MICRO LEISURE LIMITED v. COUNTY PROPERTIES & DEVELOPMENTS LIMITED and KEEPER OF THE REGISTERS OF SCOTLAND
| CA57_98 | OPINION OF LORD HAMILTON in the cause MICRO LEISURE LIMITED Pursuers; against COUNTY PROPERTIES & DEVELOPMENTS LIMITED First Defenders; and KEEPER OF THE REGISTERS OF SCOTLAND Second Defender: ________________ |
19 January 1999
The pursuers ("Micro") are a company incorporated under the Companies Acts with an issued share capital of £10,000 divided into 10,000 shares of £1 each. Until about September 1997 the shares in Micro were held as follows - 4,999 shares by a Mr Thomas Joseph Paulo, Junior ("Thomas, Junior"), 2 shares by a Mr Thomas Joseph Paulo, Senior ("Thomas, Senior") and 4,999 shares by a Mr Mark Paulo ("Mark"). Thomas, Junior and Mark are brothers; they are the sons of Thomas, Senior. In about September 1997 Thomas, Junior transferred his shareholding in Micro to Mark who has accordingly since then held all but two of Micro's shares. Mark is now the sole director of Micro. Prior to 1997 both Mark and Thomas, Junior were directors of Micro and a Mr Drummond was its secretary.
The first defenders ("County") are a company incorporated under the Companies Acts. Prior to September 1997 its shares were also held by members of the Paulo family. Information as to the exact distribution of those shares was not before the Court but it was accepted that in that period Thomas, Junior and Mark were so associated with County that County was then a person connected, within the meaning of Part X of the Companies Act 1985, with each of them. Mr Drummond was also secretary of County.
In this action Micro makes the following averments in relation to dealings involving it and County in 1993 and 1994. In about 1993, it is averred, Mark, as a principal of Micro, identified certain property at East Kilbride as available for purchase. An agreement was then made (it seems, orally) that County would provide funds to allow Micro to effect the purchase of that property. In return County was to receive (1) title to part of that property and (2) a half share in the profit arising from the development of the remainder. In December 1993 the seller, in exchange for the purchase price of £361,000, granted a disposition of that property in favour of Micro. In February 1994 solicitors, purportedly acting for both Micro and County, put in place an arrangement under missives whereby Micro would on certain terms convey certain parts of the recently acquired property to County. There was, it is averred, no consultation about this arrangement with Mark or with the members of Micro in general meeting. On 17 June 1994 Thomas, Junior and Mr Drummond, as a director and as secretary respectively of Micro, executed in its name a disposition in favour of County of the whole of the recently acquired subjects. That disposition bore -
"WE, MICRO LEISURE LIMITED ... heritable proprietors of the subjects hereinafter disponed CONSIDERING THAT the whole price paid by us for the subjects was advanced to us by COUNTY PROPERTIES & DEVELOPMENTS LIMITED ... and that we have completed title to the said subjects as trustee for the said County Property & Developments Limited and FURTHER CONSIDERING THAT it is right and proper that we now, at the request of the said County Properties & Developments Limited, DISPONE the said subjects to them; THEREFORE WE THE SAID MICRO LEISURE LIMITED without any consideration passing DO HEREBY DISPONE to and in favour of the said County Properties & Developments Limited and their successors heritably and irredeemably ALL AND WHOLE ... [the acquired subjects] ..."
On the same day and acting in the respective capacities of a director and of secretary of County Thomas, Senior and Mr Drummond executed a standard security in name of County over those subjects in favour of the Royal Bank of Scotland plc. That deed bore to be in security of all sums due or to become due by County to the bank. Thereafter but also on the same day Thomas, Senior and Mr Drummond acting again as a director and as secretary respectively of County executed in its name a disposition reconveying to Micro part of the subjects conveyed by it earlier that day. That disposition bore to be "without any consideration passing". It also bore to be executed not only by County but also by Micro and by the bank in respect of an agreement that the granting of that disposition should not prejudice or affect the preference of the standard security in favour of the bank. The execution of that deed on behalf of Micro bears to have been by Mark and by Mr Drummond acting as a director and as secretary respectively of Micro. Each of the foregoing deeds was delivered to the relative grantee, although the registration procedure in respect of the disposition by Micro to County is not yet complete.
