Case No: ABENI 1998/1627/A2

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN’S BENCH DIVISION
(OFFICIAL REFEREES BUSINESS)
HIS HONOUR JUDGE TOULMIN CMG QC

Strand, London, WC2A 2LL

Tuesday, 19 January 2000

B e f o r e :

THE MASTER OF THE ROLLS
LORD JUSTICE WARD
and 
LORD JUSTICE LAWS

	GERALD CLIFFORD SMITH (ADMINISTRATOR OF COSSLETT (CONTRACTORS) LTD)	Respondent	
	- v -		
	BRIDGEND COUNTY BOROUGH COUNCIL		Appellant	

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040,  Fax No:  0171 831 8838
Official Shorthand Writers to the Court)

Mr Terence Etherton QC and Mr Peter L Arden (instructed by Messrs Edwards Geldard for the appellant)
Mr Richard Wilmot-Smith QC and Mr Alan Maclean (instructed by Hammond Suddards for the Respondent)

Judgment
As Approved by the Court

Crown Copyright ©

Tuesday, 19 January 2000

JUDGMENT
Lord Justice Laws:

INTRODUCTORY

1	This is an appeal by the defendant borough council against an order made by HHJ Toulmin CMG QC perfected on 8 September 1998.  The appeal is brought with permission granted by Stuart-Smith and Thorpe LJJ on 17 December 1998.  By the order complained of the learned judge at first instance directed that summary judgment be entered against the appellants with damages to be assessed; and he required the appellants to make an interim payment of £389,000 within 28 days.  He dismissed the appellants’ applications for orders to strike out the statement of claim and the action. 

2	The claim, commenced by writ issued on 11 November 1997, was brought by the administrator of a company, Cosslett (Contractors) Limited (“the company”), against the appellants for damages for conversion of two items of equipment called coal washing plants and certain ancillary equipment (to all of which I will refer compendiously as “the plant”). The appeal raises issues of some refinement as to the powers and rights of an administrator appointed under the provisions of the Insolvency Act 1986 (“the 1986 Act”). In order to understand these issues it is necessary to explain the background to the case, which has already been once to the Court of Appeal. I will set out in turn the essential facts, the relevant contractual provisions, the relevant statutory provisions, the material conclusions of the Court of Appeal in the earlier litigation, counsel’s arguments, and my conclusions on the issues canvassed before us, and in the course of doing so will also canvass the essential reasoning of the learned judge in the court below.

3	Since the matter was before the learned Judge in the court below  on 15 October 1999 Deputy Master Joseph made an order, by consent, substituting Mr Gerald Clifford Smith for Mr Ian Clark as administrator of the company and giving permission for consequential amendments to be made to the claim form and statement of case.  Thus Mr Smith is now the respondent to this appeal, whereas Mr Clark was the claimant below.  In the course of this judgment where the expressions “the administrator” and “the respondent” are used, they should be read as referring to whichever of Mr Clark or Mr Smith was the administrator of the company at the material time.

THE FACTS

4	On 28 January 1991 the appellants and the company entered into a contract (“the company’s contract”) whereby the company was to carry out works of land reclamation at a site in the Upper Garw Valley in mid-Glamorgan.  The works involved the processing of coal-bearing shale through a washing plant or plants so as to separate the coal from the residue.  The coal thus won would be sold and delivered to British Coal.  In order to carry out their obligations under the company’s contract the company purchased two coal washing plants.  The first of these was bought in early 1991 and delivered to the site and installed between June and December 1991.  The second was bought in about March 1992 and delivered and installed between about May and September 1992.  These purchases were, it is to be noted, financed by the appellants.

5	At length the company fell into financial difficulties. On 6 August 1993, in accordance with the procedure which the company’s contract prescribed, the engineers certified that the company had abandoned the site. The appellants thereby became entitled to complete the works themselves, or to employ another contractor to do so, and to use the plant (by themselves or their substitute contractors) for that purpose. I shall set out the relevant contractual provisions in due course. On 12 August 1993 the appellants gave notice of their entitlement to enter on the site, and on 27 August 1993 they gave further notice that they would take possession of the plant on 31 August 1993. On the same date they entered into what has been called the “caretaker” contract with another firm of contractors, Burrows. Burrows started work on the site on 31 August 1993.

6	On 8 September 1993 an administration order was made by which Mr Clark, was appointed administrator of the company. The order, made by Chadwick J (as he then was), specified as its purposes the company’s survival as a going concern and a better realisation of its assets.

7	On 22 September 1993 the respondent demanded payment from the appellants for their continued use of the plant. That was refused. A further demand was made, for delivery up or payment of a rent of £10,000 per week, or that the appellants should purchase the plant for a reasonable sum put at not less than £1.2m. That too was refused.

8	On 10 January 1994 the appellants and Burrows entered into what has been called the “continuation” contract, for the works to be continued and completed. The continuation contract provided that upon completion of the works the plant should be removed from the site and “will become the property of the Contractor [Burrows] when off-site”. In fact it was removed by Burrows in mid-1997.

