recognised. He referred in this regard to Ewing v Orr Ewing (1883) 9 App Cas 34.

[28] At the continued hearing this Wednesday Mr Clancy departed from the submission and informed the court that Ticketus asserted no rights in the tickets themselves. Nonetheless, as I am asked to make directions, it is appropriate that I record my views on this point. I have no problem with the first two points which he made about the 1990 Act. Where I disagree is that I do not consider that the Rome Convention deals with proprietary rights at all. Article 1(1) states that the rules apply "to contractual obligations in any situation involving a choice between the laws of different countries." The creation of an equitable interest intermediate between a personal right and a right in rem is to my mind not a contractual obligation which the Convention covers. The Guiliano-Lagarde report on the Rome Convention (O.J. C 282, 31 October 1980) supports this view, stating in its discussion of Article 1 of the Convention:

"Since the Convention is concerned only with the law applicable to contractual obligations, property rights are not covered by these provisions."

This is consistent with what that report says on Article 10 of the Rome Convention, which does not suggest that the concept of "performance" extends the applicable contractual law to questions of proprietary right. I agree with the authors of Dicey, Morris and Collins "The Conflict of Laws" (14th ed.) at para 32-195, that the report "describes what is meant by performance in a somewhat obscure passage." The examples which the report gives, however, lend no support for extending the concept of "performance" to include the creation of an equitable right with "proprietary" characteristics. I therefore consider that Mr Clancy was correct to withdraw his submission based on the 1990 Act.

 

The characterisation of Ticketus' rights under Scots law

(i)                 In the seats of the stadium

[29] The STA did not create any real right in the seats which may in subsequent seasons come to be the subject of season tickets if supporters choose to purchase them. Presently there are no season tickets in relation to future seasons. On purchase of a season ticket the supporter would not have any real right in relation to his allocated seat. His right of access to and occupancy of the seat would exist only when a match was being played. The right could not be categorised as a lease because it conferred only an intermittent right of occupation for a limited purpose and for limited periods of time. See by way of analogy Broomhill Motor Co Ltd v Assessor for Glasgow 1927 SC 447. In any event, a lease could not confer a real right under the Leases Act 1449 without possession.

[30] It would not be incorrect to describe a season ticket as a licence giving access to and egress from the allocated seat and a right to occupy that seat when matches are played at Ibrox. But such a licence is a contractual right and does not confer a real right in relation to a seat. In Scots law there is a clear divide between a real right and a personal right and it has long been established that there is no intermediate right. The payment by the purchaser of the price of the asset to be acquired does not convert a personal contractual right into a real right. Modern vouching of this point can be found, as is well-known, in Gibson v Hunter Home Designs Limited 1976 SC 23, in Lord President Hope's detailed analysis of real rights and personal rights in Sharp v Thomson 1995 SC 455 and in the concurring analysis by the House of Lords in the context of the bankruptcy of a seller of heritable property after he has delivered a disposition but before the purchaser has recorded his title (Burnett's Trustee v Grainger 2004 SC (HL) 19).

[31] The right of a trust beneficiary in the estate of a trust, although a personal right, prevails over the unsecured creditors of the trustee in the latter's insolvency (Heritable Reversionary Co Ltd v Millar (1892) 19 R (HL) 43). As insolvency is the acid test of property rights, the beneficiary's right is in that sense proprietary. But Mr Clancy for Ticketus did not assert that under Scots law Ticketus had an interest as a trust beneficiary in particular seats in the stadium and I consider he was right not to do so.

(ii)               Whether the season tickets or the expected income from the sale of season tickets in future years were the subject of a trust

[32] The Ticketus agreements do not purport to creat a trust in relation to the seats which are intended to be made available to the public by the sale of the STA tickets. In the STA Rangers sold the STA tickets, which do not yet exist. It was a matter of agreement between counsel that we are not concerned with the existence or otherwise of a piece of paper which is a ticket but with the bundle of rights, which the ticket confers and which comes into existence on the issuance of an STA ticket to a supporter. The Agency Agreement contains a mechanism by which Rangers as Ticketus' agent is to sell the STA tickets and hold the proceeds in a designated account on behalf of its principal.