County acknowledges that these conveyancing transactions took place but maintains that they were carried out, as part of a banking arrangement, with the full knowledge of Mark and with the consent of the members of Micro. For present purposes, however, Micro's narrative must be taken pro veritate.
Section 320(1) of the Companies Act 1985 provides:
"... a company shall not enter into an arrangement -
(a) whereby a director of the company or its holding company, or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company; or
(b) whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such a director or a person so connected,
unless the arrangement is first approved by a resolution of the company in general meeting ...."
It is not disputed in this action that by the disposition in its favour County acquired from Micro a non-cash asset of the requisite value and that County was a person connected with a director of Micro within the meaning of Section 320. By the first conclusion Micro seeks production and reduction of that disposition.
Section 322 of the 1985 Act provides:
"(1) An arrangement entered into by a company in contravention of Section 320, and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) is voidable at the instance of the company unless one or more of the conditions specified in the next subsection is satisfied.
(2) Those conditions are that -
(a) restitution of any money or other asset which is the subject-matter of the
arrangement or transaction is no longer possible ... ; or
(b)any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would be affected by its avoidance ;
.... "
Mr Sellar for County submitted at debate that there were no relevant averments in support of the grant of the remedy sought by the first conclusion. To support reduction of a voidable transaction it was necessary, he argued, that a pursuer aver that it was possible to restore the party against whom reduction was sought to the same position as he had been in prior to that transaction. At common law that rule was well settled, emphasis being placed on the position of the party against whom the remedy was sought though it being recognised that restoring that party broadly to his pre-transaction position would suffice (Spence v Crawford 1939 S.C. (H.L.) 52, especially per Lord Thankerton at pp. 69-71). Section 322 should be approached against that common law background. The conditions specified in Section 322(2) were additional to the restitutional requirement implicit in Section 322(1). Reference was made to Re Duckwari plc (No.2) [1998] 2 B.C.L.C. 315, per Nourse L.J. at p. 319f-g. The proper approach in relation to a UK statute was to follow and apply what had been decided by the appellate court in the sister jurisdiction (In Re Savoy Hotel Limited [1981] 1 Ch. 351, per Nourse J. at pp. 360-1). The principle expressed in Spence v Crawford was not restricted to cases where there had been a misrepresentation (O'Sullivan v Management Agency [1985] 3 All E.R. 351). In the present case Micro did not offer to restore County to its pre-transaction position; on the contrary its averments indicated that such restoration was not possible. As part of the transaction County had granted a standard security over the property and had incurred an unlimited personal obligation to the bank. In Re Duckwari plc (No.2) [1997] 2 B.C.L.C. 729 Judge Paul Baker Q.C. at first instance had relied upon the taking of security by a bank as a reason why the primary remedy of a avoidance was not available (p. 734h). Micro's averments were silent as to how restitutio in integrum was to be effected in respect of those matters; they were also silent as to restitution relative to (1) the purchase price advanced by County for the disposition granted by the third party seller, (2) the part of the subjects reconveyed to Micro and (3) the part of the subjects which, under the original agreement (as averred), County was to receive. In the absence of an offer of appropriate restitution the first conclusion was bound to fail. Moreover, the bank had by its security acquired rights bona fide for value and without actual notice of any contravention of Section 320. Its position might be so affected as to prevent avoidance (Section 322(2)(b)). Micro was not entitled to approach the "transaction" in an artificially narrow way by looking in isolation at the conveyance by Micro to County; the whole transaction had to be taken into account.
Mr Wallace for Micro submitted on this aspect of the case that Micro's averments were relevant for inquiry. As to the availability of remedies, Section 322, while reflecting common law principles, had replaced those by statutory provisions which alone should be considered. Micro's position was that the transaction challenged was the granting of the disposition by Micro in favour of County. That disposition, having been granted gratuitously (as the disposition bore) and in contravention of Section 320, fell to be reduced. Nothing was to be gained by looking at the prior missives, which had not been implemented by the subsequent conveyancing and were, in any event, highly suspect. The challenged disposition was also inconsistent with the 1993 agreement. There was no reason to look beyond the unauthorised conveyance. Although not the subject of averment, the sum advanced by County for the purchase in 1993 had been entered as a debt in Micro's books. The members of Micro might well be content with the 1993 agreement but be severely disadvantaged by the grant of the disposition in 1994. Although that disposition bore that Micro had "completed title to the said subjects as trustee for the said County Properties & Developments Limited", the proposition that Micro had held the property in trust for County was unfounded in fact; it was not a relationship to which Micro had at any stage acceded. County, it was believed, had found that the original arrangement did not suit it and had sought by the challenged conveyance to secure a different arrangement; that arrangement had had the effect of denuding Micro of an asset of substantial value. There was no question of the bank being adversely affected by the reduction sought. It retained its real rights as security holder over the subjects whoever was the proprietor. In any event, it was not clear what value (if any) had been given by the bank. Intimation of the present action had been made to the bank which had not entered the process. The personal obligation undertaken by County to the bank and any borrowings by County covered by that obligation were irrelevant to Micro's claim.