9	On 1 February 1994 the respondent issued proceedings against the appellants claiming an order for delivery up of the plant as the company’s property, under s.234 of the Insolvency Act 1986 (“the 1986 Act”). These were the earlier proceedings which ultimately went to the Court of Appeal, where the claim was rejected on 29 July 1997. I will refer to the court’s judgment later. When the s.234 claim was commenced the works had not been completed; so that the appellants were entitled under clause 63(1) of the company’s contract (which I will set out) to use the plant or have it used to complete the works. That was sufficient to defeat the s.234 claim. In fact by the time the Court of Appeal dealt with the s.234 case in July 1997 the works had been completed and, seemingly, the plant removed from the site. The continuation contract provided for the removal of the plant from the site upon completion of the works, whereupon the plant would (by, but only by, the terms of the continuation contract) become the property of Burrows, as I have indicated. So it was that the appellants purported to hand over rights of title to and possession of the plant to Burrows who, when the works were finished, removed it and sold it on (or it may be part of it).

10	By these present proceedings, commenced in November 1997, the respondent asserts that the appellants had no legal right to hand over the plant to Burrows, and he is in consequence entitled to damages for conversion. If that is the correct view of the case, the appellants must pay over the value of the plant which, no doubt (all other things being equal), would then be available to contribute to the company’s creditors’ debts rateably.

THE COMPANY’S CONTRACT

11	The company’s contract was concluded upon standard ICE Conditions, subject to some special conditions.  Clause 53(2) provided that plant owned by the company “shall when on site be deemed to be the property of [the council]. The [plant] must be owned by [the company].” Clause 53(6):

“No plant... shall be removed from the site without the written consent of the Engineer which consent shall not be unreasonably withheld where the same are no longer immediately required for the purposes of the completion of the Works but [the council] will permit [the company] the exclusive use of all such plant... in and for the completion of the Works until the occurrence of an event which gives [the council] the right to exclude [the company] from the Site and proceed with the completion of the Works.”

53(7):
“Upon the removal of any such Plant... as [has] been deemed to have become the property of the Employer under sub-clause (2) of this Clause with the consent as aforesaid the property therein shall be deemed to revest in the Contractor and upon completion of the Works the property in the remainder of such Plant... as aforesaid shall subject to clause 63 be deemed to revest in the Contractor.”
 
Clause 63(1) is of particular importance.  So far as material it provides:
“...if the Engineer shall certify in writing to the Employer that in his opinion the contractor: -
(a)  has abandoned the Contract:
...
then the Employer may after giving seven days’ notice in writing to the Contractor enter upon the Site and Works and expel the Contractor therefrom without thereby avoiding the Contract or releasing the Contractor from any of his obligations or liabilities under the Contract or affecting the rights and powers conferred on the Employer or the Engineer by the Contract and may himself complete the Works or may employ any other contractor to complete the Works and the Employer or such other contractor may use for such completion so much of the Constructional Plant Temporary Works goods and materials which have been deemed to become the property of the Employer under Clauses 53 and 54 as he or they may think proper and the Employer may at any time sell any of the Constructional Plant Temporary Works and unused goods and materials and apply the proceeds of sale in or towards the satisfaction of any sums due or which may become due to him from the Contractor under the Contract.”

12	It was of course by this provision that the appellants enjoyed the right, after the site had been abandoned by the company, to use the plant to complete the works or have their new contractors, Burrows, do so. This circumstance proved to be an important feature in the decision of the Court of Appeal in the respondent’s s.234 proceedings.

THE STATUTORY PROVISIONS
13	Part II of the 1986 Act is headed “ADMINISTRATION ORDERS”. S.8 provides in part:
 “(1)   Subject to this section, if the court -

(a)	is satisfied that a company is or is likely to become unable to pay its debts (within the  meaning given to that expression by section 123 of this Act), and
(b)	considers that the making of an order under this section would be likely to achieve one or more of the purposes mentioned below, 
the court may make an administration order in relation to the company.

(2)	An administration order is an order directing that, during the period for which the order is in force, the affairs, business and property of the company shall be managed by a person (“the administrator”) appointed for the purpose by the court.

(3)	The purposes for whose achievement an administration order may be made are -

(a)	the survival of the company, and the whole or any part of its undertaking, as a going concern;
(b)	the approval of a voluntary arrangement under Part I;
(c)	the sanctioning under section 425 of the Companies Act of a compromise or arrangement between the company and any such persons as are mentioned in that section;  and
(d)	a more advantageous realisation of the company’s assets than would be effected on a winding up;

and the order shall specify the purpose or purposes for which it is made.”

The significance of an administrator’s appointment is largely given by s.11(3):

“(3)	During the period for which an administration order is in force -

(a)	no resolution may be passed nor order made for the winding up of the company;
(b)	no administrative receiver of the company may be appointed;  
(c)	no other steps may be taken to enforce any security over the company’s property, or to repossess goods in the company’s possession under any hire-purchase agreement, except with the consent of the administrator or the leave of the court and subject (where the court gives leave) to such terms as the court may impose;  and
(d)	no other proceedings and no execution or other legal process may be commenced or continued, and no distress may be levied, against the company or its property except with the consent of the administrator or the leave of the court and subject (where the court gives leave) to such terms as aforesaid.”

