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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Clydesdale Bank Plc, Re Application For Sequestration [2000] ScotCS 81 (24 March 2000) URL: http://www.bailii.org/scot/cases/ScotCS/2000/81.html Cite as: [2000] ScotCS 81 |
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OUTER HOUSE, COURT OF SESSION |
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OPINION OF LORD NIMMO SMITH in Petition of CLYDESDALE BANK PLC Petitioner; FOR SEQUESTRATION OF THE ESTATES OF GRANTLY DEVELOPMENTS Respondent:
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Petitioner: Haldane; Dundas & Wilson, C.S.
Respondent: Sir Crispin Agnew of Lochnaw Q.C.; Robsons, W. S., S.S.C.
24 March 2000
[1] The petitioner is Clydesdale Bank plc ("the Bank"). The respondent is the firm of Grantly Developments ("the firm"), which has a place of business at an address in Glasgow and has had an established place of business in Scotland for at least a year immediately preceding the presentation of this petition, so that for present purposes it is subject to the jurisdiction of this court. In terms of the petition the Bank seeks sequestration of the estates of the firm in accordance with the provisions of the Bankruptcy (Scotland) Act 1985 (as amended) ("the Act"). The Bank has advanced certain monies to the firm by way of term loans and development loans for the purposes of its business. The terms and conditions applicable to the said loans provide inter alia that the sums advanced to the firm shall be repayable on demand. As at 2 February 2000 the sums due and outstanding in terms of the said loans amounted to £778,065.07. A charge for payment of the said sums was served upon the firm on 15 February 2000. No payment has been made consequent thereon. The petitioner is a creditor of the firm in the total sum of £778,203.17 conform to the relative creditor's statement, registered for preservation and execution in the Books of Council and Session on 3 February 2000, and extract charge for payment vouching the debt, which have been lodged as productions. No payment has been made by the firm of the debt following service of the charge for payment upon it. The days of charge have now expired. The firm is accordingly apparently insolvent within the meaning of section 7(1)(c)(ii) of the Act. The Bank avers that the estates of the firm are liable to be sequestrated under and in terms of the Act. The question for me to decide is whether an award of sequestration should now be made.
[2] In seeking to oppose an award of sequestration the firm has put a number of matters in issue, so I need to say a little more about the overall context. The firm has two partners, Richard William Crocket and Graham Duffy. It carries on business as a developer of heritable property. Its major assets are in residential housing developments at Kirk Road, Carmunnock, and Manse Road, Glasgow, both of which are still incomplete. The Bank holds security by way of standard securities over these properties. The Bank also holds standard securities granted by Mr Crocket and his wife and by Mr Duffy and his wife over certain properties owned by them personally. The Bank has served calling-up notices in respect of all these standard securities. The firm and Mr Crocket and Mr Duffy as its partners, Mr and Mrs Crocket as individuals and Mr and Mrs Duffy as individuals have raised an action against the Bank in this court concluding for payment by the Bank to the firm of £3 million as damages for inter alia alleged breach of contract on the part of the Bank and for declarator that the calling-up notices are null, void and of no effect, for suspension of the calling-up notices and for interdict and interim interdict of the Bank from exercising or attempting to exercise any of the powers granted to it by the Conveyancing and Feudal Reform (Scotland) Act 1970 in respect of the calling-up notices. By interlocutor dated 28 January 2000 Lord Eassie refused a motion for interim suspension and interim interdict in terms of these conclusions, holding that the pursuers in that action had failed to put forward any prima facie case for preventing the Bank from exercising its rights under the standard securities. No reclaiming motion against that interlocutor has been marked. As I understand it, the intention is that that action should proceed, at least in respect of the claim for damages. Mr and Mrs Duffy occupy a villa which has been constructed by the firm at 4 Manse Gardens. The villa belongs to the firm and is subject to one of the standard securities in favour of the Bank. The Bank has commenced proceedings in Glasgow Sheriff Court for possession of the villa. I was not informed of the detail of these proceedings, but I understand that they are being opposed by Mr and Mrs Duffy.