In my view it is not possible without inquiry to determine whether or not, in the event of it being established that there was a contravention of Section 320, the remedy of reduction of the disposition is available to Micro. It will first be necessary to identify against the whole factual background what was the true scope and content of any unauthorised arrangement. The history against which the deeds of 17 June 1994 were granted extends to the prior missives and to the agreement said to have been entered into in 1993. Whether and, if so, to what extent, that history, including the financial arrangements for the funding of the purchase price, forms part of or is distinct from the material arrangement cannot, in my view, be determined without inquiry. It will also be necessary to explore the relationship among the three deeds granted on 17 June 1994. While their timing ex facie suggests that they constitute elements of a single transaction, which may require to be unravelled as a whole if reduction of one of those deeds is to be granted, such interdependence is not inevitable. It will be necessary in this context to explore, among other things, the objective which dictated County's grant of the personal obligation to the bank and the nature and timing of any borrowings made by it to which that obligation relates. The narrative of trusteeship which appears on the face of the challenged disposition will require to be examined, as will the circumstances in which Mark's signature was apparently adhibited to the deed of reconveyance. Only then will the Court be able to determine whether, as a condition of the reduction sought, there must be restitution to County of any money or of any other asset and, if so, whether or not that is now possible. It is inappropriate in these circumstances to discuss at this stage the relevant law save to observe that if, as Mr Sellar submitted, it is right in this connection to have regard to common law principles, the doctrine of restitution according to those principles does not fall to be applied too literally but in a way which does practical justice (Spence v Crawford at p. 70). I would add only that, given the real security obtained by the bank and its non-appearance in this process, it seems very doubtful whether Section 322(2)(b) has any application in the present circumstances.
The second principal issue discussed at debate concerned the second conclusion of the summons. By that conclusion Micro seeks the production and reduction of a Minute of Agreement dated 26 February 1996 between County and Micro subscribed on behalf of the former by Thomas, Senior and on behalf of the latter by Thomas, Junior ("the Agreement"). The material parts of the Agreement are in the following terms:
"WHEREAS Micro has identified and negotiated for the purchase of certain lands in East Kilbride and County has purchased said lands and both parties have agreed on the development of these lands THEREFORE the parties hereto agree as by these presents they do agree as follows:-
1 DEFINITIONS In this deed the words and phrases set out in this clause shall have the meaning assigned to them in this clause;-
'The Development Land' - All land in East Kilbride owned or controlled by County or Micro including the land acquired with the purchase of Westflow Limited but excluding (i) the land acquired by County from Heatovent Limited and (ii) the land upon which County Bingo and Social Club, East Kilbride, and its associated car park is situated. A plan of the development land which is declared to be demonstrative only and not taxative is attached.
'The profit element' - The sum, or if disposed of in tranches the aggregate sum, at which the development land is disposed of to a third party after deducting the whole costs (other than the purchase price of the land to which no regard will be had) associated with funding the development and promoting its sale including, but without prejudice to the foregoing generality, the costs of Architects, Planners, Lawyers, Contractors, Estate Agents, Surveyors and all outlays associated with the development.
2 The development and marketing of the development land will be the sole responsibility of County who will determine the nature and type of the development and at what stage and in what lots the development land is to be sold.
3 The profit element will be shared between County and Micro in the manner following:-
(i) If the profit element does not exceed £1.2M then two thirds thereof to County and one third to Micro.
(ii) In all other cases, insofar as the profit element does not exceed £2M it shall be shared equally between County and Micro and any excess over £2M will be for the sole benefit of County.
4 Either County or Micro may exercise a veto against the sale of the development land at a consideration of less than £1.2M, or, if sold in tranches such lesser sum pro rata with the percentage of the development land which is sold.
..."