S.14(1) of the 1986 Act provides:
“The administrator of a company -

(a)	may do all such things as may be necessary for the management of the affairs, business and property of the company, and 
(b)	without prejudice to the generality of paragraph (a), has the powers specified in Schedule 1 to this Act...

S.14(5):
“In exercising his powers the administrator is deemed to act as the company’s agent.”

S.17(1):
“The administrator of a company shall, on his appointment, take into his custody or under his control all the property to which the company is or appears to be entitled.”

In light of the arguments addressed to us s.234 is of particular importance:
“(1)	This section applies in the case of a company where -

(a)	an administration order is made in relation to the company, or
(b)	an administrative receiver is appointed, or
(c)	the company goes into liquidation, or
(d)	a provisional liquidator is appointed;

and “the office-holder means the administrator, the administrative receiver, the liquidator or the provisional liquidator, as the case may be.

(2)	Where any person has in his possession or control any property, books, papers or records to which the company appears to be entitled, the court may require that person forthwith (or within such period as the court may direct) to pay, deliver, convey, surrender or transfer the property, books, papers or records to the office-holder.”

Schedule 1 to the 1986 Act is engaged by s.14, and is headed:
“POWERS OF ADMINISTRATOR OR ADMINISTRATIVE RECEIVER”
Twenty-three  powers are then set out, of which the following are material:
“1.	Power to take possession of, collect and get in the property of the company and, for that purpose, to take such proceedings as may seem to him expedient...
5.	Power to bring or defend any action or other legal proceedings in the name and on behalf of the company.
...
12.	Power to do all such things (including the carrying out of works) as may be necessary for the realisation of the property of the company.”

The next important provision is s.395 of the Companies Act 1985:

“(1)....a charge created by a company registered in England and Wales and being a charge to which this section applies is, so far as any security on the company’s property or undertaking is conferred by the charge, void against the liquidator [or administrator]..., unless the prescribed particulars of the charge together with the instrument (if any) by which the charge is created or evidenced, are delivered or received by the registrar of companies for registration in the manner required....”

By s.396(1)(f) s.395 is applied to “a floating charge on the company’s undertaking or property”.
 
13	In view of some of the issues in the case I should also set out the terms of Rule 4.90 of the Insolvency Rules 1986, which is headed “Mutual credit and set-off”:
“(1) This Rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.

(2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings, and the sums due from one party shall be set off against the sums from the other.

(3) Sums due from the company to another party shall not be included in the account taken under paragraph (2) if that other party had notice at the time they became due that a meeting of creditors had been summoned under section 98 or (as the case may be) a petition for the winding up of the company was pending.

(4) Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets.”  

THE DECISION OF THE COURT OF APPEAL IN COSSLETT CONTRACTORS [1998] Ch 495

14	As I have said, on 1 February 1994 the respondent issued proceedings against the appellants for the delivery up of the plant under s.234 of the 1986 Act. It is clear that issues of title may be determined in s.234 proceedings: Re London Iron & Steel [1990] BCC 159. Jonathan Parker J at first instance rejected an argument to the effect that clause 53(2) of the company’s contract transferred ownership of the plant to the appellants, but held that clause 63(1) conferred on the appellants an equitable proprietary interest in the nature of a specific charge which did not require registration under s.395 of the Companies Act 1985. He dismissed the application. On appeal, this court agreed with the judge that clause 53(2) did not transfer title, but also held that:
“... on the expulsion of the company from the site clause 63(1) granted the council the right to retain possession of the plant and to use it to complete the works, which, being only a possessory right not given by way of security, did not constitute an equitable charge; that the right to sell the plant and apply the proceeds towards the discharge of sums due from the company by reason of its failure to complete the works was a contractual right conferred by way of security and constituted an equitable charge which crystallised on notice of expulsion and was in the nature of a floating charge registrable under s.395...; that the failure to register the charge rendered the security created by the power of sale void as against the administrator, but did not affect any other right of the council which was not a security and which did not require registration and, in particular, did not invalidate the council’s contractual right to retain possession of plant and materials and use them to complete the works...” (headnote, 495G-496A)

And so this court concurred with the judge in dismissing the s.234 claim, albeit for partly different reasons. I should note in particular a short passage towards the end of the judgment of Millett LJ as he then was, which is relied on by Mr Wilmot-Smith QC for the respondent:

“But after the completion of the works the council’s right to continue in possession is referable to a security which is void against the administrator and cannot prevail against him.” (511D)
 
In describing the Court of Appeal’s decision in the s.234 proceedings, it is right, if only in passing, to draw attention to a possibly puzzling feature in the chronology. It seems to be clear that the works had been completed and the plant removed from the site by Burrows before the judgments in this court in those proceedings were given on 29 July 1997. (A chronology put in by the appellants suggests that Burrows removed the plant from the site in June 1997.) If this is right, it does not seem to have been explained to the court, whose judgments appear for all the world to proceed on the basis that any question as to the respondent’s rights in the plant after completion of the works would only arise in the future.

