SCOTTS ATLANTIC INVESTMENTS LIMITED AGAIN JOHN DAVID DRYBURGH AND OTHERS
OUTER HOUSE, COURT OF SESSION
2014 CSOH 165
CA92/11
OPINION OF LORD TYRE
In the cause
SCOTTS ATLANTIC INVESTMENTS LIMITED
Pursuer;
against
JOHN DAVID DRYBURGH and OTHERS
Defender:
Pursuer: Lindsay QC; HBJ Gateley
Second Defender: Simpson; TLT Scotland Limited
No appearance for First, Third and Fourth Defenders
18 November 2014
Introduction
[1] The pursuer is a company (“SAIL”) in creditors’ voluntary liquidation and its liquidator, Mr Timothy James Bramston. Mr Bramston was appointed at a creditors’ meeting on 15 February 2011 to replace a previous liquidator, Mr James Robin Young Dickson, who had been appointed on 14 February 2006 when SAIL went into members’ voluntary liquidation. The first and second defenders are individuals who were directors of SAIL at the material time. The third and fourth defenders are the trustees of the Scotts Atlantic Management Limited Employee Benefit Trust (“Atlantic EBT”) and of the Scotts Film Management Limited Employee Benefit Trust (“Film EBT”) respectively. The third and fourth defenders together own the whole issued share capital of SAIL.
[2] In these proceedings, the pursuer seeks payment from the defenders jointly and severally of sums amounting in total to around £1,186,000, in respect of alleged liabilities for corporation tax, interest on tax, interest due under section 419 of the Income and Corporation Taxes Act 1988, and expenses of liquidation. The basis of the pursuer’s claim against the defenders is a deed, described in the pleadings as a Deed of Indemnity, that was executed by the defenders on 3 and 4 April 2006. In this deed, the defenders narrated that Mr Dickson intended to make payment of interim distributions to them as shareholders of the company. They indemnified Mr Dickson, as liquidator, in respect of the distributions and bound themselves, in the event of the funds retained by him being insufficient to meet the company’s liabilities and the expenses of liquidation, to repay to him such sums as might be required to meet any shortfall. The liabilities of Atlantic EBT and Film EBT respectively were, however, limited to funds in each of these trusts.
[3] The matter came before me for debate between the pursuer and the second defender of four issues:
(i) whether the second defender’s liability for any sum due under the Deed of Indemnity was joint and several, or only pro rata;
(ii) whether his liability was limited to distributions received by him;
(iii) whether the benefit of the Deed of Indemnity transmitted from Mr Dickson to his successor as liquidator; and
(iv) whether the pursuer had pled a relevant case with regard to recovery of section 419 interest.
In advance of the debate, the first, third and fourth defenders intimated that they did not wish to participate.
Factual circumstances
[4] Between February 2004 and 2005, SAIL made loans of approximately £2,371,000 to the first defender and approximately £2,150,000 to the second defender. On 14 February 2006, SAIL went into members’ voluntary liquidation. The first and second defenders, as directors of SAIL, signed a declaration of solvency which stated that the estimated realisable value of SAIL’s assets was £7,508,826, with liabilities totalling £2,541,614, leaving an estimated surplus of £4,667,212. On 7 March 2006, Mr Dickson as liquidator made a distribution of SAIL’s interest as creditor in loans totalling £5,185,632.11 which SAIL had made to the first and second defenders and two other individuals. The distribution was made to the third and fourth defenders and was implemented by an assignation dated 7 March 2006 which was to be held as undelivered until the execution of a deed of indemnity by all of the defenders. On the same date Mr Dickson also made a distribution to the third and fourth defenders of a debt of £10,000 owed to SAIL by Scotts Atlantic Media Tax LLP. The pursuer avers that an interim distribution of a cash deposit of £130,000 was also made to the third defenders; this is not admitted.