So far as appears, the arrangement constituted by the Agreement is distinct from the events of 1993 and 1994. Micro, however, again seeks reduction of this deed on the basis of a contravention of Section 320.
Mr Sellar submitted that Micro's averments on this aspect of the case were also irrelevant. Section 320(1), he argued, envisaged (1) an arrangement, (2) an existing non-cash asset of requisite value and (3) the acquisition from the company of such an asset by a director or a connected person (Section 320(1)(a)) or the acquisition of such an asset by the company from a director or a connected person (Section 320(1)(b)). "Non-cash asset" was defined by Section 739 of the Act as follows:
"(1) In this Act 'non-cash asset' means any property or interest in property other than cash; and for this purpose 'cash' includes foreign currency.
(2) A reference to the transfer or acquisition of a non-cash asset includes the creation or extinction of an estate or interest in, or a right over, any property and also the discharge of any person's liability, other than a liability for a liquidated sum".
Section 320 was concerned with an arrangement whereby a non-cash asset (as defined) was acquired. It did not extend to a contractual arrangement of a broader nature relating to or in connection with such an asset. Property imported something existing and capable of ownership; an interest in property under Section 739(1) might include a pre-existing lease or licence or option to acquire (what under English law would be regarded as a beneficial interest in property). The reference in Section 739(2) to the creation of an estate or interest in property indicated the creation of a subsidiary estate or interest in pre-existing property (such as the creation of a lease). The reference to "a right over any property" was to be understood in a similar sense of a subordinate proprietorial right. The distinction between rights which would be or would not be good in a question with a liquidator of Micro was applicable. The coming into existence under the Agreement of a contractual right to share prospective profits in respect of the development of land, albeit it might in a sense relate to property, was not the creation of an interest in or of a right over such property within the meaning of Section 739(2). This approach had been implicitly confirmed in the decided cases. Reference was made to Re Duckwari plc (No.1) [1997] 2 B.C.L.C. 713, especially per Millett L.J. at pages 722-4 (where there was a pre-existing contractual right), to Lander v Premier Pict Petroleum Limited 1997 S.L.T. 1361 (where emphasis had been placed on the asset being of its nature capable of valuation) and to Gooding and Another v Cater and Others (Mr Edward Nugee, Q.C., sitting in the Chancery Division, 13 March 1989, unreported). Reference was also made to Niltan Carson Limited v Hawthorne [1988] B.C.L.C. 298 in which Hodgson J. at p. 321 had quoted with approval a passage from Gore-Browne on Companies. Had it been intended that Section 320 should apply beyond the normal concept of acquisition (ie. of a pre-existing item of property), language such as that used in capital gains tax legislation would have been deployed. Reference was made to O'Brien v Benson's Hosiery (Holdings) Limited [1980] A.C. 562. The Agreement was simply a contractual provision relative to the development of land and the splitting of the profit element in particular proportions. None of the provisions involved the creation of an interest in or of a right over property such as to give rise to an acquisition by Micro or by County. In the event of insolvency, the rights created by the Agreement would give rise only to personal claims. The fact that another arrangement differently framed but having a similar commercial result might have been within Section 320 was irrelevant.
Mr Wallace for Micro submitted on this aspect of the case that, by the arrangement constituted by the Agreement, County had acquired rights which were non-cash assets because such rights were (1) capable of assignation and (2) interests in or rights over land. Section 739(1) defined a "non-cash asset" as meaning any property or interest in property other than cash; this had been described judicially as a comprehensive definition (Lander v Premier Pict Petroleum Limited, per Lord Osborne at p. 1365L). While a right under a contract might be described as personal, it was, if assignable, an item of incorporeal moveable property. The non-assignability of the option right discussed in Lander had excluded it from being property. The bringing into existence of an assignable right involved the creation of property. "Property" was not a technical expression (Sharp v Thomson 1997 S.C. (H.L.) 66, per Lord Jauncey at page 76I). Section 320(1) as read with Section 739(1) applied because on the execution of the Agreement County acquired assignable rights, albeit those rights had not existed as an item of property prior to the execution of the Minute. In any event Section 739(2) was not confined to the creation of real or secondary rights in pre-existing property; it included the creation of primary rights of property. The provisions were intended to have a wide scope. Reference was made to Re Duckwari plc (No.1), per Millett L.J. at p. 722g-i and pp. 724i-725a. The creation of a right to acquire property would be within the scope of the statutory provisions. Micro's approach was consistent with that of Lord Osborne in Lander. An effect of clause 2 of the Agreement was that Micro gave up and County acquired the right to develop and market Micro's land. By doing so County acquired an interest in or right over land of the nature of a res merae facultatis. Although the valuation of that right might be difficult, it was not impossible. Clause 3 also brought into existence a right in County which constituted an asset which it thereby acquired, namely the right to an unfair share in development profits; that right was capable of assignation and of valuation (and was of substantial value). It could properly be said to be an interest in the development land. Clause 4 involved the acquisition by County of a very important right, namely, the right in certain circumstances to veto a sale of development land. That constituted a right in that land. Section 320 (as read with Section 739) intentionally cast a wide net (in Re Duckwari plc (No.2), per Nourse L.J. at pp. 323i-324b). The only property excluded was cash.