THE ARGUMENTS

15	The argument advanced by Mr Wilmot-Smith QC for the respondent possesses a seductive and elegant simplicity. I hope I summarise it accurately in these following five propositions. (1) As this court held in the earlier proceedings, the appellants were by contract entitled to use (or have Burrows use) the plant for the purpose of completing the works, and so until the works were completed had a good defence to the respondent’s claim under s.234 for delivery up of the plant. (2) But once the works were completed, the appellants’ right to sell the plant, which then arose under clause 63(1) of the company’s contract, was a floating charge which being unregistered was by virtue of s.395 of the Companies Act void against the respondent administrator. (3) Accordingly as at the completion of the works the respondent should have had an unanswerable s.234 claim to the plant. (4) By disposing of the plant to Burrows and permitting them to remove it from the site the appellants deprived the respondent of the fruits of that claim and have thereby converted the plant; and this gives rise to a cause of action in that behalf in the respondent’s hands. (5) If these first four propositions are right, the learned judge below correctly ordered summary judgment for damages to be assessed, and was correct also to deny the appellants any right of equitable set-off in relation to their claim for damages for the company’s undisputed breach of contract: to allow such a set-off would effectively uplift the appellants (and by the ladder of their own wrongdoing vis-a-vis the respondent, namely their entering into the continuation contract) from the status of unsecured to secured creditors, which they are not.

16	Propositions (1), (2) and (3) are uncontentious. But Mr Etherton QC for the appellants would I apprehend lay heavy emphasis on the fact - also uncontentious - that any claim under s.234 would only have been, as it was put, in specie to recover the plant, not its value; and such a claim lay strictly in the hands of the respondent administrator, not the company, by virtue of s.395 of the Companies Act as it was applied to the facts of the case by this court in the earlier proceedings. As between the company and the appellants, clause 63(1) remained good. In his reply Mr Etherton accepted in terms that but for the continuation contract with Burrows the respondent could at the end of the works have gone against his clients under s.234.

17	The real issues in the case turn on the correctness or otherwise of propositions (4) and (5). Mr Etherton seeks to refute proposition (4) on two bases, one founded on the construction of the 1986 Act, the other on the substantive law relating to the tort of conversion. The construction argument is that the respondent, being a statutory administrator whose powers and functions are conferred in their entirety by the 1986 Act, has no right or authority to bring these proceedings in conversion, because they lie outwith the range of process which the 1986 Act permits him. The substantive argument is to the effect that on the facts there was never a moment in time when the respondent administrator was entitled to immediate possession of the plant; and a right to immediate possession is a necessary constituent of the cause of action in conversion.

18	I turn then to the construction argument. It was advanced by Mr Etherton along these lines. The respondent administrator qua administrator may only assert such rights of action in court as the 1986 Act allows him. He is a creature of the statute; and must therefore, as it were, live or die by the statute. He has no separate or free-standing rights. Accordingly, his rights to take proceedings in court can have no longer reach than those conferred by s.234 and Schedule I. These are the only avenues - more accurately, the only conceivably relevant avenues - to the courtroom which the statute allows him. But s.234 only confers a right in specie to recover property: it bites, and only bites, in the case where “... any person has in his possession or control any property” (subs.(2)). It cannot, therefore, authorise these proceedings for damages. As for Schedule I, the powers given by paras. (1) and (5) to take proceedings are limited by the terms of s.14(5), which I repeat for convenience: “In exercising his powers the administrator is deemed to act as the company’s agent”. So limited, the Schedule cannot afford the necessary vires for these proceedings: clause 63(1) of the company’s contract was at all material times good as against the company, so that at the end of the works the company would have enjoyed no claim whatever against the appellants in relation to the plant. The respondent administrator might have enjoyed such a claim only because of this court’s conclusion in the earlier proceedings that “the right to sell the plant and apply the proceeds... constituted an equitable charge which crystallised on notice of expulsion and was in the nature of a floating charge registrable under s.395...; that the failure to register the charge rendered the security created by the power of sale void as against the administrator” (emphasis added). But an agent cannot stand in bigger shoes than his principal. 

19	In reply Mr Etherton took another point on the Schedule. It was to the effect that whereas para. 1 is couched in general terms, para. 5 is much more specific or particular, and so by conventional canons of construction the former must give way to the latter. In consequence, he submitted, para 1 does not permit the administrator to take any form of proceedings other than what is authorised by para 5, that is “any action or other legal proceedings in the name and on behalf of the company”: so it is said that the administrator cannot bring these proceedings, as he has done, in his own name to claim a right not available to the company itself.