[33] If I am correct in my conclusion that Scots law applies, the difficulty which Ticketus faces in asserting a trust over the proceeds of sale of the STA tickets is that the proceeds do not yet exist. On the assumption that the Ticketus agreements are sufficient to amount to a declaration by Rangers of a trust over the STA tickets and the proceeds of their sale, the non-existence of both is fatal to the creation of a trust. Where the truster and trustee are the same person it is our law that there must be constructive delivery of the trust subjects to himself as trustee of an irrevocable trust: see Allan's Trustees v Lord Advocate 1971 SC (HL) 45, in which Lord Reid at p. 54 spoke of the doing of "something equivalent to delivery or transfer of the trust fund." In Clark Taylor & Co Limited and Quality Site Development (Edinburgh) Limited 1981 SC 111, Lord President Emslie (at p. 118) stated that, for that to be possible, there must be in existence an asset. There is a line of authority consistent with this approach and it includes two further Inner House decisions, namely Export Credits Guarantee Department v Turner 1979 SC 286 and Tay Valley Joinery Ltd v C F Financial Services Ltd 1987 SLT 207, and also the decision of Lord Penrose in the Outer House, Balfour Beatty Ltd v Britannia Life Ltd 1997 SLT 10.

[34] Mr Clancy submitted that there were strong grounds for criticising this line of authority. He referred to two articles, one by the late Professor Wilson in 1983 SLT (News) 106 and one by Professor Kenneth Reid in 1987 SLT (News) 113. He acknowledged however that I was bound by the authoritative decisions of the Inner House and therefore reserved his right to argue against those decisions in a higher court.

[35] For completeness, I record that Mr Clancy also submitted that there was no rule of law which prevented the assignation of future and as yet non-existent assets. He submitted that the law of accretion applied not only to heritable property but also to moveable property. In support of that submission he referred to Professor Reid's tentative comments in Volume 18 of the Stair Memorial Encyclopaedia at para 678. He also referred to Lord Hoffmann's suggestion in Buchanan v Alba Diagnostics 2004 SC (HL) 9 (at para 22) that it was arguable that an assignation of future improvements of a patent operated "entirely in the realm of proprietary rights." Without further submissions I am not able to make anything of the two suggestions about accretion which are, in part at least, contradictory.

[36] The central issue which divides the parties is whether the expected future income from the sale of season tickets to supporters for the 2012-2013 season and the two following seasons is subject to a trust so that Ticketus has a beneficial interest in that income when it arises. If it were so subject, that would have significant consequences for the administration because the trust right would not be affected by a CVA or a scheme of arrangement: Re Lehman Brothers International (Europe) [2010] 1 BCLC 496, Patten LJ at para 65. It would also, as I have said in paragraph [31] above, prevail in a winding up of Rangers, although it is not clear how content would be given to the trust right if Rangers were unable to perform their contractual obligations which were a precondition of their receipt of the proceeds.

[37] That is not a complication which I have to address because, for the reasons set out above, I conclude that Ticketus has merely a contractual right through the STA and the Agency Agreement for the expected income when it is received by Rangers to be held in trust. That is not a trust right: Bank of Scotland v Liquidators of Hutchison Main & Co Limited 1914 SC (HL) 1, Lord Kinnear at p. 7.

 

The power of an administrator to terminate a contract of the company when the counterparty is not in breach

[38] I am satisfied that I cannot give the original direction which the administrators have sought without further information about the relevant circumstances of the administration and the administrators' proposals in the light of their discussions with interested parties. The administrators are unable to provide that information to the court and Ticketus as the latter are parties in a consortium which has expressed interest in response to the Memorandum of Offer and the release of commercially confidential information to one interested party would undermine a fair competition between the prospective bidders.

[39] The second alternative direction which the administrators seek is as to the test which they or the court are to apply in determining whether the administrators can be prevented from causing Rangers to terminate the agreements. On a proper analysis of contract law, as I explain below, the administrators do not have power to terminate a contract in the absence of a contractual power to do so or material breach on the part of the other contracting party. Accordingly, the direction sought is shorthand for a request for a legal test to be applied by the court if, after the administrators had repudiated the Ticketus contracts, it were to be asked to compel the administrators to arrange that Rangers perform its contractual obligations.