[5] The Deed of Indemnity with which this opinion is concerned was executed by the first and second defenders on 3 April 2006 and by the third and fourth defenders on 4 April 2006. The deed designed the first and second defenders as the directors of SAIL and the third and fourth defenders as “the respective holders of 100,000 and 100 ordinary shares of £0.01 comprising the entire issued share capital of [SAIL] now in Members Voluntary Liquidation”. It continued as follows:
“CONSIDERING that the said James Robin Young Dickson as Liquidator foresaid intends to make payment of an interim distribution or interim distributions to us as shareholders of the Company in the course of the Liquidation; NOW THEREFORE we the said John David Dryburgh, Andrew Davis Somper, Saltire Trustees (Overseas) Limited and Turcan Connell Trustees (Guernsey) Limited hereby indemnify James Robin Young Dickson as Liquidator foresaid in respect of such interim distributions and in the event of the funds retained by him in the Liquidation Account being insufficient to meet in full the liabilities of the Company and the expenses of said Liquidation we the said John David Dryburgh, Andrew David Somper, Saltire Trustees (Overseas) Limited and Turcan Connell Trustees (Guernsey) Limited bind ourselves to repay to the said James Robin Young Dickson as Liquidator foresaid such sums as may be required to meet any shortfall but the liability of the said Saltire Trustees (Overseas) Limited shall not exceed the funds in the Scotts Atlantic Management Limited EBT and the liability of Turcan Connell Trustees (Guernsey) Limited shall not exceed the funds in the Scotts Film Management Limited EBT”.
[6] The pursuer avers that further interim distributions totalling £1,807,770.19 were made by Mr Dickson to the third and fourth defenders on 7 April and 5 May 2006.
[7] According to averments by the pursuer which are admitted by the first and second defenders, on 16 August 2006, the first and second defenders requested the third and fourth defenders (or the third defenders only, according to the first and second defenders) to grant them new loans totalling £5,052,000. They also requested Barclays Bank plc to make transfers amounting to £5,050,885 to SAIL. On 21 August 2006, Mr Dickson gave irrevocable instructions to Barclays to transfer funds of £5,050,885 from SAIL’s bank account to Turcan Connell’s General Client Account upon receipt of funds from the first and second defenders. Various transfers of funds then took place on 23 August 2006:
- Barclays granted the first and second defenders an overdraft facility and transferred £5,050,885 to SAIL.
- SAIL transferred £5,050,855 [sic] to Turcan Connell’s General Client Account.
- Turcan Connell transferred sums totalling around £5,050,000 to the personal bank accounts of the first and second defenders.
- The first and second defenders used these sums to repay the Barclays overdraft.
One effect of this series of transactions was that the loans which had been assigned to the third and fourth defenders on 7 March 2006 were repaid. A number of loans have subsequently been made to the first and second defenders by the third and fourth defenders. (The word “loans” in this connection appears within inverted commas in the pursuer’s pleadings but no specific explanation for this is stated.)
[8] The pursuer avers that the funds retained by the liquidator in the liquidation account are insufficient to meet in full the liabilities described in paragraph 2 above.
Construction of the Deed of Indemnity: general observations
[9] It is common ground that the Deed of Indemnity is a commercial contract which falls to be construed according to the guidance provided by the Supreme Court in recent cases such as Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, in which Lord Clarke of Stone-cum-Ebony observed at paragraph 21:
“The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”
[10] In applying this approach to the proper construction of the Deed of Indemnity, I consider that the following features are significant:
(i) The deed was granted by two persons (the third and fourth defenders) who together were the whole shareholders of SAIL and therefore were receiving the whole of the interim distributions, and by two persons (the first and second defenders) who were not members of SAIL and were not therefore entitled to receive anything by way of distribution.
(ii) The obligation undertaken in terms of the deed was “to repay”.
(iii) The obligation to repay was quantified by reference to sums required to meet any shortfall in the funds retained by the liquidator to meet SAIL’s liabilities, rather than, for example, any sum for which the liquidator might be found personally liable as a consequence of having made the distributions at a time when creditors’ claims had not been finally ascertained.
I set out these features at this stage because it seems to me that, taken together, they are indicative of the answers to the first three issues debated at the hearing.
Issue 1: joint and several or pro rata liability
[11] On behalf of the second defender, it was contended that the deed did not impose joint and several liability upon the defenders. The general rule was stated in Gloag, Contract (2nd ed, 1929), page 198, in a passage approved by Viscount Hailsham in Coats v Union Bank of Scotland 1929 SC (HL) 114 at 119, as follows:
“As a mere general rule, subject to many exceptions and yielding to expressions indicative of an intention to the contrary, obligations are construed as involving rights and liabilities pro rata, so that one of two creditors can exact payment of a half only; one of two debtors is liable only in the same proportion.”
