[2011] CSOH 175



in the cause

RICHARD HEIS, MICHAEL PINK, RICHARD FLEMING AND BLAIR CARNEGIE NIMMO, Joint Building Society Special Administrators of Dunfermline Building Society






Petitioners: Mrs Wolffe QC; Brodies LLP

Respondent: Lindsay QC; MBM Commercial

21 October 2011

[1] This is an application by the Joint Building Society Administrators of Dunfermline Building Society for an administration order under paragraph 12 of Schedule B1 to the Insolvency Act 1986 in respect of FM Front Door Limited ("FMFD"). FMFD opposed the application and a hearing was fixed on the petition and answers.

Factual background

(i) The Loan Agreement, floating charge and guarantee

[2] On 30 October 2007 FMFD entered into a loan facility agreement with Dunfermline Building Society ("DBS") under which DBS advanced monies to it to assist the purchase of residential flats at the Skyline development, Finnieston Street, Glasgow. Interest was payable quarterly on defined interest payment dates. FMFD undertook to repay the loan on a repayment date which was defined as five years from the first drawdown. The first drawdown of the facility occurred on 20 September 2007. Accordingly, in the absence of earlier default, FMFD was obliged to repay the advances on 20 September 2012. Clause 1 of the agreement provided that the maximum principal amount of the facility was 85% of the market value of the properties with a minimum net interest cover ratio of 100% or £4,169,250, whichever was the lower.

[3] Clause 10.1 of the loan agreement provided that FMFD would:

"make all payments under or in respect of the facility not later than 11.00am Greenwich Mean Time on the due date for value in immediately available sterling funds to DBS at such account as DBS may from time to time instruct you. All repayments of the Loan and any interest thereon will be made by you to DBS by direct debit."

[4] Clause 13 specified certain grounds of default and provided that, on the occurrence of such default, DBS could by written notice terminate its obligations under the facility and demand immediate repayment of the loan together with accrued interest and certain other sums and that FMFD would comply with such demand forthwith. The grounds of default included, so far as relevant, the following:

"13.1.1 If you fail to pay any sum payable under this letter on the due date; or ...

13.1.7 If you are (or admit that you are) unable to pay your debts as they fall due or are deemed unable to pay your debts under section 123(1) of the Insolvency Act 1986 (or any equivalent legislation); or ...

13.1.10 If any circumstances arise which in DBS opinion have or may have a material adverse effect on your ability to perform your obligations under this letter or on the value, validity or enforceability of DBS security or any Security Document."

[5] As FMFD asserts that DBS has acquiesced in a departure from the strict terms of the loan agreement in relation to the prompt payment of interest it is necessary also to refer to clause 20, which was headed "No Waivers, Remedies Cumulative" and which was in the following terms:

"No failure or delay on DBS part to exercise any power, right or remedy under this letter shall operate as a waiver thereof nor shall any single or partial exercise by DBS of any power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. The remedies provided in this letter are cumulative and are not exclusive of any remedies provided by law."

[6] In support of its borrowings FMFD granted a bond and floating charge dated 19 September 2007 over the whole of the property comprised in its property and undertaking and also standard securities over each of the flats. Its parent company, FM Developments Limited ("FMD") granted a guarantee dated 25 October 2007 in respect of the obligations of FMFD subject to a limit of £125,500 in any twelve month period.

(ii) The alleged defaults and the demand for repayment of the loan

[7] In terms of the loan agreement the quarterly interest payments were due on 1 January, 1 April, 1 July and 1 October each year. On each occasion between 1 July 2010 and 1 July 2011 FMFD paid the sums due between eleven and twenty one days after the start of the relevant month. After payment was not made on 1 July 2010 Mr Trevor Barkley of DBS emailed FMFD stating that the quarterly interest payment was now due and that its amount was £16,267.71. He stated that he would be obliged if funds could be lodged as soon as possible and confirmed the bank account into which the funds were to be paid. On 15 July when the funds had not been paid, he sent a reminder, again stating the sum due and identifying the bank account into which the funds were to be paid. He concluded that FMFD's cooperation would be appreciated. FMFD thereafter paid the money. On 4 October 2010, after the quarterly interest payment had become due on 1 October, Mr Barkley again emailed FMFD stating that the sum of £16,267.71 was now due and inviting it to clear the arrears. Again he stated the same bank account into which the funds were to be paid. On 6 October Mr Matthew Frame of DBS sent FMFD an automatically produced reminder letter stating that its records showed that there was an outstanding sum of £16,267.71 on its loan account and requesting that it make arrangements to bring its account up to date immediately. FMFD thereafter paid the money.

