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DAVID FRASER GLASGOW IN THE NOTE BY THE LIQUIDATOR OF GLASGOW AND WEIR BLACKSMITHS LIMITED v DAVID FRASER GLASGOW


SHERIFFDOM OF LOTHIAN AND BORDERS

 

[2016] SCEDIN 20

 

CA11/15

JUDGMENT OF SHERIFF PRINCIPAL MHAIRI M STEPHEN QC

 

In the appeal by

 

DAVID FRASER GLASGOW

 

Defender and Appellant;

 

in the note

 

by

 

THE LIQUIDATOR OF GLASGOW AND WEIR BLACKSMITHS LIMITED

 

Noter and Respondent;

against

 

DAVID FRASER GLASGOW

Defender and Appellant:

 

Act:   McColl;  Thorntons Law

Alt:   Edward;  Thorley Stephenson

 

EDINBURGH, 29 February 2016

The Sheriff Principal having resumed consideration of the appeal, refuses the appeal, adheres to the sheriff's interlocutors of 25 November and 15 December 2015;  certifies the appeal as suitable for the employment of junior counsel;  finds the appellant liable to the noter and respondent in the expenses of the appeal and allows an account of expenses to be lodged and once lodged remits the same to the Auditor of Court to tax and to report.

 

 

NOTE:

1.         The defender, David Glasgow, appeals the sheriff's judgment of 25 November 2015 together with the interlocutor of 15 December 2015 which disposes of any remaining questions regarding interest and expenses.

2.         The noter was appointed provisional liquidator of Glasgow and Weir Blacksmiths Limited (the "Company") by interlocutor of 29 June 2012 at this court.  He was appointed interim liquidator on 30 July 2012 and liquidator on 4 September 2012.

3.         The defender and now appellant is the sole director of the company.  He and his former wife are the sole shareholders.  The company used to trade in the construction industry and supplied architectural metal work.

4.         The noter brings these proceedings under section 212 of the Insolvency Act 1986 ("the 1986 Act") which is described in the heading of the statute as a "summary remedy against delinquent directors, liquidators etc".  The section applies if a person who is or has been an officer of the company has misapplied or retained or become accountable for any money or other property of the company or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

5.         The sheriff issued an interlocutor and judgment on 25 November 2015 following a hearing on the note and answers which took place on 2 June, 8 and 9 September and 19 October 2015.  The sheriff's interlocutor of 25 November 2015 followed an examination of the appellant's conduct as a Director of Glasgow and Weir Blacksmiths Limited.  The sheriff found that the appellant had misapplied certain sums which should have been paid to the company.  The sums are set out in the interlocutor under headings (a)-(e).  The sheriff found that these sums ought to have been paid to the company and instead were wrongfully paid to a third party company namely Glasgow and Weir Windows Limited ("Windows").  The sheriff ordained the defender to contribute to the assets of the company a sum equal to the total of these sums by way of compensation.  The sheriff makes a finding in fact and law that the appellant has misapplied sums contractually owing to the company by paying them or causing them to be paid direct to Windows rather than to the company.  These include sums paid under contracts with Travel Lodge and Motel One where the main contractor is Sharkey.  There is also a further sum paid by TKS Plumbing.  The sheriff finds that he is, as such, guilty of misfeasance with company funds and has wrongly preferred the claims of Windows over the claims of the company's other creditors particularly HMRC.  Accordingly, in terms of section 212(3) of the Insolvency Act 1986 it is appropriate that the defender is compelled to compensate the company for the sums which were diverted away from the company.

6.         In the second finding in fact and law the sheriff finds that the defender has acted honestly but not reasonably in relation to these payments and he ought not to be excused from payment in terms of section 1157 of the Companies Act 2006.

7.         The appellant is also a director of Glasgow and Weir Windows Limited ("Windows").  Again, he and his former wife are the sole shareholders of Windows which trades as a manufacturer and supplier of windows including sash and case windows.