In my view it is appropriate to construe Section 320 (as read with Section 739) in a way which gives due recognition to its manifest purpose. That purpose was to protect shareholders against the company being bound without their approval by an arrangement entered into between the company on the one hand and a director or a person connected with him on the other hand by which either party acquired one or more non-cash assets of the requisite value. For present purposes that value was "not less than £2,000 (but subject to that) exceeds £100,000 or 10 per cent of the company's asset value ... [identified in a prescribed way] ..." (Section 320(2) (as amended)). Thus, the arrangements against which protection is given are those of substantial value relative to the worth of the company.
The concept of a person acquiring an asset from the company (or vice versa) imports, in my view, as a matter of ordinary language that immediately prior to the time of acquisition the asset is in existence - though, given that Section 320 covers arrangements under which a party "is to acquire" an asset, it may be that it can apply where an asset comes into existence between the making of the arrangement and the acquisition of the asset under it. Section 739(1) defines "non-cash asset" as meaning any property or interest in property. That is, as Lord Osborne observed in Lander at p. 1365L, a comprehensive definition. That definition (when read with Section 320 and leaving aside for the present the effect of Section 739(2)) does not, however in my view embrace property or an interest in property which is brought into existence only by the "acquisition" itself. It matters not that the property or interest in property then brought into existence is itself capable of transmission, by assignation or otherwise. In the present case, none of the rights acquired under the Agreement existed prior to its execution. None of those rights, in my view, constitutes property or an interest in property acquired by the Agreement within the meaning of Section 320(1) as read with Section 739(1).
Section 739(2), however, is clearly designed to extend the concept of acquisition to certain situations in which what is acquired is created contemporaneously with its acquisition. It does not extend to all assets so created. It applies only when what is created is "an estate or interest in, or a right over, any property". That formulation imports, in my view, that, prior to the creation of the relative asset, there has existed other property and that the created asset constitutes an estate or interest in that other property or a right over it. The purpose of the extension effected by subsection 739(2) is, in my view, to bring within the purview of Section 320 (and also within that of Section 104 of the Act to which the transfer of a non-cash asset appears to refer) the creation (and extinction) of subsidiary estates, interests and rights of substantial value.
It is not difficult to find examples of what, if of the relative value, would fall within the scope of Section 320(1) as read with Section 739(2). In Scotland the grant of a feu disposition or of a long lease would constitute the creation of an estate or interest in property and the grant of a servitude or a standard security would constitute the creation of a right over property. Those examples would be classified under traditional Scots taxonomy as real as distinct from personal rights. However, the reference in Section 739(2) to "a right over any property" cannot, in my view, be construed as confined to a subsidiary right in the sense of a subsidiary real right. If it were so confined, the manifest purpose of the statutory provision would in Scotland be defeated. For example, a licence to use property (heritable or moveable) or an option to acquire it would not, on that narrow construction, be within the scope of the provision. Such rights under Scots law are personal only and, unless fortified by some form of security, would not confer preferential treatment in any insolvency. If the creation of an option to acquire property on favourable terms is within the scope of Section 739(2), it is difficult to see why the benefit of a bilateral contract to acquire it on such terms should not equally be within its scope. Likewise, the creation of a beneficiary's interest under a bare trust would appear apt in this context for inclusion as a "right over property". That the ambit of Section 739(2) is not intended to be narrow is also clear from the inclusion within it of the discharge of any person's liability, other than a liability for a liquidated sum. In these circumstances I have come to the view that, in applying a purposive construction to the statutory provisions, it is appropriate to recognise that Section 739(2) extends beyond subsidiary real rights to subsidiary rights which, albeit personal, are capable of materially affecting the exercise by the other party of its proprietorial rights.