[40] It is trite law that when one contracting party breaks his contract in a material way the other party can accept that as a repudiation, rescind the contract, and claim damages: Photo Production Ltd v Securicor Transport Ltd [1980] AC 827; McBryde, "The Law of Contract in Scotland" (3rd ed.) paras 20-104 and 20-116f. Alternatively, in many cases, the other party may continue with the performance of the contract and raise an action against the party in breach for specific implement. Thus it is possible that an administrator who causes a company in administration to break a contract may be compelled by the court, whether by interdict, order for specific implement, direction or otherwise, to cause the company to perform the contract.

[41] Mr Sellar in his written submission advanced the following test as a possible answer to his request for the second alternative direction:

"The test for preventing the unlawful termination of a personal contract is whether the court is satisfied that, despite the termination of the contract being likely to cause material loss to the other party, the continuation of the contract would materially impede the achievement of one or more of the objectives of the administration, and so cause material loss to the company's creditors as a whole, that is as a collective body."

He referred the court to several English cases and to textbooks on company insolvency and administration and submitted that they were consistent with his proposed test.

[42] Mr Clancy invited me to refuse to make any direction at this stage of the administration as the court had insufficient information to make a direction which would govern how the administrators should act in this case. He also pointed out forcefully that the formulation of an abstract test might be an academic exercise where the administrators had not presented the court with facts about the negotiations which showed that they ought to disclaim the contracts.

[43] I consider that there is some force in Mr Clancy's points. I am also concerned that it may not be appropriate to articulate a succinct test which might wrongly be treated as if it were a statutory formulation, particularly when I have been asked to give guidance in circumstances of no little urgency. I am satisfied however that, when the administrators as officers of the court have requested directions, it would not be appropriate for me to refuse to give guidance of a more general nature which would have to be applied with care to the particular circumstances of an administration.

[44] Mr Clancy also submitted that the direction sought involved the consideration of two distinct issues, namely (i) the circumstances in which an administrator would choose to cause the company in administration to withhold further performance of a contract and (ii) the circumstances in which the courts might enforce the contract by recalling the moratorium and granting a remedy to compel performance. I agree that both issues are engaged but, as I explain below, I think that they are not wholly distinct.

[45] I was not referred to any Scots law authority which addressed these issues directly. I can obtain some assistance from the English cases and the textbooks, to which I was referred, but they do not speak with one voice. Therefore, before turning to them, I address, first, the law of liquidation and receivership which may give guidance by analogy. Secondly, I discuss the current statutory provisions and the practice of administration as it has developed since 1986. Thirdly, I consider how far, having regard to the current statutory regime for administration, the court can legitimately use the law relating to liquidation and receivership in giving guidance to an administrator.

[46] Turning, first, to a winding up of a Scottish company, counsel agreed that the liquidator had no statutory power to terminate the contracts of a company in liquidation. There is no provision equivalent to section 178 of the 1986 Act which allows the liquidator of an English company to disclaim onerous property. But that does not mean that a liquidator of a Scottish company cannot decline to perform a contract. Such a liquidator is a manager of the company's affairs and acts on its behalf: Smith v Lord Advocate 1978 SC 259, Lord President Emslie at p.272. Although he has no statutory power to disclaim a contract, the liquidator can choose to make the company in liquidation disaffirm a pre-existing contract by declining to perform it and thereby placing the company in breach of contract: Asphaltic Limestone Concrete Co Limited v Glasgow Corporation 1907 SC 463, Lord McLaren at p.473.

[47] I was not referred to any instance in which the Scottish courts have ordered a company in insolvent liquidation to perform a contract which a liquidator had disclaimed. In my view that is not surprising. It is well vouched that a court may decline to order specific performance where it is impossible to perform, or it is impossible to enforce the decree, and in circumstances where the enforcement of a decree would cause exceptional hardship: Gloag on Contract (2nd ed.), pp. 656-661. Where a company is being wound up, it could not comply with a decree of implement without the co-operation of the liquidator who has statutory duties to achieve the winding up of its affairs and a duty, so far as is consistent with achieving the beneficial winding up of the company in the interests of the creditors as a whole, to treat unsecured creditors equally. In my view, at least as a general rule, if a court were asked to order a company in an insolvent winding up to implement a contract it should refuse to do so because the company could not perform or because such an order would conflict with the statutory duties of the liquidator.