NOTE OF APPEAL

8.         It is contended on behalf of the appellant that the proceedings taken by the noter in terms of section 212 of the 1986 Act are procedural in nature and do not provide a remedy in law.  Accordingly, the sheriff erred in finding that the defender became liable to make payment to the company.

9.         The second ground of appeal is to the effect that the measure of any payment to the company by the defender should be based on any loss to the company caused by the defender's actings.  In this case, as no overall loss resulted, the sheriff erred in ordering payment to the company of the amounts which the defender admits had been paid to Windows rather than to the company.  The sheriff's order has placed the company in a better financial situation than it would have been had the contractual payments due to the company been paid.

 

OBJECTION TO THE COMPETENCY OF THE APPEAL

10.       Counsel for the noter raised an objection to the competency of note of the appeal (lodged on 24 December 2015) which bears to be an appeal against the interlocutors of 25 November 2015 and 15 December 2015.  He argues that, on any view, the latter interlocutor is an interlocutor pronounced on joint motion and therefore of consent.  It is incompetent to appeal such an interlocutor (Macphail on Sheriff Court Practice 18.15). Clearly the appellant seeks to open up the prior interlocutors in particular the sheriff's judgment and interlocutor of 25 November in which he deals with the substance of the application.  Simply put the appellant could not appeal the interlocutor of 15 December 2015 pronounced of consent.

11.       Counsel for the appellant under reference to section 27 of the Sheriff Courts Act 1907 considered the terms of Rule 36 of the Sheriff Court Company Insolvency Rules 1986.  An appeal is not competent without leave unless it is a final interlocutor or certain enumerated interlocutors.  A final judgment means "an interlocutor which by itself or taken along with previous interlocutors disposes of the subject matter of the cause notwithstanding that judgment may not have been pronounced on every question raised, and that the expenses found due may not have been modified, taxed or decerned for."  It is well established that an interlocutor is not final until expenses have been dealt with in the sense that liability for expenses has been determined.  Mr Edward accepted that the interlocutor of 15 December 2015 proceeded on a concession by the appellant as to expenses together with agreement as to the rate of interest and the date when interest should be calculated from.  Nevertheless, this does not prevent the appellant or losing party from appealing the substantive decision of the sheriff.  (Gamble v Unison 1997 SLT (ShCt) 5).  In any event the question whether the court may review an interlocutor pronounced of consent is not truly a question of competency but rather a question whether the court should entertain an appeal against such an interlocutor.  The interlocutor of 15 December 2015 being simply the interlocutor which makes the judgment final is not the interlocutor which is truly under review but the operative interlocutor which allows an appeal without leave.

12.       I repelled the objection to the competency.  As this is a note in a liquidation process the Sheriff Court Insolvency Rules 1986 provide for appeals in Rule 36.  Rule 36(1) as in force until the end of December 2015 states:-

"36 Appeals to the Sheriff Principal or Court of Session

(1)  Where an appeal to the Sheriff Principal or the Court of Session is competent it shall be taken by note of appeal which shall……

(2)  Such an appeal shall be marked within 14 days of the date of the interlocutor appealed against."

 

            The provisions for appealing are prefaced by the words "where an appeal is competent".  Accordingly, it is necessary to consider the terms of section 27 of the 1907 Act.  The interlocutor of 25 November 2015 deals only with the merits of the application under section 212 of the 1986 Act.  This is not a final judgment and it is therefore not competent to appeal that judgment at that stage without leave of the sheriff.  Macphail at 18.36 states: "for an interlocutor to be a final judgment it is therefore normally essential that it should dispose of the question of expenses, not necessarily by deciding the amount of expenses payable, but by dealing with and determining the question of the liability of one or other of the parties for expenses."  I regard that to be settled law.  However I was also referred to Caledonian Railway Company v The Corporation of the City of Glasgow 1900 SC 871.  In that case expenses were reserved.  The Inner House decided that unless the interlocutor disposes of the question of expenses it does not dispose of the whole subject matter of the cause and cannot be reclaimed against without leave.  The objection was sustained.  The same or similar considerations which apply in reclaiming procedure in the Court of Session likewise apply in appeals to the Sheriff Principal.