[8] On 29 December 2010 Mr Barkley sent an email to FMFD to remind it that the next quarterly payment was due on 1 January 2011. He asked FMFD to arrange for funds of £16,267.71 to be lodged to meet the payment and again confirmed that the funds should be transferred into the same bank account, again concluding that he would appreciate FMFD's cooperation. When FMFD did not pay the money as requested, Mr Barkley emailed FMFD again on 5 January 2011 in the following terms:

"As advised, monies of £16,267.71 required to cover this quarters interest payment. Can funds be lodged to meet this [?] ..."

On the same day Mr Anthony Morris of DBS sent an automatically generated reminder letter in the same terms as that sent on 6 October 2010. Some time thereafter FMFD paid the money. On 4 April 2011 Mr Barkley again emailed FMFD about arrears in April, asking:

"Can you arrange for funds of £16,267.71 to be lodged to cover the current arrears position[?]"

He asked for funds to be transferred electronically as soon as possible. Again he confirmed the same bank account details for the receipt of the funds.

[9] When FMFD did not pay the quarterly interest payment on 1 July 2011, DBS did not send a reminder but Mr Blair Nimmo on behalf of DBS sent FMFD a formal letter dated 5 July 2011 intimating that it was in default and demanding immediate repayment of the principal sum of £3,836,050 and interest of £16,267.71 accrued to 1 July 2011. Relying on clause 8 of the loan agreement, he also intimated that interest would continue to accrue at 4% above the base rate of The Royal Bank of Scotland plc from time to time. The defaults on which he founded were (i) FMFD's failure to repay the interest payment due on 1 July 2011 (clause 13.1.1) and (ii) a material adverse effect (clause 13.1.10). He explained the latter as follows:

"The amount of the Loan outstanding is currently £3,852,317.71 and the combined value of the Properties in terms of a valuation dated 26 July 2010 obtained by the Society is currently £3,535,000. The combined value of the properties in terms of a valuation dated 21, 29 August 2007 and 11 October 2007 obtained by the Society was £4,504,000. The combined value of the Properties has therefore reduced by an aggregate of £969,000.

The outstanding amount of the Loan therefore represents 108.98% of the current combined value of the Properties. The Society is of the opinion that the reduction in the combined value of the Properties has a material adverse effect on the Borrower's ability to perform its obligations under the Loan Agreement and has a material adverse effect on the value of the standard securities granted by the Borrower in favour of the Society over the Properties ("the Standard Securities"). The Standard Securities are Security Documents in terms of the Loan Agreement.

In addition, the Society is of the opinion that the insolvency of, and appointment of administrators to, FM Developments Ltd on 23 February 2009 has had a material adverse effect on the value of the guarantee granted by FM Developments Ltd in favour of the society on account of the liabilities of the Borrower dated 25 October 2007 ("the Guarantee"). The Guarantee is a Security Document in terms of the Loan Agreement."

[10] In response to this demand, Mr Jonathon Milne, a director of FMFD, wrote to DBS on 5 July 2011 contesting its entitlement to hold FMFD to be in default. He stated that DBS had historically always advised FMFD of the amount of interest which was due to be paid in advance of the interest payment date and also the account into which it was to be paid. No such notification had been given in respect of the interest payment due on 1 July 2011 and as a result FMFD had not been able to make payment to date. He confirmed that the company had funds in place to make an immediate payment and requested confirmation of the bank account into which the funds should be paid. He continued:

"As advised, now that FM Front Door Limited have been advised of the interest which is due to be paid, it will arrange for this as soon as account details are provided, however I consider it wholly unreasonable for Dunfermline Building Society to issue a breach notification under these circumstances.