[3] As I have indicated, the present petition is for sequestration of the estates of the firm. Only the firm is referred to in the instance and the prayer. In terms of the Schedule, service of the petition is sought in common form upon inter alios Mr Crocket and Mr Duffy. A number of documents were lodged as productions along with the petition, but not the oath by the creditor under section 11(1) of the Act. By interlocutor dated 2 March 2000 Lord Macfadyen appointed the petition to be intimated on the walls in common form and to be served upon the persons named and designed in the Schedule thereto; granted warrant to cite the firm by serving upon it a copy of the petition and interlocutor and appointed the firm, if so advised, to appear within this court on 16 March 2000, being a date not less than six nor more than fourteen days after the date of citation, to show cause why sequestration should not be awarded; and appointed Duncan Donald McGruther, C.A., Glasgow, to be interim trustee on the estates of the firm with the powers and duties prescribed by the Act. The application came again before Lady Paton on 16 March 2000, when it was indicated that the firm intended to show cause why sequestration should not be awarded, and it was continued to 17 March 2000, when it came before me. By that time answers and productions had been lodged on behalf of the firm. In addition, an oath sworn by a person authorised to act on behalf of the Bank on 16 March 2000 was lodged (as no. 6/9 of process) on the morning of 17 March and was in process by the time that the application came before me. During the course of the hearing a summons in an action in this court at the instance of the firm and Mr Crocket and Mr Duffy as its partners against the Bank, Mr McGruther and the Scottish Ministers was signetted. In terms of that summons the pursuers conclude for production and reduction of Lord Macfadyen's interlocutor dated 2 March 2000, for suspension ad interim of the said interlocutor pending a determination of the claim for reduction, alternatively for suspension ad interim of the nomination and appointment of Mr McGruther as interim trustee and for interdict and interim interdict of the Bank from taking any further steps in the present petition pending a determination of the claim for reduction aforesaid. After it was established that Mr McGruther and the Scottish Ministers had indicated that they had no interest in the proceedings, a motion for interim suspension and interim interdict came before me. In due course, having heard counsel, I continued the hearing in the petition for sequestration until today, so that I could give full consideration to counsel's submissions, and I refused in hoc statu the motion for the interim orders concluded for in the summons signetted on 17 March 2000. I see no need to go further into the terms of that summons. The grounds upon which it proceeds appear to me to be identical to those upon which the firm seeks to resist an award of sequestration, and I have difficulty in seeing what contribution to an already complicated procedural situation the raising of a fresh action is supposed to make.
[4] There is no dispute about the firm's apparent insolvency, constituted as aforesaid. Section 12(3) of the Act provides inter alia that where, on a petition for sequestration presented by a creditor, the court is satisfied of various matters, it shall, subject to subsection (3A), award sequestration forthwith. The only further provision of subsection (3) which it is necessary to mention is paragraph (b), which requires the court to be satisfied that the petition has been presented in accordance with the provisions of the Act; it is not in dispute that the remaining provisions of the subsection, so far as applicable, have been complied with. Subsection (3A) provides that sequestration shall not be awarded in pursuance of subsection (3) if inter alia (a) cause is shown why sequestration cannot competently be awarded or (b) the debtor "forthwith pays or satisfies, or produces written evidence of the payment or satisfaction of, or gives or shows that there is sufficient security for the payment of" the debt in respect of which he became apparently insolvent. Prior to the amendment of section 12 by the Bankruptcy (Scotland) Act 1993, section 4, the provision I have quoted did not include the words "or shows that there is".
[5] Counsel for the firm challenged the competency of the petition in respect of (1) the instance and (2) the oath. I shall deal with these issues in turn. Counsel submitted that the instance was incompetent because it omitted any mention of the partners of the firm. He referred to Sea Insurance Co of Scotland &c v Gavin &c (1827) 5 S. 375/348 and Antermony Coal Co Ltd v Wingate & Co (1886) 4 M. 1017 in support of an argument that where a firm with a descriptive name is party to a litigation it should sue and be sued not only in its descriptive name but in the names of its partners, if two or three in number, or of three of its partners, if more than three in number. This, he submitted, was not a trivial matter, as in Yule v Jewson Ltd 1991 S.L.T. 291 where there had been a mistake in the spelling of the debtor's surname, and the need for a high degree of accuracy in proceedings such as this, which was recognised in that and other cases, meant that the defective description of the firm rendered the petition incompetent.