13.       The interlocutor of 15 December 2015 is the final interlocutor which disposes of the whole subject matter of the case.  Interlocutors dealing with expenses and other ancillary matters such as interest following on the decision of the court on the merits may well be dealt with on joint motion or by concession where there is no issue to argue.  It would be unfortunate and unusual if any such interlocutor was construed to be an interlocutor which is not appealable due to it possessing the nature of an interlocutor pronounced of consent.  A losing party who is not in a position to argue against any finding of expenses should not be compelled to oppose that finding simply to avoid the argument that the final interlocutor was pronounced of consent or on joint motion and is therefore unappealable.  The interlocutor of 15 December is the operative order of the court which brings the subject matter of the application to a conclusion and makes the judgment final.  Parties may then consider the terms of section 36 of the Sheriff Court Company Insolvency Rules if an appeal is contemplated.  An appeal should be marked within 14 days of the date of the final interlocutor.  This appeal was marked timeously and the objection is repelled.

 

APPELLANT'S SUBMISSIONS

14.       Mr Edward advanced two arguments based upon the note of appeal.  Firstly, the court is concerned with an application in terms of section 212 of the 1986 Act.  That section is essentially a procedural provision and does not create a new duty or ground of action.  It is acknowledged that the appellant is an officer of the company being the sole director of the company.  The court is entitled to examine the director and his conduct.  However, where the director has diverted payments due to the company to a creditor company (Windows) it does not follow that he becomes liable to make payment of that amount to the company.  The second ground of appeal relates to the sheriff's order that the appellant pay compensation by contributing to the assets of the company a sum equal to the total of the sums which were wrongfully paid to Windows Limited.  If the court orders compensation or a contribution this must relate to the loss sustained by the company.  It is neither just nor proper for the sheriff to order payment of the whole amount.  Any compensatory payment following a breach of duty should be akin to damages based on the loss or harm caused to the company.  In the circumstances of this case the payments made to the third party company Windows constituted payment of debt due by the company to Windows.  That payment had the effect of depleting the company's liabilities.  There is no identifiable loss to the company.  The company should be restored to the position they would have been in but for the misapplication of the funds.  The sheriff's order will place the company in a better financial situation than it would have been had the payments due to the company from Sharkey and TKS Plumbing been properly and timeously paid to the company.

15.       In support of the first ground of appeal I was referred to the terms of section 212 of the 1986 Act.  The section is procedural in nature.  It relies on an officer of the company (ie the appellant) having breached his duty to the company.  The section does not create a separate or new ground of action but merely provides a mechanism by which the liquidator may carry out his functions in the liquidation.  There must have been a breach of an existing duty under statute or common law.  The appellant referred to Blin v Johnstone 1988 SC 63.

16.       In support of the second ground of appeal the argument was advanced that any compensatory order made by the sheriff amounts to damages which should be based on the proven loss to the company.  In support of this point I was referred to the English decision in re Derek Randall Enterprises Limited [1990] BCC 749.  In that case the Court of Appeal decided that the Judge at first instance was correct in holding that the misfeasance claim failed on the basis that there was no loss sustained by the company.  The original misfeasance by the director was the retention of a commission payment of £78,000.  The appeal court considered that by paying a sum in excess of the commission payment into a blocked bank account, which in turn had the effect of reducing the company's indebtedness, the director had, in effect, repaid the commission to the company.  Accordingly the misfeasance claim failed due to there being no loss sustained by the company.  Mr Edward placed reliance on this case in support of his argument that the sheriff erred in making the order that the appellant compensate the company in a sum equivalent to the total of sums (a) to (e) in the interlocutor ie a sum in excess of £177,000.