I would appreciate your confirmation that, under these circumstances, the breach notification will be withdrawn and that future notifications of interest will be provided sufficiently in advance of the interest due date to allow FM Front Door Limited to make payment."

[11] In the subsequent correspondence Mr Nimmo rejected Mr Milne's assertion that DBS had given advance notice of the amount of every interest payment and of the bank account into which payment was made and called for evidence to vouch that claim. Mr Milne's assertion that DBS had departed from an established practice to engineer a default met with a robust response from Mr Nimmo in a letter dated 7 July 2011. He stated:

"No precedent has been set regarding the provision of information regarding interest payments and there has been no change to the Society's customs or practice in respect of the provision of information. Historically the correspondence between the Society and FM Front Door Limited has been necessitated because of arrears on your account, which have arisen due to your persistent failure to meet your obligations as they fall due under the terms of your facility. The Society is no longer prepared to tolerate these continual breaches of your obligations and has therefore demanded repayment under the terms of the facility letter following the most recent breach.

In respect of this quarter's (late) payment, it is noted that it is exactly the same in quantum as last quarters and, indeed, numerous previous quarters. The payment details are also exactly the same as you have used on numerous previous occasions, as outlined to you in writing when the Society made changes to its procedures in April 2010. Your assertion that you did not know how much to pay or where to pay it is absolutely ridiculous."

[12] Mr Milne's response in a letter dated 12 July 2011 was that under the facility letter interest was calculated on the actual numbers of days elapsed and a 365-day year. Accordingly, FMFD had needed details of payment amounts and the applicable bank account details. The practice of spreading the interest charge throughout the year did not comply with the loan agreement's provision for the calculation of interest on a days-elapsed basis. As a result FMFD had had no certainty as to the amount of interest required until DBS notified it of this.

[13] In this regard I observe that clause 7.1.4 of the loan agreement provided that interest was payable in arrears on the first day of each interest period and was "calculated on the basis of the actual number of days elapsed and a 365-day year."

The statutory provisions

[14] There are two tests to be met before the court may grant an administration order. The court must be satisfied, first, that the company is or is likely to become unable to pay its debts, and, secondly, that the administration order is reasonably likely to achieve the purpose of the administration: Schedule B1 to the Insolvency Act 1986 ("the 1986 Act") paragraph 11. In relation to the first, inability to pay its debts has the meaning given in section 123 of the 1986 Act: Schedule B1, paragraph 111.

[15] The objectives of the administration for which DBS argues are (i) to achieve a better result for the company's creditors as a whole than would be likely if the company were wound up and (ii) to realise property in order to make a distribution to DBS as a secured creditor: Schedule B1, paragraph 3(b) and (c).

The Petitioners' case

[16] Mrs Wolffe QC for DBS submitted that FMFD was unable to pay its debts and that an administration order would achieve one or other of the statutory purposes. In relation to its inability to pay its debts, Mrs Wolffe founded principally on FMFD's default in July 2011, through (i) its failure to make timely payment of interest, (ii) its insolvency and (iii) the material adverse effects, giving rise to the demand for repayment of the principal sum and accrued interest together with interest at 4% over base. She founded also, in any event, on its further failure to pay the next instalment of interest due on 1 October 2011. She also submitted that, even if it were not in default in July, FMFD was unable to pay its debts both through cash-flow insolvency and also balance sheet insolvency: 1986 Act, sections 123(1)(e) and 123(2) respectively.

FMFD's defence

[17] Mr Lindsay QC for FMFD submitted that FMFD was not in default. Drawing on Mr Milne's stance in the correspondence in July 2011 mentioned above, he argued that the parties had varied their contract so that FMFD did not have to pay the quarterly instalments of interest until DBS had informed it of the sum due and the bank account into which the sum should be paid. If that were correct, FMFD was not in default through delayed payment in July and October 2011 as DBS had not provided the needed emails. In any event, he submitted that DBS had acquiesced in late payment and was personally barred from founding on the delayed payment in July. He acknowledged that his argument of bar could not apply to the non-payment in October as DBS had given notice that it would not tolerate late payment by then. In relation to the ground of default based on insolvency, Mr Lindsay correctly observed that clause 13.1.7 of the loan agreement referred only to cash-flow insolvency and not balance sheet insolvency under section 123(2).