20	Before addressing Mr Wilmot-Smith’s responses to these submissions, it is convenient to canvass what I have called Mr Etherton’s substantive argument, which only arises if the construction issue does not conclude the case in his favour. The substantive argument proceeded as follows. A plaintiff in conversion must enjoy an immediate right to possession, exercisable at the time of the alleged act of conversion: Clerk & Lindsell, Torts, 17th edn paras 13-51,52. But as against the appellants, there was never a moment when the respondent administrator enjoyed such a right. Before the completion of the works clause 63 of the company’s contract allowed the appellants to retain and use the plant (or have Burrows use it). Their exercise of that right cannot possibly have amounted to a conversion of the plant. Nor can the relevant terms of the continuation contract, by which upon completion of the works title to the plant would purportedly pass from the appellants to Burrows: while the making of that contract by the appellants no doubt amounted to a denial of the title which (as this court held, by virtue of s.395 of the Companies Act) would enure to the respondent on completion of the works, denial of title is not of itself conversion - see Torts (Interference with Goods) Act 1977 s.11(3). In any event, submits Mr Etherton, the continuation contract was entered into at a time when, by virtue of clause 63, the respondent had no immediate right to possession. If its making were capable of giving rise to any claim against the appellants, it could only be by way of what Clerk & Lindsell (paras 13-166, 167) refer to as “reversionary injury”. Clerk & Lindsell have this passage (13-167):

“The action for reversionary injury lies... in respect of any act which would, but for the problem of the plaintiff’s lack of title to sue, amount to trespass, negligence, or conversion, provided it has the effect of depriving him... of the benefit of his reversionary interest... because [the goods] are wrongfully disposed of by a transaction whereby the disponee acquires a good title, so preventing recovery of them. But actual damage is necessary... except in so far as the plaintiff can prove it has destroyed his title or at the very least reduced his chances of recovering the goods, no damages are available.”

It was held in Mukibi v Bhavsar [1967] EA 473 that “the action can only be founded on damage, so that a reversioner can sue only if the chattel has been destroyed or if it has been so disposed of that a valid title to it has become vested in a third party” (headnote p.473). Based on this reasoning Mr Etherton’s argument is that the respondent can show no damage for the purpose of a claim for injury to his reversionary interest in the plant: his s.395 title, arising on completion of the works, was not destroyed or extinguished by Burrows’ rights which had effect between (and only between) them and the appellants in virtue of the continuation contract. There is no evidence that he could not have pursued a claim against Burrows in specie to recover the plant under s.234, at least if he had moved promptly upon completion of the works. Indeed Mr Etherton would presumably say that, assuming only that the goods remained whole, the respondent could recover them under s.234 from whoever possesses them.
       
21	And Mr Etherton would certainly insist that the transfer of possession of the plant, upon completion of the works, to Burrows (who proceeded to remove it from the site) was in the events which happened quite incapable of amounting to a conversion by the appellants; it may have been a conversion by Burrows.

22	Thus Mr Etherton submits that there is no stage in the relevant history of this affair at which as against the appellants the respondent had in his hands all the constituent elements of the cause of action in conversion, or the cognate tort of reversionary injury. 

23	In dealing with the construction argument Mr Wilmot-Smith accepts that s.234 confers only a right to recover property in specie, and cannot therefore constitute any statutory basis for the respondent’s claim in conversion. In my judgment this concession is plainly correct. Mr Wilmot-Smith submits, however, that the claim is properly brought under Schedule I para 1, read with ss.14(1)(a) and (b) and 17(1), which I have set out. He was of course confronted with Mr Etherton’s argument based on s.14(5). His response was to submit that the deeming provision there contained does not constitute the administrator the company’s agent simpliciter: it means only that for the purposes of Schedule I para 1 he does not act on his own behalf. Its effect, said Mr Wilmot-Smith, was no more than to confer locus or standing on the administrator so as to refute any suggestion, were it made, that he lacked the authority to take such proceedings under Schedule I para 1 as he properly thought fit. As regards the substantive argument, Mr Wilmot-Smith’s case is that the appellants converted the plant at the moment when, upon completion of the works, they handed it over to Burrows, as they had obliged themselves to do by the continuation contract. That was the very time at which (given the effect of s.395) the appellants were in truth obliged to transfer the plant to the respondent administrator. 

24	Mr Wilmot-Smith says that s.395 must be given some substantive effect: and its effect here was on the facts to confer on the respondent a clear - indeed, undisputed - right to recover the plant under s.234 if at the end of the works it had remained in the appellants’ hands. That right has been frustrated by the appellants’ own act, in entering into and carrying out those obligations in the continuation contract by which Burrows took the plant. Accordingly, unless the conversion claim is good (and no equitable set-off allowed), the appellants will by their own wrongdoing have promoted themselves to the status of secured creditor, which they had no business whatever to enjoy; and they will have set at nothing the effects of s.395 which the legislature must have intended. He cited British Eagle [1975] 1 WLR 758 for the proposition that the pari passu rule in bankruptcy and liquidation may not be avoided by private contract.

CONCLUSIONS
25	Upon the substantive argument Mr Wilmot-Smith did not, I think, cite distinct authority to refute the submissions advanced by Mr Etherton regarding the limited nature of any potential claim for reversionary injury. However if I considered that the legal principles which in truth lie at the root of this case required that the respondent be accorded the remedy he seeks, I would have been prepared to hold that as between A, B and C, A converts B’s goods when he (A) gives possession and purported title in the goods to C, notwithstanding that A’s obligation to C to do so had been undertaken at a time when B had no right to immediate possession. Likewise (as regards the construction argument) I would have looked for an interpretation of the 1986 Act which would have favoured the court’s receiving the respondent’s claim. 