17.       This case is similar to Randall as the payments made to Windows, who were a creditor of the company, had the effect of reducing both the assets and liabilities of the company with the net result that it suffered no actual loss.  Accordingly, the sheriff’s reasoning in paragraph 108 of his judgment discloses an error in the application of section 212 of the 1986 Act.  The appeal should be allowed.

submissions for the respondent

18.       Mr McColl briefly set out the important findings in fact upon which the sheriff based his decision.  The appellant as the sole director of the company and therefore the controlling mind of the company was in a similar position in respect of the company Windows who were the beneficiaries of his misfeasance.  The company had been insolvent since approximately April 2012 with the main creditor being HMRC.  At the material time whilst the company was insolvent the defender chose to divert the sums in question totalling £177,259.17 to his other company Windows.  That sum ought to be available to be paid to the company's general body of creditors.  Instead it was diverted to one particular potential creditor, namely the company which the appellant himself controlled.  This is clearly an unfair preference however the proceedings under section 212 of the 1986 Act are concerned with a misfeasance or misapplication of funds.

19.       The sheriff's findings in fact deal fully and properly with the subject matter of the application under section 212 of the Act.  That application was concerned with the appellant's dealings with company money or money which was due to the company.  There are no findings with regard to the other company namely, Windows, or any entitlement they may have to be accepted as creditors of the company.  Accordingly, the short answer to the appeal is that there being no challenge to the sheriff's findings in fact the appeal must fail.

20.       Nevertheless, the legal framework to the noter's application is section 212 of the 1986 Act.  It is accepted that the section does not create new duties for officers of the company.  It is a mechanism for liquidators to resolve issues involving retention or misapplication of company funds.  It is not necessary to create new duties as the appellant as a director and an officer of the company breaches his duties as a director by his misapplication of the funds due to the company.  This is a clear case of misfeasance.

21.       The court's powers are set out in section 212(3).  The court may examine into the conduct of the director and may also compel him to repay or account for money or contribute to the company's assets by way of compensation for the misfeasance or breach of fiduciary or other duty "as the court thinks just".  Counsel referred to the annotated Westlaw version of the relevant provision and the case notes or extracts from the authorities Top Brands Limited and Ors v Sharma and Ors [2014] EWHC 2753 (Ch) and Stone and Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UK HL 39.  These authorities confirm the procedural nature of the section which does not create new obligations; duties or cause of action.  In other words it does not create a cause of action where none previously existed.  In Stone and Rolls Limited, a decision of the House of Lords, it was noted that section 212(3)(b) confers on the court a judgmental discretion as to the quantum of compensation that would not in an ordinary damages action be applicable.

22.       Accordingly, there is no error disclosed in the sheriff's decision.  There can be no dispute that the appellant breached his duties as a director by misapplying the funds due to the company and creating a wrongful and unfair preference in favour of the company (Windows) which he controls.  That submission is made taking the appellant's case at its highest and on the hypothesis that Windows might have a claim in the liquidation.  However, there is no finding that Windows are entitled to rank as a creditor of the company at all.  Accordingly, the sheriff correctly analysed the law in paragraph 91 and in his findings in fact in law.

23.       The sheriff was entitled to make the order which he did by way of compensation in terms of section 212(3)(b).  Adopting the terminology of Stone and Rolls Limited (supra) the sheriff was entitled to exercise his discretion in determining that the sums diverted to Windows should be repaid to the company by way of a compensatory payment.  The section does not require the court to measure loss to the company when making an order in terms of section 212(3)(b).  The case of Derek Randall is not directly in point as it was not concerned with an order under this provision.  Accordingly the appeal should be refused.

APPELLANT'S REPLY

24.       In a short reply Mr Edward indicated that the extract from Stone and Rolls Ltd should be treated with caution as the passage was strictly an obiter remark by one judge in the House of Lords.  Secondly, the case of re Derek Randall was in point.  Although it did not deal with the equivalent provision of the Insolvency Act it, nevertheless, dealt with the remedy for misfeasance and any compensation should reflect loss to the company.  These proceedings do not deal with unfair preferences.  The sheriff accepted that the appellant had not been dishonest.  Despite the terms of the sheriff's first finding in fact and law this action is not about unfair preferences.