This passage in Gloag was supported by institutional and civilian authority. Lord Hailsham construed it as a rebuttable presumption, differing from English law, that joint debtors were regarded as incurring only pro rata liability. Lord Hailsham’s dictum had never been doubted. In the present case there was nothing to rebut the presumption, which could have been done very easily by expressing liability as “joint and several”. There was no common purpose in the making of the distributions but simply four obligants with parallel interests. The analogy with joint adventure drawn by the pursuer was inappropriate. It was not legitimate to construe the deed by reference to subsequent events: James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, Lord Reid at 603.
[12] On behalf of the pursuer, it was submitted that the deed, read as a whole, and the method by which the distributions were carried out established that it was the intention of the parties that liability would be joint and several. The obligation to indemnify was imposed upon the defenders collectively without distinction. It accorded with business common sense that the liquidator should be able to recover a shortfall from any defender with assets to meet it, avoiding the expense of multiple proceedings and the difficulty of obtaining a share from an obligant who was insolvent or overseas. It would not have been commercially sensible for Mr Dickson to require anything less than joint and several liability when making a distribution prior to establishing the extent of claims of creditors, including HMRC. The manner in which loans were subsequently made by the third and fourth defenders did not accord with normal commercial practice. In these circumstances the defenders could be viewed as “joint adventurers” who appointed Mr Dickson as their “agent” for the purpose of extracting money from the company. The rule prohibiting reference to subsequent events was not applicable as the issue was not construction of the contract but description of the relationship among the defenders.
Decision
[13] In Coats v Union Bank of Scotland, Lord Hailsham identified the question for the court as being
“…whether the documents in this case, read as a whole, and the method by which the transaction was carried out, contain evidence sufficient to rebut the presumption and to prove that the intention of both parties was that Mr Coats should be liable for the whole of the debt.”
In the present case, having regard to the terms of the deed read as a whole, and to the surrounding circumstances, I do not consider that the pursuer has made a relevant case that the presumption in favour of pro rata liability is rebutted. I am not impressed by the pursuer’s argument based upon what, as a matter of business common sense, would afford the liquidator the greatest benefit and protection. One could equally argue the converse, i.e. that pro rata liability would, as a matter of business common sense, be attractive to the obligants as restricting their exposure. As has often been emphasised, it is not the function of the court to re-make the parties’ bargain. Nor, in my opinion, is the pursuer’s analogy with joint adventure or agency apposite. In the first place it transgresses the general rule that subsequent events are not relevant to the construction of a contract. I reject the proposition that a common future intention shared among the defenders (but not Mr Dickson) at the time of execution of the deed would of itself be relevant to construction of the terms of an indemnity granted in favour of a liquidator about to make a distribution, and it is not averred that at the time when the deed was granted Mr Dickson was party to an arrangement whereby loans would be made at a later date on uncommercial terms by the third and fourth defenders to the first and second defenders. As counsel for the second defender observed, if the parties had wished to provide for joint and several liability in respect of the whole sums distributed, it would have been very easy to do so. In the absence of such provision, each of the defenders is, in my opinion, liable for a one-quarter share of any sum due to be paid to the liquidator in pursuance of the obligation undertaken by execution of the deed.
Issue 2: whether liability limited to distributions received
[14] On behalf of the second defender, it was submitted that the liability of each party to the Deed of Indemnity was limited to the amount received by that party by way of distribution from the liquidation funds. Use of the word “repay” pre-supposed that a party had been “paid” a sum. It would not make commercial sense for the first and second defenders to assume liability to “repay” amounts that they had never received. Their interest in the trusts of which the third and fourth defenders were trustees was only as objects of the trustees’ discretion. The loan made some months later to the second defender did not count as a payment out of the liquidation funds.
[15] On behalf of the pursuer, it was contended that the absence of an express limit of the liability of the first and second defenders, in contrast to the restriction of the third and fourth defenders’ liability to the amount of funds in the respective EBTs, indicated that there was no limit. It was not necessary to imply a limit in order to give the deed business efficacy. The question whether the sums later “lent” to the first and second defenders by the third defender should be viewed as “payments” would require proof before answer.