[48] Although the Enterprise Act 2002 has removed the power of a holder of a floating charge, which was created after 15 September 2003, to appoint an administrative receiver and the statutory provisions survive only as a transitional regime, it is useful to look by way of analogy to the rules of Scottish receivership. The receiver, who has been appointed under a floating charge over all of the assets of the company, acts as manager of the company superseding the managerial power of the directors. On his appointment the company's pre-receivership contracts remain in force but the receiver is not personally liable for those contracts: section 57(4) of the 1986 Act. The receiver can cause a company to decline further performance of a contract. By so doing the receiver puts the company in breach of contract. But it is not the practice of our courts to order specific implement against a company in receivership for reasons which are analogous to those which apply in a liquidation. The company in receivership cannot perform the contract except through the receiver who, if he acted, would incur personal liability. If the company failed to act, it would incur liability for contempt and it would be unfair on its creditors to punish it with a fine: MacLeod v Alexander Sutherland Ltd 1977 SLT (Notes) 44. The court has regard to the reality of the company's insolvency and the task which the receiver has to perform in realising the secured assets for the benefit of the charge holder and respecting the rights of the company's other creditors.

[49] I turn, secondly, to the development of the law governing administration since 1986. The statutory purposes of administration initially did not have the sequential hierarchy which now exists: see paragraph [11] above. The purposes, as initially enacted, were the first two purposes of the current legislation and also the approval of a CVA and the sanctioning of a scheme of arrangement: section 8(3) of the 1986 Act. The latter two purposes are now subsumed within purposes (a) and (b) in paragraph 3(1) of Schedule B1. The Enterprise Act 2002 introduced (i) the sequential hierarchy and (ii) the duties to act in the interests of the company's creditors as a whole, both of which now govern the approach of an administrator to his task. It also introduced the purpose in paragraph 3(1)(c) at the same time as it removed the right of a holder of a floating charge created after 15 September 2003 to appoint an administrative receiver and replaced it with a right to appoint an administrator: para 14 of Schedule B1.

[50] Administration has developed as a very flexible procedure to cope with the likely or actual insolvency of a company. While, as the earlier English cases show, administration was originally seen as a short-term process which would give a company protection from its creditors for a period when an administrator attempted to sort out its affairs, it has become a process which is used in many cases as a surrogate for receivership or for a winding up. It is of significance that the statutory provisions now envisage that an administrator, if appointed to perform more than one of the relevant objectives, will first attempt to achieve what is set out at the top of the hierarchy of objectives and proceed to a lower tier purpose only if unsuccessful in that endeavour. It is not uncommon now for administration to be the only formal stage of an insolvency process. While an administration may be followed by a creditors' voluntary winding up of a company, an administrator not uncommonly obtains the permission of the court to pay a dividend to creditors and thereafter arranges for the dissolution of the company: paras 65, 83 and 84 of Schedule B1.

[51] While it is not uncommon for an administrator to sell a company's business or assets promptly, there are many administrations which, for various reasons, continue for several years before moving to a creditors' voluntary winding up or directly to dissolution.

[52] It is against this background of statutory provision and practice that the administrator has to decide whether to repudiate a contract. Administration is, as I have said, a flexible process. It can accommodate a circumstance in which a company, which was thought to be or likely to be insolvent, turns out not to be so and can emerge from the administration without having reached a compromise with its creditors. In such a circumstance it is hard to envisage how an administrator could properly repudiate a contract in exercise of his function of attempting to achieve the objective of rescuing the company as a going concern. But where, as in the normal run of administrations, the company is insolvent and will not emerge from administration without a CVA or a scheme of arrangement with its creditors, the administrator has to consider whether he should decline further performance of a contract which would prejudice the achievement of an otherwise achievable statutory objective. In reaching a view on that matter he is under a statutory duty to act in the interests of the company's creditors as a whole: para 3(2) of Schedule B1. Thus he must consider the extent and effect on the company's other creditors of the claim in damages which would arise if a party contracting with the company accepted his repudiation. He must also consider, when addressing the interests of the creditors as a whole, the interests of the contracting party who, if the contract is repudiated, may be a creditor in a claim for damages.