DECISION

25.       This appeal is concerned with the operation of section 212 of the Insolvency Act 1986 and the ambit of the court's powers under that provision.  As the head note to the section suggests, section 212 is designed to provide a summary remedy in the context of a liquidation if, following examination, the court is satisfied that there has been wrongful conduct or breach of duty by an individual who is an officer of a company or has been concerned in the management of the company.

26.       In Blin v Johnstone, in the passage to which I was referred, the Lord Justice Clerk held that its earlier equivalent, section 333 of the Companies Act 1948, was a procedural section which depended on there being a wrong or breach of duty in the existing law upon which the statutory summary provision could proceed.  In other words, the section did not create new obligations or duties on officers of companies.  Section 212 is the statutory successor to section 333 of the Companies Act 1948 and its terms are, in all material respects, identical.  It does not appear that the procedural nature of the section is in dispute.  The authorities mentioned by the respondent Top Brands Limited and Ors v Sharma and Ors (supra) and Stone and Rolls Ltd (In Liquidation) v Moore Stephens (supra) also confirm this.

27.       It is important, however, to observe that although procedural in nature the section provides a summary remedy.  See Ross v Davy 1996 SCLR 369.  Lord Penrose provided a commentary on the provision and its scope at page 379:

"The provision applies only where there has been some wrongful act by the director or other officer 'either of the nature of misfeasance, or of the nature of breach of trust in a wide sense, including no doubt a breach of trust by negligence or something of that kind'.  This does not bear to be a comprehensive definition of the scope of the provision and it may be that one could not with safety attempt any such definition.  That would be consistent with the view that the provision is not primarily concerned with definition of grounds of action which find their source in the statute but with procedural means for accelerated disposal of issues otherwise actionable in the context of insolvency."

 

Accordingly, it is correct to characterise the section as providing a mechanism in the context of a liquidation to obtain a summary remedy where there has been a wrongful act by a director or other officer of the company.

28.       In this appeal, the appellant argues that the sheriff erred in law in finding where the appellant has caused or permitted payments due to the company to be paid to a third party, the defender became liable to make payment to the company of the same amount.  Leaving to one side the quantum of the sheriff's order, the first ground of appeal suggests that the appellant's misapplication of the monies due to the company did not constitute a breach of his duties as a director or a misfeasance.  The sheriff in his findings in fact, which are not challenged in this appeal, makes a finding as to the date when the company is likely to have become insolvent (Finding in Fact 5).  At that stage a large debt was outstanding to HMRC.  In the following paras 6, 7 and 8 the sheriff makes findings with regard to the sums due to the company in terms of the contract with Sharkey, which payments were diverted or misapplied to the bank account of the company controlled by the appellant "Windows".  Finding in Fact 8 relates to the contract with TKS Plumbing.  Sums due and payable to the company under this contract were also diverted to Windows.  Standing these findings in fact it cannot be argued that the sheriff was not entitled to come to the conclusion that the defender had misapplied sums contractually owing to the company by paying them or causing them to be paid direct to Windows and that this constituted a misfeasance with the company's funds.  Indeed it constituted an unfair preference of one potential creditor over creditors who had demanded payment (HMRC).  On any view the actings of the appellant constituted both misfeasance and a breach of his duties as a director to the company and to the general body of creditors.  It was open to the sheriff to refer to this being an unfair preference although that is not the question in issue in a section 212 application.  The findings in fact more than adequately support the sheriff's conclusions in law entitling him to proceed to consider in terms of section 212(3) the appropriate remedy.

29.       Thus the case law confirms that this is a summary remedy available to the liquidator in the exercise of his duties in the winding up of the company.  It is described as a summary remedy.  The court's powers are set out in section 212(3) is as follows:-

"(3)      The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within sub-section (1) and compel him –

(a)        to repay, restore or account for the money or property or any part of it, with interest at such a rate that the court thinks just, or

(b)        to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just."