Decision
[16] In my opinion it would not accord with commercial common sense to construe the Deed of Indemnity as limiting the liability of each of the obligants to distributions received. I have already noted that the first and second defenders were not members of SAIL and accordingly did not and could not have received any part of a distribution out of the liquidation funds. If the liability of these parties was restricted to sums received, their participation in the granting of the indemnity would have been entirely pointless. That does not accord with commercial business sense. Conversely, once it is established (as I have held) that each obligant is liable for a pro rata share of the sums distributed, it makes commercial sense for each to bind himself to “repay” all or part of that share to the liquidator if required to do so in order to meet a shortfall in the funds retained in the liquidation account. Viewed from the perspective of the liquidator, use of the word “repay” makes perfect sense. On this construction of the deed, it is unnecessary to consider whether sums lent to the first and second defenders some months later constituted payments which they could be obliged to “repay”.
Issue 3: transmission of benefit of indemnity
[17] On behalf of the second defender, it was submitted that the question whether the benefit of the Deed of Indemnity transmitted from Mr Dickson to Mr Bramston as his successor was one of construction of the deed: cf Yzquierdo v Clydebank Engineering and Shipbuilding Co Ltd (1902) 4F (HL) 31, Lord Halsbury LC at 32-33. The present deed contained no express reference to Mr Dickson’s successors in office. The deed did not bear to have been entered into by Mr Dickson on behalf of SAIL, but rather for his own benefit, albeit in a particular capacity. Its purpose was to protect Mr Dickson personally. Any liability of Mr Dickson for negligence would not transmit to his successor. In circumstances where parties should be taken to have realised that if SAIL became insolvent a new liquidator might be appointed, an intention to confer the benefit of the indemnity on the successor could and would have been expressly stated.
[18] On behalf of the pursuer, it was contended that the deed made clear that the indemnity was granted in favour of Mr Dickson in his official capacity. On each occasion when he was referred to, his name was followed by the qualification “as Liquidator”. As the indemnity was granted to him in that capacity it was enforceable by a successor: cf Mowbray v Valentine 1998 SC 424, Lord Gill at 429. There was no element of delectus personae to prevent transmission. Such an interpretation accorded with commercial common sense. It made no sense for Mr Dickson to continue to have title and interest to enforce the indemnity after his resignation and for it to be unenforceable at the instance of his successor in office. The indemnity was against claims emerging against the company. What was indemnified was the liability of the liquidator to settle such claims to the extent that they exceeded the funds retained in the liquidation account.
Decision
[19] In my opinion the pursuer’s interpretation is to be preferred. The key issue is to identify whether the indemnity was intended to operate for the benefit of the company on the one hand or the liquidator on the other. I am of the view that the indemnity was intended to operate for the benefit of the company. That is clear from the measure of the liability, namely the sum required to meet any shortfall in the funds in the liquidation account. Liability is triggered regardless of whether any criticism can be made of the liquidator’s decision to make the interim distributions at the time when they were made. For these reasons I construe the indemnity as being intended to operate in favour of the company’s creditors and not the liquidator as an individual. I therefore consider that entitlement to enforce it, for the benefit of the creditors, transmitted to Mr Bramston as Mr Dickson’s successor.
Issue 4: section 419 interest
[20] I can deal with this issue briefly. One of the heads of the pursuer’s claim, amounting to £65,621.57, is for interest said to have been paid to HMRC under ICTA 1988, section 419 (which was in force at the material time) in respect of the loans made by SAIL to the first and second defenders. Counsel for the second defender drew attention to an averment by the pursuer that interest had been chargeable under section 419 from the date when the loan was made until the date when it was repaid. He pointed out that in terms of sections 59D(1) and (3) and 87A(1) of the Taxes Management Act 1970, interest on sums due under section 419 did not begin to run until the tax became due and payable nine months after the end of the accounting period in which the loan was made. No relevant case could be made for recovery of interest prior to that date. I understood senior counsel for the pursuer to accept that this was so; he suggested by way of explanation that the pleadings were inaccurately framed. He undertook to confirm whether the sum sued for by way of section 419 interest was calculated for the correct period, i.e. for a period commencing on the date when the tax became due and payable.
Disposal
[21] As I have not upheld the second defender’s contention regarding the non‑transmissibility of the indemnity, the action does not fall to be dismissed. Parties were agreed that in that eventuality I should put the case out By Order to be addressed on further procedure.