[53] An administrator would not be acting in breach of his duty to the company if he refused to perform a contract having acted reasonably to satisfy himself that the continued performance of the contract (i) would impede his achievement of the objectives of the administration and (ii) was not in the interests of the company's creditors as a body. If he could establish reasonable grounds for being so satisfied, I consider also that he would be likely to have the legal justification which would exclude a personal liability to the counterparty of a company's contract for inducing the company to break that contract. See Fletcher, Higham & Trower, "Corporate Administrations and Rescue Procedures" (2nd ed.) para 5.29; OBG Ltd v Allan [2008] 1 AC 1, Lord Hoffmann at paras 39-44 and Lord Nicholls at paras 168-173; and Professor Joe Thomson, "Delictual Liability" (4th ed.) para 2.3. I am aware of the caution on the issue which David Richards J expressed in an application for summary judgment in Lictor Anstalt v Mir Steel UK Ltd [2011] EWHC 3300 (Ch) at paras 57-63. But I do not see how an administrator could perform his statutory duties in many insolvencies if he were not able to plead justification. As the delict is an accessory liability it appears to me that a third party who contracts with the company in administration, for example in acquiring the company's assets after the administrator's repudiation of a contract, will not incur liability for inducing breach of contract if he merely responds to an invitation to treat from the administrator who is properly exercising his statutory duties.

[54] Thirdly, I consider that where the company in administration is clearly insolvent there are close parallels with insolvency in the context of a receivership or a winding up. Faced with such insolvency, the only realistic options for an administrator, if he cannot achieve the purpose in para 3(1)(a), are to move to a lower tier objective or straight to a winding up. In that context I consider that the analogy of a receivership or a winding up is close and the court, if asked to enforce the contract against the company in administration ought to have regard to the considerations which I discussed in paragraphs [46] to [48] above and would order performance only in exceptional circumstances.

[55] During the administration the other party to the company's contract could not commence proceedings to enforce the contract without the consent of the administrator or the permission of the court: para 43 of Schedule B1. Where a creditor has only contractual rights against a company I consider that the court would be slow to disrupt the administration by allowing enforcement of such rights. To do so would be to depart from its approach in other circumstances of insolvency. In my view some guidance as to the correct approach of the court can be found in the approach which the English courts have taken to applications for leave to exercise proprietary rights against a company in administration. In In re Atlantic Computer Systems plc [1992] Ch 506, Nicholls LJ (at pp. 542-543) gave guidance on the correct approach which involves the court exercising its judgement in a balancing exercise in which it seeks

"to give effect to the purpose of the statutory provisions, having regard to the parties' interests and all the circumstances of the case."

In a case in which the statutory moratorium suspended the proprietary or security rights of another party the court would bear in mind that the owner would ultimately be able to vindicate his property or security (or the proceeds of the security) in the administration or in a winding up. An owner or security holder might lose income and the opportunity to use his property profitably or realise the security during the moratorium.

[56] A contracting party who had a purely personal right to performance by the company would not have any security interest, trust interest or property right to enforce in the administration or winding up of the company. If he were to seek to have the moratorium lifted to request interdict or implement or if he were to apply under para 74 of Schedule B1 for relief on the basis that the administrator was unfairly harming his interests, the court would in my view have to bear in mind that a failure of the objective or objectives of the administration would lead to an insolvent winding up of the company in which he would rank equally with other unsecured creditors. In this context I note the concession, which Mr Clancy made, that the approach in Ex parte James (1874) LR 9 Ch App 609 did not apply in a Scottish insolvency: Clyde Marine Insurance Co Ltd v Renwick & Co 1924 SC 113.

[57] I have considered the cases to which counsel referred me and have not found anything which contradicts my view other than a statement of Vinelott J in Astor Chemicals Ltd v Synthetic Technology Ltd [1990] BCLC 1. In that case at p. 12a-b he stated that there was not an analogy between the position of a receiver and an administrator because:

"[t]he administrator is appointed to manage the affairs of the company and not to realise them for the benefit of one of the creditors."

His reasoning appears to be that the court would not prevent a receiver from breaking a contract of the company because he had a duty to realise the charged assets for the benefit of the charge holder and that an administrator did not have an equivalent duty. I am not persuaded that that view is correct in the context of the post-2003 legislative regime in which the administrator, in attempting to carry out his proposals, has to act for the benefit of the company's creditors as a whole. Once there is a clear insolvency, which means that a company will have to reach a compromise with its creditors if it is to survive, the administrator's duty to the creditors as a whole may create a conflict with the contractual counterparty which is analogous to that which a receiver or a liquidator may face.