26	In this case I have found the search for principle elusive, but am in the end clear that its answer lies in two areas of the legislature’s policy: (1) that relating to the powers and duties of administrators under the 1986 Act, and (2) that relating to the effects of s.395 of the Companies Act. 

The Legislative Policy Relating to Administrators
27	As for the first of these, the policy of the 1986 Act relating to the position of administrators was explained by Sir Nicolas Browne-Wilkinson VC as he then was in Paramount Airways [1990] BCC 130, 147G ff as follows:

“... the statutory purpose is to install an administrator, as an officer of the court, to carry on the business of the company as a going concern with a view to achieving one or other of the statutory objectives mentioned in sec. 8(3). It is of the essence of administration under Pt. II of the Act that the business will continue to be carried on by the administrator. Such continuation of the business by the administrator requires that there should be available to him the right to use the property of the company, free from interference by creditors and others during the, usually short, period during which such administration continues. Hence the restrictions on the rights of creditors and others introduced by sec. 10 and 11 of the Act. In my judgment in construing Pt. II of the Act it is legitimate and necessary to bear in mind the statutory objective with a view to ensuring, if the words permit, that the administrator has the powers necessary to carry out the statutory objectives, including the power to use the company’s property.”   

I should cite a further passage from the judgment of the Vice-Chancellor in that case, since it features in these proceedings in the reasoning of the learned judge below. It appears at 150B-D:
“... nearly all administrations will raise the question whether, for example, company vehicles subject to a repairer’s lien or goods consigned on the terms that the carrier has a lien on such goods can be withheld from the administrator unless he pays the debt in full.
If retention under such possessory lien does not require the leave of the court under sec. 11 [sc. of the 1986 Act], this will be an exception to the normal rule. The administrator will be forced either to seek to run the business without the chattels so retained or to pay in full and at once the amount owed to the lien holder. As in the present case, it may not be possible to run the business without the chattels. If the creditor claiming the lien is to be paid in full, he will be placed in a uniquely favourable position compared with all other creditors. During the administration an unsecured creditor cannot, without the leave of the court, enforce his debt by action so as to obtain immediate payment: sec. 11(3)(d). Secured creditors cannot appoint a receiver or enforce their security in any other way: sec 11(3)(b) and (c). The policy of the Act is plainly to impose a moratorium on the payment of debts save to the extent that the administrator chooses to pay (in order, for example, to obtain further supplies from a creditor) or the court so directs.”

At 156C-D, in a passage also referred to by the learned judge below, Woolf LJ as he then was said this:
“A person who comes into possession of goods lawfully is not guilty of conversion or other unlawful interference with those goods if he does not hand those goods over immediately he receives a demand from a person who is in fact entitled to possession of the goods. He is entitled to first take a reasonable time over verifying the right to the possession of the person who requires the goods to be handed over...”

Having set out this last passage the learned judge at first instance continued (approved note of judgment, p.11):
“It is implicit in this that if, after having taken a reasonable time... to verify the request, the person continues to refuse to hand over the goods to the administrator that person is liable in conversion. In this case the Council has not even retained the goods but sold them on without any right to do so.”

28	The judge considered that the two latter passages which I have cited from Paramount Airways entailed the conclusion that the position taken by the defendants/appellants would “defeat the statutory objective” of the 1986 Act (approved note of judgment, p.10), because it would mean that they would “be placed in a uniquely favourable position compared with all other creditors”. I do not agree. Neither passage, nor the first set out above in which the Vice-Chancellor describes the legislature’s overall purpose in enacting the provisions relating to administrators, suggests or implies any conclusion to the effect that an administrator whose only claim to the goods in question arises under s.395 of the Companies Act, by virtue of non-registration of a security, may maintain an action for damages for conversion under Schedule I of the 1986 Act against a party no longer in possession of the goods in question. The second passage from the Vice-Chancellor’s judgment deals with rival contentions as to the scope of application of.s.11(3)(c), which is not here in play. The passage from Lord Woolf was elaborated in the context of a potential problem relating to certain statutory rights arising under s.88 of the Civil Aviation Act 1982, which I do not find it necessary to describe, since it has nothing to do with any aspect of the present case. 

29	However Paramount Airways is with respect helpful in light of the first passage cited from the Vice-Chancellor’s judgment, in particular the opening statement: “... the statutory purpose is to install an administrator, as an officer of the court, to carry on the business of the company as a going concern with a view to achieving one or other of the statutory objectives mentioned in sec. 8(3). It is of the essence of administration under Pt. II of the Act that the business will continue to be carried on by the administrator”. There is no question whatever of these present proceedings being brought to enable the administrator to carry on the business of the company. By the time they were issued, as I have said in November 1997, it is plain and I understand undisputed that the company had no business. It had then and has now only creditors, and (through the respondent) this present claim. In that context it is, to say the least, a matter of some surprise that the administrator should have remained in office for so long as he has. Authority such as Barrow [1990] 1 Ch 227 (per Millett J as he then was) shows that an administration order should (I summarise the procedures involved) give place to a liquidation once it is clear that the company cannot be salvaged as a going concern. In Paramount Airways itself Harman J at first instance stated his view that an administration order was an emergency procedure intended to last for months only, or “occasionally it may be of a year” (139G).