[18] I am not persuaded that the email correspondence to which I was referred vouches any variation of contract. It is consistent with DBS politely reminding its borrower that sums are overdue and pressing for payment. It does not establish any agreed practice that DBS would inform FMFD of both the sum due and the bank account into which the money was to be paid before the sum had to be paid. There was no suggestion that, before the default, FMFD had incurred any charges or fees, that it had repaid any principal, or that there had been changes in the interest rate, any of which might have caused some uncertainty as to the amount due for quarterly payment. On the contrary, the sum due in each quarter remained the same and the bank account into which it was to be paid did not change.

[19] In Minevco Ltd v Barratt Southern Ltd 2000 SLT 790 the First Division at paragraphs [16] and [17] held that a clause of a written contract could be varied or altered if there were facts and circumstances which were explicable only on the basis that there was an express or implied agreement so to alter the contract. The emails from DBS, on which Mr Lindsay founded, did not come near to meeting such a test.

[20] In relation to the defence of acquiescence or personal bar I consider that the circumstances in this case are to be distinguished from those in Whitbread Group plc v Goldapple Ltd 2005 SLT 281, to which Mr Lindsay referred. In that case a lease provided that the rent was to be paid by standing order but for three years the landlord had accepted the tenant's practice of paying rent by cheque into its account. Lord Drummond Young (at paragraph [26]) stated:

"When parties to a contract have in practice adopted a method of payment that does not conform to the precise terms of the contract, one party cannot insist on strict compliance with the terms of the contract without giving the other a reasonable opportunity to do so: Tankexpress A/S v Compagnie Financière Belge des Petroles SA, at [1949] AC, p 98 per Lord Wright, pp100-101 per Lord Uthwatt and pp 103-106 per Lord Du Parcq. Consequently, when a payment is due on a particular date and the creditor decides to insist on strict compliance with the contractual terms for that payment, he must give the debtor notice in sufficient time to enable him to make payment in that manner. In such a case, the practice does not alter the terms of the contract: see Lord Wright at p 98; instead a form of personal bar is set up by the creditor's acquiescence in the established practice. Such an acquiescence can, of course, be inferred objectively, from facts and circumstances."

[21] In my opinion, the emails which DBS sent FMFD asking for payment vouch its knowledge of late payment but do not amount to the adoption of a practice of condoning such payment such as to require notice before demanding strict compliance with the terms of the loan agreement. The email of 29 December 2010 is evidence that DBS sought performance of the contract in accordance with its terms and that of 4 April 2011 clearly referred to arrears in relation to that quarterly payment. The emails on which FMFD founds are not sufficient to demonstrate a practice which did not conform to the terms of the contract. Further, in my view, while there is some uncertainty as to the boundaries of the efficacy of "no waiver" clauses (viz. McBryde, The Law of Contract in Scotland, (3rd ed.) paragraph 25-07), clause 20 of the loan agreement has the effect that FMFD cannot found on a failure by DBS to assert a default when there had been a delay in making a prior quarterly payment to preclude DBS from giving notice of a default on the occurrence of a later failure. Personal bar seeks to prevent unfairness caused by inconsistent behaviour. But in this case FMFD must be taken to have been aware of clause 20 of the loan agreement and thus to have known that a failure by DBS to exercise a right or remedy did not amount to an abandonment of that right on a later non-performance. I see no unfairness in DBS's assertion of its contractual rights.

[22] It follows from this that FMFD was in default in July 2011 when it failed to make the quarterly interest payment in a timely manner.