[6] I reject this submission. Section 4(2) of the Partnership Act 1890 provides that in Scotland a firm is a legal person distinct from the partners of whom it is composed. Section 6(1) of the 1985 Act provides that, subject to subsection (2) the estate belonging to or held for or jointly by the members of any of certain specified entities may be sequestrated. These include (b) a partnership. Subsection (2) does not apply to the circumstances of the present case. Subsection (4) provides that the sequestration of the estate of a partnership shall be on the petition of (a) the partnership, with the concurrence of a qualified creditor or qualified creditors or (b) a qualified creditor or qualified creditors, if the partnership is apparently insolvent. Subsection (5) provides that a petition under subsection (4)(b) may be combined with a petition for the sequestration of the estate of any of the partners as an individual where that individual is apparently insolvent. There is no suggestion whatever in these provisions that the petition requires to name any of the partners of a firm, whether or not with a descriptive name, when seeking sequestration of the firm's estate. Indeed, in The Royal Bank of Scotland plc v J & J Messenger 1991 S.L.T. 492 it was held that, statutory exceptions apart, sequestration could only be awarded in respect of the separate estate of a distinct legal persona and that it was quite inappropriate and indeed incompetent to sequestrate jointly the estate of a partnership and the estates of individual partners. Counsel for the firm sought to rely on passages in chapter 4 of McBryde, Bankruptcy, (2nd edn), in support of his submission about the need to name the partners of the firm, but I can find nothing there to support this approach. On the contrary, in paragraphs 4-20ff Professor McBryde clearly distinguishes between a petition for sequestration of the estate of a partnership alone and a petition or petitions for sequestration of both the estate of the partnership and the estates of the individual partners. There appears to me to be a clear distinction between the position at common law where a firm with a descriptive name is suing or being sued in an ordinary action and a petition brought within the statutory framework provided by the Act. Moreover, in a petition such as this the purpose of the instance is to state by whom the application is made and to give an indication of the nature of the remedy sought. The remedy is then set out at length in the prayer. The respondent, in this case the debtor, receives service of the proceedings by virtue of being named in the schedule for service and the granting of the first order. Other persons who may have an interest in the proceedings, like Mr Crocket and Mr Duffy, may also be named in the schedule for service and accordingly receive service of the petition pursuant to the first order and may lodge answers. This is quite unlike the procedure in an ordinary action. As it happens, Mr Crocket and Mr Duffy have chosen not to lodge answers, the only answers which have been lodged being those on behalf of the firm. The Bank, as petitioning creditor, appears to me to have done all that is required of it in terms of the Act and the procedure applicable to petitions such as this in stating that the petition is for the sequestration of the estates of the firm under its descriptive name and without introducing the partners, sequestration of whose estates as individuals is not sought, except in the manner I have mentioned.
[7] I turn now to the oath. Section 11(1) of the Act provides inter alia that every creditor, being a petitioner for sequestration, shall produce an oath in the prescribed form made by him or on his behalf. The prescribed form is to be found in the Bankruptcy (Scotland) Regulations 1985 (as amended) as Form 2 in the Schedule. Section 11(4) provides that if the oath contains any error or has omitted any fact, the court to which the petition for sequestration was presented may, at any time before sequestration is awarded, allow another oath to be produced rectifying the original oath. Subsection (5) provides that every creditor must produce along with the oath an account or voucher (according to the nature of the debt) which constitutes prima facie evidence of the debt; and a petitioning creditor shall in addition produce such evidence as is available to him to show the apparent insolvency of the debtor. As I have said, the oath in the present case was not produced until 17 March 2000, but was in process during the hearing before me. Counsel for the firm referred to passages in Goudy, Bankruptcy, (4th edn),, pp. 129-130, in support of a submission that on a proper construction of section 11(1) the oath must be produced along with the petition. This, he submitted, was a mandatory requirement and could not be cured by subsequent lodging. Counsel said that there was some support for this approach in Lord Advocate v Thomson 1995 S.L.T. 56, where at p. 61 J-K the Second Division found it unnecessary to consider a question arising in relation to section 11(5); he submitted, however, that the remainder of the Opinion supported the view that the procedural requirements are mandatory. Counsel acknowledged that Bell v McMillan 1999 S.L.T. 947 was against him on this point. In that case Lord Osborne held that an award of sequestration was not rendered incompetent by the fact that an oath in the prescribed form had not been lodged when the award was made, and that it was open to the sheriff to waive the failure to lodge the oath timeously under section 63 of the Act, which empowers the sheriff to cure defects in procedure. Counsel for the firm submitted that Lord Osborne's decision was wrong, in light of the passages in Goudy, Bankruptcy, on which counsel relied. In any event, he submitted that in terms of section 63 only the sheriff, and not this court, had power to cure defects in procedure. Counsel for the Bank, on the other hand, submitted, under reference to section 11(4), Bell v McMillan, and the decision of Lord Caplan in Pattison v Halliday 1991 S.L.T. 645, that it was quite clear that there was no mandatory requirement to lodge the oath at the same time as the petition. The opportunity for allowing another oath to be produced, in terms of section 11(4), and in any event for curing defects in procedure, under section 63, showed that an oath might be lodged at a later date than the presentation of the petition, either for the first time or in substitution for another oath. I agree with this submission. It is sufficient for present purposes for me to say that in my opinion it is sufficient compliance with the Act that the oath was lodged at a time which enabled me to consider it along with the other statutory requirements in deciding whether sequestration can competently be awarded. Although the approach in Lord Advocate v Thomson might justify a refusal to grant the usual first order where the oath has not been lodged, that does not mean that where a first order has been pronounced before the oath is lodged the whole proceedings are rendered fundamentally incompetent, as counsel for the firm sought to argue. On the contrary, I am satisfied that the provisions of the statute have been sufficiently com
[8] A further point which counsel for the firm sought to make about the oath arises from the terms of the prescribed form, which requires inter alia that information be given about any security held in respect of the debt or debts. Note (4) states:
"Specify the nature and value of any security held in respect of the debt or debts. For the purposes of the petition for sequestration, the value of any such security need not be deducted from the amount of the debt claimed. Security is defined for the purposes of the Bankruptcy (Scotland) Act 1985 as meaning 'any security, heritable or moveable, or any right of lien, retention or preference'."