30	No doubt it would be wrong to speculate, without evidence, why this particular administration has lasted so long. However what in my judgment emerges from this consideration of authority, in the context of the legislature’s purpose in enacting the administration provisions in the Act of 1986, is that nothing in the way of legislative policy can assist Mr Wilmot-Smith in any endeavour to stretch the procedural provisions of the Act so as to win the construction argument, or to stretch the requirements of the common law of conversion so as to win the substantive argument: if anything the contrary. Lord Browne-Wilkinson’s statement of principle in the first passage cited above from Paramount Airways is, as it seems to me, perfectly consistent with the appellants’ position in this litigation upon both arguments. But that conclusion does not of itself determine the merits of either of them.

31	Mr Wilmot-Smith would no doubt submit that even if the learned judge’s reliance on Paramount Holdings was misplaced, the merits of his case are not displaced: it remains the fact that to deny the administrator’s claim allows the appellants, by their own wrongdoing as against the respondent, unilaterally to translate their own status from that of unsecured to secured creditor. In order finally to engage with this submission, and arrive also at a conclusion upon the merits of the construction and substantive arguments, I find it convenient to go next to the second area of principle which I identified earlier, namely that which relates to the effects of s.395 of the Companies Act. 

S.395 of the Companies Act
32	In this context it is useful at once to emphasise what I regard as a key circumstance in the case, namely that as between the company and the appellants clause 63(1) of the company’s contract remained good at all material times. It is worth having in mind the case of Re Monolithic Building Co [1915] 1 Ch 643, which concerned s.93 of the Companies (Consolidation) Act 1908. For all presently relevant purposes s.93 was a predecessor of s.395, from whose language it did not materially differ. Phillimore LJ said this at 667:

“We have to construe s.93 of the statute. It makes void a security; not the debt, not the cause of action, but the security, and not as against everybody, not as against the company grantor, but against the liquidator, and against any creditor, and it leaves the security to stand as against the company while it is a going concern. It does not make the security binding on the liquidator as successor of the company.”

On the facts here, the failure to register the floating charge, which as this court found was constituted by clause 63, in my judgment conferred on the respondent administrator a purely adventitious potential claim in specie to recover or retain the plant as against the appellants if it lay in their hands after completion of the works. This inchoate claim had nothing to do with the true state of account between the company and the appellants as it would fall to be ascertained for the purposes of a just and reasonable approach to the administration or, were it to arise, and having regard to Rule 4.90 of the Insolvency Rules, the liquidation of the company. The account between the company and the appellants must always have included or involved the value of the appellants’ unquestionable claim for damages for breach of contract. As Mr Etherton submitted, had there been no clause 63 but the appellants had in fact sold or transferred the plant to Burrows (thus converting it as against the company), any claim for damages then issued by the company against the appellants would plainly have been met by a set-off raising the appellants’ damages claim, and there would in my judgment have been no answer to such a set-off.  

33	This adventitious claim in the hands of the respondent, as I have described it, arose through the combined effects of s.395 of the Companies Act and s.234 of the 1986 Act. Had the respondent found the plant in the appellants’ possession after completion of the works, s.395 would have allowed him to recover it in specie through the procedural avenue of s.234, because the appellants’ claim to it, dependent as it must have been on clause 63(1), was bad against him. But the existence of this opportunity to take advantage of the ineffectiveness of the appellant’s floating charge - on the facts nothing but statutory serendipity - is one thing. It is quite another to assert that once that opportunity is gone the respondent is entitled to compensation for its loss. Yet that is what these proceedings in conversion amount to. The superficial attraction of Mr Wilmot-Smith’s case rests (and I have referred to it more than once) in the seeming translation of the appellants from unsecured to secured creditors, lifted to that status by no stronger pulley than their contract with Burrows which was or should have been ineffective against the respondent. But the case is only seductive for so long as one is caught in the trap of supposing an identity between the putative state of account between the appellants and the administrator and the actual state of account between the appellants and the company. There is no such identity. And it is the latter state of account which matters for the purpose of assessing the merits of the respondent’s case. That state of account, between the appellants and the company, would always have marked up the appellants’ claim against the company on one side of the balance. 

34	It follows in my judgment that the appellants’ case in these proceedings entails no special or unique advantage to be enjoyed by them, and with respect the learned judge below was wrong to hold otherwise. If, as I would conclude, the appellants are not liable to the respondent to pay damages for conversion, the result as between them and the company is the same as it must always have been unless the respondent had been in a position to take advantage of the failure of the appellants’ security as against him. In the events which happened, he was in no such position. I accept - as indeed did Mr Etherton - that that is in virtue of the continuation contract between the appellants and Burrows. But it is plain that there is no question of that contract having been entered into as a deliberate ploy to frustrate the respondent’s potential s.234 claim to the plant. Had it been otherwise and such a device were shown on the evidence to have been in contemplation, I might have taken a different view of the case; but it is unnecessary to give any further consideration to that.