[58] Re P & C and R & T (Stockport) Limited [1991] BCLC 366 is consistent with the approach which I favour. In that case Scott J held that a party to a insolvent joint venture could not use its merely contractual rights to stand in the way of the administrator's proposals. Beyond vouching that the statutory moratorium did not alter or destroy a creditor's rights, Barclays Mercantile Business Finance Ltd v Silbec Ltd [1992] 1 WLR 1253 does not assist the determination of the issue on which the administrators seek a direction. Like the Barclays Mercantile case, Re David Meek Access Ltd [1993] BCC 175 concerned an application by an owner to repossess property and did not address that issue.

[59] In Re Zegna III Holdings Inc. BLV Realty Organization Ltd v Batten (2010) BPIR 277 Norris J refused a management contractor's attempt under para 74 of Schedule B1 to have administrators removed from a company which had contracted with it for its services because they proposed to dispense with those services. Norris J described administration as "a form of class remedy" because the administrators had to perform their functions "in the interests of the creditors as a whole." He stated (at para 20):

"It may be in the interests of the creditors as a whole that one particular contract with one particular creditor is terminated (even wrongfully): for example if the administrators thought that a particular service could be provided more cheaply or to a higher standard than was currently being done by a creditor with a continuing contract for a service necessary to the ongoing trading, with a beneficial result to the creditors as such. Or it may be that whilst in general ongoing contracts with creditors were being terminated (even wrongfully), one particular contract (e.g. to maintain the principal asset) was kept in being, with the beneficial result to the creditors as such. It would in each case be in the interests of the creditors as a whole that would have to prevail over the particular interest of individual creditors: and that might result in different treatment."

I agree with this analysis, which is wholly consistent with my approach.

[60] The court can intervene in an application under para 74 of Schedule B1 if an administrator's decision is based on a wrong application of the law or is conspicuously unfair to a particular creditor: re C E King Ltd [2000] 2 BCLC 297. But that may not assist. In Scots insolvency law, a contracting party who has paid in advance for an asset does not thereby acquire an equitable right in the thing and is treated as an unsecured creditor: see paragraph [30] above. This may shock English lawyers who are used to equity stepping in to protect contractual expectations in some such circumstances. But no unfairness arises in an insolvency when unsecured creditors are treated equally in accordance with their rights.

[61] I was also referred to several legal texts, namely Lightman and Moss, "The Law of Administrators and Receivers of Companies" (5th ed.) at paras 12.50-12.52 and 25.002 - 25.004, Goode, "Principles of Corporate Insolvency Law" (4th ed.) at paras 11.25 and 11.102, "Pennington's Corporate Insolvency Law" (2nd ed.) at pp. 366 and 393-4, Tolley's "Insolvency Law" at [A5238], "Palmer's Company Law" (25th ed.) Vol 3, at para 14.086, "Gore-Browne on Companies" para 52.32, and Fletcher, Higham & Trower, "Corporate Administrations and Rescue Procedures" (2nd ed.) at paras 6.4 and 6.5. Although the authors of those texts have presented the law in different ways from what I have written in this opinion, I consider that their presentations are wholly compatible with what I have said.

[62] I therefore summarise my views as follows: (i) an administrator must perform his functions in the interests of the company's creditors as a whole (subject to the qualification in paragraph 3(4) of Schedule B 1 which is not relevant in this case); (ii) where the company in administration is insolvent, an administrator may have to decline to perform a contractual obligation of the company in pursuit of the statutory objective or objectives in his proposals if that is in the interests of the company's creditors as a whole; (iii) should he do so, the court would not, absent exceptional circumstances, force the company to perform those contractual obligations to the detriment of the creditors as a whole; (iv) the court has power to interfere under paragraph 74 of Schedule B1 if the administrator's decision is conspicuously unfair to a particular contractor or creditor; but (v) treating unsecured creditors in accordance with their legal rights in an insolvency would not of itself involve such unfairness.

 

Conclusion

[63] I conclude that the legal nature of the rights which Ticketus has in the Ibrox stadium, the season tickets for that stadium and the proceeds of future sales of the season tickets are purely personal contractual rights. In relation to the second alternative direction I refer the administrators to my discussion in paragraphs [38] to [62] above.