 

            The court therefore has options to order repayment or restoration of the money; order an accounting for the money which has been misapplied or retained with interest or to order a contribution to the company's assets by way of compensation "as the court thinks just".

30.       In my opinion, there is no requirement that the court have regard only to actual loss to the company.  The court is required to examine the conduct of the appellant and then to consider a remedy in terms of section 212(3).  The appellant relies on re Derek Randall Enterprises Limited (supra) as authority for the proposition that the measure of any payment to the company by the defender should be based on any proven loss to the company attributable to the appellant's misapplication of funds or misfeasance.  In other words the company must be shown to have suffered loss as a result of the appellant's misfeasance.  Re Derek Randall is an English Court of Appeal judgment in a misfeasance summons by the liquidator against the director 'R'.  Misfeasance was readily established, the respondent having pled guilty to theft in criminal proceedings.  The misfeasance summons focussed on a sum of £78,000 by way of commission which the director had received and failed to account to the company for.  When the company was in financial difficulties 'R' paid the sum of £88,500 into a special blocked account with the company's bank in support of his guarantee.  That sum included the £78,000 which he had misappropriated.  This payment substantially reduced the company's indebtedness to its bank.  The judge held that there was no liability to restore the money as the company had not suffered any loss given that 'R' had paid this substantial sum into a special account and reduced the company's liability to the bank.  The liquidator appealed and the Court of Appeal (by a majority) refused the appeal (Dillon LJ dissenting).  This case is readily distinguishable from the present appeal.  In re Derek Randall the bank are creditors.  The company had heavy liabilities to the bank by way of an overdraft.  The liability to the bank as creditors to the company was not in dispute and had been established.  The company clearly had the benefit of the monies which included the £78,000 which the director had misappropriated.  Accordingly, the monies had been paid back to the bank in the sense of reducing the bank's liability to its bankers.  In this appeal there has been no restoration of funds.  Windows' status as a creditor is not established.  The appellant asserts that by paying Windows the company's liabilities had been reduced but that is mere assertion and has neither been established nor accepted by the noter.  This significantly distinguishes the current appeal from the facts of Derek Randall.  It is, of course, important to recognise that the Court of Appeal in re Derek Randall approved the dicta in re Anglo-French Co-operative Society ex parte Pelly (1882) 21 ChD 492.  In that case a payment of £2,600 of the company's money to a newly formed company was a misfeasance.  However, it was argued by the directors that their liability for the misfeasance was satisfied when the £2,600 came back to the company by way of debentures.  That claim was rejected.  The ratio of the Anglo-French Co-operative case was approved in re Derek Randall Enterprises.

31.       Once a misfeasance or breach of fiduciary duty is established the court may order or impose one of the remedies set out in section 212(3).  It is important to note that the court has a discretion as to the mode and amount of repayment or compensation.  There is no requirement to assess that compensation by reference to any established loss to the company.  In this case the compensatory payment has been made by reference to the amounts misapplied or diverted from the company by the appellant.  The appellant's assertion that the company suffered no loss is not accepted.  These assertions and the claim that Windows are creditors of the company remain to be verified.  (See Finding in Fact 10).  Accordingly, the compensatory payment ordered by the sheriff relates directly to the sums diverted from the company to the third party company Windows wholly controlled by the appellant.  These sums should be available to the liquidator for the benefit of the creditors of the company and the sheriff's order seeks to achieve that.  The important words in the sub-section are "as the court thinks just".  They entrust to the court the power to do what it considers just in the circumstances of the case.

32.       The dicta of Lord Scott of Foscote in Stone and Rolls Ltd (in liquidation) (supra) are indeed strictly obiter, as that case involved an action based on the negligence of the company's auditors.  It did not involve an application under section 212.  That, however, does not detract from the correctness of his observation that section 212(3)(b) confers on the court a judgmental discretion as to the quantum of compensation that would not be applicable in an ordinary damages action.  I agree with that analysis.  Accordingly, the appeal falls to be refused.

33.       Parties are in agreement that expenses should follow success and that the appeal is suitable for employment of junior counsel.