The Construction and Substantive Arguments		
35	Mr Etherton’s submissions upon what I have called the construction and substantive arguments, looked at in isolation from the broader questions of the case’s merits which I have examined, possessed in my judgment much greater force than their opposing counterparts, with one exception: I do not consider that on the true interpretation of paras 1 and 5 of Schedule I, the administrator’s power to bring proceedings under para 1 is limited so as to apply only to legal proceedings in the company’s name. Upon this narrow point (whose resolution will not affect the result in the case) Mr Etherton’s argument mistakes the relevant rule of construction. It is not to the effect that the more general provision has to be confined to the scope of the more particular: it is, rather, that the scope of the particular is not to be cut down by the terms of the general provision. The Latin makes it clear: generalia non specialibus derogant (see also McPhail v Lothian Regional Council 1981 SLT 173, discussed in the respondent’s further written argument submitted after the hearing, to which I refer below). Otherwise, however, Mr Etherton’s submissions upon the construction and substantive arguments are in my judgment well-founded. In particular I consider (a) that s.234 was weapon enough in the administrator’s hands to take advantage, if he could, of the effects of s.395 in a case like the present: there is no basis for stretching Schedule I (read with s.14(5)) to confer ancillary or consequential rights upon him; and (b) I entertain no doubt but that the decision in Mukibi v Bhavsar is good in the law of England. It is wholly consistent with the reasoning of their Lordships’ House in Leigh & Sillavan v Aliakmon [1986] AC 785. 

Further Argument		
36	It will be apparent that these brief conclusions as to the construction and substantive arguments are animated by my overall judgment that nothing in what may, perhaps crudely, be called the equities of the case militates in favour of the respondent’s position as it was upheld by the learned judge below. In all those circumstances I would be content simply to hold that on the facts no action in conversion lies in the respondent’s hands against the appellants, and to allow the appeal accordingly. I am conscious however that we have had the benefit of submissions, written and oral, as to the law of equitable set-off, and in addition further written submissions, prepared after the close of argument at the request of the court, dealing with certain cases decided in the Court of Session and noted in Palmer’s Company Law (vol. 3 para 14.035). It appeared that the Scottish cases might throw light on the question whether, assuming that the respondent enjoyed a cause of action in conversion, the court should allow or deny a right of equitable set-off to the appellants in respect of the damages owed by the company to them; and what might be the impact of Rule 4.90 of the Insolvency Rules (which I have set out).

37	Mr Wilmot-Smith and his junior Mr Maclean have produced a very helpful note on the Scottish cases. In Taylor 1982 SLT 172, Lord Ross sitting in the Outer House had to deal with a question concerning s.15(1)(a) of the Companies (Floating Charges and Receivers) (Scotland) Act 1972, which was a predecessor of, or contained closely similar provisions to, the measures set out in Schedule I para 1 of the 1986 Act. He held that s.15(1)(a) did not empower a receiver to sue a debtor of the company: the property of the company did not vest in the receiver. The respondent says that this was a misinterpretation of the Act, but if it was not, Lord Ross’ conclusion is anyway distinguishable from the present case. The distinction is driven by s.17 of the 1986 Act, which obliges the administrator to get in all the company’s property. “Property” is accorded a wide meaning by s.436 and includes things in action. Then in Myles J Callaghan 1988 SLT 227 Lord Prosser (also sitting in the Outer House), dealing with a receiver’s claim based on a pre-existing contract between the company and another party, held (229-230) that:
“... the company and only the company is the proper person to seek payment of any debt in terms of such a pre-existing contract... In such a case it is for the company to vindicate its rights... it appears to me that the appropriate action would require to be raised in the name and on behalf of the company.”

38	I have dealt with these two cases exiguously, and Mr Wilmot-Smith and Mr Maclean discuss other Scottish authorities besides. In the end, while I am grateful to counsel for their research, this learning is in my opinion of no real assistance in the present case. If the company had any claim to the plant, the position would no doubt be very different. But as matters stand I do not consider that any issues relating to set-off realistically arise. For all the reasons I have given I am clear that the respondent cannot maintain a claim in conversion in the first place. If that is wrong, I would certainly allow a set-off, so as to reflect the true accounting position between the company and the appellants, which is at the heart of the case. 

***

39	I would allow the appeal. I would think it follows, if my Lords agree, that the action should be struck out, but we have not heard argument as to relief. 

Lord Justice Ward:

I agree.

Lord Woolf MR:

I also agree and invite argument on what should be the result.

Order
1.	Appeal allowed with costs here and below.
2.	Action struck out.
3.	Leave to appeal to the House of Lords refused.
4.	Stay on enforcement of costs allowed.
Order does not form part of approved judgment.