[23] I am also satisfied that DBS has established a default under clause 13.1.10. See paragraph [4] above. Schedule 1 to the loan agreement required as conditions precedent the provision of standard securities by FMFD and also a guarantee by FMD and clause 3.2 referred such documents as "Security Documents". The insolvency of FMD was likely to have had a material adverse effect on the value of its guarantee. Further, DBS was entitled to take the view that the fall in value of the flats which FMFD acquired was likely to have a material adverse effect on the value of its standard securities and on FMFD's ability to repay the advances. The parties took differing views as to the current value of the flats. DBS relied on a valuation by DM Hall dated 16 September 2011 which valued the flats at £3,320,000, if sold individually and gradually, and at £2,324,000, if they had to be sold within a six-month period. Slater Hogg & Howieson valued the flats at £3,657,500, but did not state whether that assumed that sales would take place gradually. Whichever valuation is more accurate, it is clear that there has been a material fall in the value of the properties and that the outstanding balance of the loan exceeds their value. That is a position which is materially adverse to the circumstance in 2007 when DBS stipulated that the maximum that it would lend was 85% of the market value of the properties. While it may be, as Mr Milne hopes, that the housing market will improve before September 2012, when (in the absence of default) the advances were due for repayment, DBS was entitled to take the view that the decline in property prices might have a material adverse effect of FMFD's ability to repay its debt. Accordingly, it was entitled on this ground also to treat FMFD as being in default.

[24] Having so concluded, I am satisfied that FMFD is unable to pay its debts. FMFD's failure to repay the principal sum in response to DBS's demand and the evidence of the current value of its property portfolio demonstrate that inability. It is clear that FMFD is not able to pay its debts as they fall due. In relation to commercial or cash-flow insolvency under section 123(1)(e) I was referred to the judgment of Briggs J in In re Cheyne Finance plc (No 2) [2008] Bus LR 1562 and my opinion in Mac Plant Services Ltd v Contract Lifting Services (Scotland) Ltd 2009 SC 125 at paragraphs [66] and [67]. My conclusion is consistent with the approach in those cases. The section 123(e) requirement is, as Briggs J stated in In re Cheyne Finance plc (at paragraph 56), "flexible and fact sensitive", but that does not assist FMFD in this case. One may speculate whether Mr Milne might, if given time, achieve the re-financing of FMFD, but there is no basis for inferring that the company will be able promptly to repay the sums which are now due.

[25] I was also addressed on balance sheet insolvency. It is clear that when the court looks at balance sheet insolvency under section 123(2) it is not simply taking a snap shot of the balance between a company's assets and it liabilities then and there. It is not concerned with temporary imbalances. Rather in considering that balance the court looks to the future and asks whether it is clear in practical terms that because of an incurable deficiency in its assets it will not be able to meet its future or contingent liabilities. In other words, the section allows the court to have regard to the interests of contingent or prospective creditors (the latter being creditors with existing debts which are not yet due for payment) and form a judgment whether it has been established that the company cannot reasonably be expected to meet those liabilities. See the discussion of section 123(2) by the Court of Appeal in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc [2011] EWCA Civ 227, [2011] BCC 399, and especially Lord Neuberger MR at paragraphs 42-58 and Toulson LJ at paragraphs 110-119. In this case it is not necessary for me to reach a view on whether there is likely be light at the end of the tunnel for FMFD before September 2012 in assessing balance sheet insolvency as I am satisfied that FMFD is cash-flow insolvent as a consequence of DBS's current demand for repayment of its advances.

[26] The second question therefore is whether an administration order is likely to achieve the purpose of the administration. As one of the two purposes which the intended administrators advance is to make a distribution to DBS as a secured creditor and as there is no suggestion that they will not be in a position so to do, I am satisfied that it is likely that that purpose will be achieved. It is not necessary therefore to consider the relative merits of administration as against winding up, on which I was not addressed in any detail.

[27] The requirements of paragraph 11 of Schedule B1 are therefore met. The court has a discretion to make an administration order. No reason has been advanced as to why I should not do so. Given FMFD's insolvency and DBS's interest in protecting its loan, I am satisfied that it is appropriate that I should appoint Mr Frost and Mr Cartwright as its joint administrators.


[28] I therefore repel FMFD's pleas in law and make the orders sought in sections (ii) and (iii) of the prayer of the petition.