It follows that I would not be disposed to accept the more restricted interpretation urged by Mr Sellar. However, it remains at present doubtful whether the broader interpretation which I favour will assist County in relation to the Agreement. The discussion before me proceeded, as I understood it, on the premise that development land owned by Micro was by the Agreement made subject to rights over it acquired by County, particular reliance in this connection being placed on clauses 2, 3 and 4. If Micro did indeed own such land, it might be that on the above construction of Section 739(2) Section 320 would, subject to questions of requisite value, apply to it in respect of clauses 2 and 4. The creation in another party of an exclusive power to develop (including develop by building) and market the land of a proprietor or the creation of a power to veto the sale of that land might be regarded as the creation of a right over that land within the meaning of Section 739(2). However, on further consideration of the Agreement I am not satisfied that that premise is necessarily well founded. By clause 1 "The Development Land" is defined as "all land in East Kilbride owned or controlled by County or Micro ...". The narrative with which the Agreement opens reads:
"WHEREAS Micro has identified and negotiated for the purchase of certain lands in East Kilbride and County has purchased said lands ...".
The implication of that narrative is prima facie that the expression "owned or controlled" in the definition is disjunctive, the sole owner of any such land being County albeit some (or all) of it is in some sense "controlled" by Micro. If no relevant land was at the date of Agreement owned by Micro, it is difficult to see how County can have acquired under the Agreement any right over any property. There is nothing on averment to indicate that Micro in fact at that date owned any of the development land, though it may be that it still retained the land reconveyed to it in 1994. A further difficulty arises in relation to application of Section 320 to the Agreement. An arrangement is challengable under that section only if there is an acquisition of an asset of the requisite value. The onus of establishing that a non-cash asset is of the requisite value is on the person who invokes the section (Niltan Carson v Hawthorne, per Hodgson J. at p. 321h-i). Where Section 739(2) is relied on, my provisional view is that it must be demonstrated that the created estate or interest or right, as the case may be, is itself of the requisite value, not that the property in or over which it is created is of that value. Otherwise assets of minimal value might be brought within a regime designed to deal only with substantial property transactions. Moreover, the punctum temporis for valuation is the date of the Agreement (Lander per Lord Osborne at p. 1366C-D). There are no averments that the rights created by clauses 2 and 4 were at the material time individually or cumulatively of the requisite value. Prima facie it seems very doubtful whether they could have been. However, as I heard no argument on this aspect, I express no concluded view at this stage.
I am, on the other hand, satisfied that such rights as were acquired by County under clause 3 of the Agreement cannot fall within Section 739(2). That clause is in no sense concerned with any right over property. It is concerned with the distribution between the parties of any profit element generated by dealings in property.
I should add that in the context of Section 739(2) I do not regard assignability as necessarily a critical factor. For example, the creation of a lease with a prohibition on assignation could, in my view, fall within Section 739(2). The discussion of assignability in Lander was in the context of Section 739(1).
The third principal issue at debate concerned the averments in support of Micro's fifth conclusion by which, failing decree of reduction being pronounced as first and second concluded for, it seeks an order on County to account to it for any gain which County may have made directly or indirectly "from the arrangement". Micro also concludes for payment for £2 million or such other sum as may appear as the balance due on such accounting and, failing an accounting, for payment of £2 million with interest from 17 June 1994.
Section 322(3)(a) of the Act provides that in the event of a connected person entering into an arrangement with a company in contravention of Section 320, that connected person is liable "to account to the company for any gain which he has made directly or indirectly by the arrangement or transaction." Mr Sellar submitted that Micro had made no averments on the basis of which it could be held that County had made any gain directly or indirectly from either the grant of the 1994 disposition or from the Agreement. Any gain which was recoverable would require to fall naturally albeit indirectly from the contravening acquisition; otherwise the company might secure a windfall benefit. An analogy could be drawn with the treatment in Re Duckwari plc (No.2) at pp. 322f-324e of the inter-relationship between avoidance and indemnity. In assessing any gain it was appropriate to look at the whole situation in the round and no further than the justice of the case demanded (O'Sullivan v Management Agency). In the present case, in so far as concerned the 1994 disposition, it was necessary in assessing whether there had been any relevant gain to look at the wider transaction. When that was done and it was recognised that Micro would never have owned the property had not its purchase been funded by County, it was plain that no gain which may have accrued to County following the conveyance of the property to it flowed naturally from that conveyance. Insofar as concerned the profit sharing arrangement under the Agreement, the same considerations applied. The position of a trustee was analogous. Reference was made to In re Gee [1948] Ch. 284, per Harman J. at p. 295. No relevant causal link has been averred between either of the challenged arrangements and any gain to County. In any event, it was necessary to distinguish between any gain and what Micro was claiming. Its claim proceeded on the averment "Potential profits from the development of the Subjects are estimated by the pursuers to be around £4,000,000". That was not a relevant basis for a claim in respect of any gain. What must be addressed was the value of any gain at the date of the Court's adjudication (in Re Duckwari plc (No.2) at p. 322h-i and p. 324e). Reference was also made to Walker on Civil Remedies, page 305. The action, insofar as made on the fifth conclusion, should be dismissed.
Mr Wallace submitted that Micro's averments in support of its fifth conclusion were relevant for inquiry. The remedy of accounting under Section 322(3)(a) was here sought as an alternative to reduction. Where there had been a contravention of Section 320 by a connected person, that person had an absolute obligation to account for any gain which it had made directly or indirectly by the arrangement or transaction. It was not for the company to particularise the gain but for the connected person to produce an account (which might then be the subject of challenge or investigation). Micro's averments in relation to potential profits were designed only to point to the order of gain which it was likely had accrued to County. Micro was at this stage able to give, in relation both to the 1994 disposition and to the Agreement, only a broad estimate of the order of gain. It could not be said that there was obviously no relevant gain. There was no material distinction between gain and profit.
In this action the remedy of accounting sought by the fifth conclusion arises only if (1) it is established that there was a contravention of Section 320 and (2) the remedy of reduction (avoidance) under Section 322(1) is found not to be available in respect of such contravention. (Although in certain circumstances both reduction and an accounting may be available, the remedies sought in this action are alternative only). Where it is established that an arrangement in contravention of Section 320 has been entered into with a company by a connected person, that person is by Section 322(3)(a) liable to account to the company for any gain which he has made directly or indirectly by the arrangement or transaction. A statutory liability to account is thus in such circumstances imposed. Unless it is plain from admitted circumstances that the connected person has not made directly or indirectly any gain from the arrangement or transaction in question, such statutory liability requires the connected person to account for his intromissions with the property (or the interest in or right over property) which he acquired in contravention of the statute. In such circumstances it is, in my view, in the first instance for the person so liable to account to provide at the appropriate procedural stage information, by pleading or otherwise, as to his financial dealings with that property so that the extent of his relevant gain (if any) may be assessed. It is not in the figured circumstances for the company as a matter of relevancy of its claim to particularise the amount of that gain.
In relation to the alleged contravention by reason of the grant of the 1994 disposition, it cannot, in my view, be said at this stage that it is plain that no gain was made by County from the challenged arrangement or transaction. As I have already held in the context of discussion of the first principal issue, the whole circumstances will require to be explored in order to determine what constitutes the material arrangement. The circumstance that County admittedly provided the funding which allowed Micro to make the purchase does not necessarily preclude any gain made by County following its subsequent acquisition from Micro being a gain to which Section 322(3)(a) may apply. In these circumstances it would be inappropriate at this stage to dismiss the action insofar as it seeks an accounting in respect of the alleged contravention founded on the grant of the 1994 disposition. As regards the Agreement, no question of an accounting can arise unless and until it is established that a non-cash asset of the requisite value was acquired by County. It is accordingly inappropriate as regards it to determine any issue under Section 322(3)(a) until the issue of requisite value under Section 320 is addressed.
In the whole circumstances I shall put the case out By Order for the purpose of determining further procedure against the views expressed above. It may be appropriate to hear further argument in relation to the Agreement.
| | OPINION OF LORD HAMILTON in the cause MICRO LEISURE LIMITED Pursuers; against COUNTY PROPERTIES & DEVELOPMENTS LIMITED First Defenders; and KEEPER OF THE REGISTERS OF SCOTLAND Second Defender: ________________ Act: Wallace McKay & Norwell W.S. Alt: Sellar Biggart Baillie (First Defenders) 19 January 1999 |