The oath which has been lodged in the present case gives details of four standard securities in favour of the Bank over various heritable properties, including those at 9 Kirk Road, Carmunnock and 11 Manse Road, Glasgow, stating that each of them is "for all sums due and to become due" and giving the dates of execution and registration of each of them. Counsel for the firm submitted that this form of words was not what was required by Note (4) in the prescribed form, which I have quoted, and that this rendered the oath and in turn the proceedings incompetent. I have already expressed my view about the effect of a failure to lodge the prescribed form timeously, and a fortiori the lodging of an oath which in some particular is not in the prescribed form does not in my opinion render the proceedings competent. In any event, Note (4) can only apply where it is possible to place a value on the security and, if that is not possible, there can be no requirement for it. For reasons which will become apparent, there is ample scope for dispute about the current market value of the security subjects, and when it might be realisable. Counsel for the firm submitted that at least an estimate required to be given to enable the oath to be completed in proper form, but in the circumstances of this case I think that it is sufficient compliance with the relevant requirements that the information about the standard securities which I have quoted should be given. It is to be observed that Note (4) requires specification of "the nature and value of any security held in respect of the debt or debts", which is not necessarily the same as the nature and value of the security subjects. In my opinion the nature of the standard securities is sufficiently specified by giving the usual details of the creditor, the subjects and the dates of execution and registration, and that they are "for all sums due and to become due". The value of each security is thus related to the amount of the debt, of which details are given elsewhere in the oath.
[9] I am thus satisfied that the petition has been presented in accordance with the provisions of the Act and that no cause has been shown why sequestration cannot competently be awarded.
[10] I turn now to a further point taken by counsel for the firm, under reference to the provisions of section 12(3A)(b) of the Act. Counsel submitted that the existence of the standard securities enabled the firm to show that there was sufficient security for the payment of the debt in respect of which it had become apparently insolvent. Counsel for the Bank referred to a series of cases in which issues arising from the provisions of section 12 (prior to its amendment by the 1993 Act) had been considered: The Royal Bank of Scotland plc. v Forbes 1988 S.L.T. 73, Drybrough & Co Ltd, Petitioners, 1989 S.C.L.R. 279, Bank of Scotland v Mackay 1991 S.L.T. 163 and National Westminster Bank plc v W. J. Elrick & Co 1991 S.L.T. 709. While the question whether it could ever be open to the debtor to rely on a pre-existing security had been resolved by the amendment of section 8, counsel for the Bank submitted that the amendment did not detract from what could otherwise be taken from the cases. She relied in particular on National Westminister Bank plc v W. J. Elrick & Co, in which Lord Kirkwood considered the earlier cases and held inter alia that a debtor who was apparently insolvent could resist an award of sequestration if the debt was paid or if he was able to satisfy the court that the creditor had been or could be given sufficient valid security to cover the debt, which he would do if the court were satisfied that the security was valid, covered the whole of the outstanding debt and would result in the whole debt being paid without undue delay; that the Act envisaged that an early decision be taken on whether sequestration should be awarded; and that in the circumstances of that case the court could not be satisfied that the standard securities, which were granted some years earlier and the values of which were in dispute, constituted "sufficient security for the payment of" the debt. He accordingly awarded sequestration. Counsel for the firm submitted that this approach was wrong. As I understood his submission, a debtor who had granted a standard security was entitled to more time to enable him to take steps such as the firm proposed to do here, which was either to constitute its claim for damages against the Bank or alternatively to have time to refinance the debt owed to the Bank. He submitted that the security contemplated by the Act was such as would give security to the creditor while steps such as these were taken.
[11] I am bound to say that I have found some difficulty in following this argument. Section 12(3A)(b) of the Act makes it clear that the debtor can only escape an award of sequestration if he forthwith inter alia pays the debt or gives or shows that there is sufficient security for the payment of the debt (my emphases). This is not a form of words which is intended to enable the debtor to buy time in the hope that something will turn up. There can be little scope for Micawberism in the application of bankruptcy legislation and procedures. In my opinion the correct approach is as laid down in the cases referred to by counsel for the Bank, and in particular National Westminister Bank plc v W. J. Elrick & Co, and a standard security is only sufficient security if it is capable of realisation forthwith and will accordingly result in payment of the whole debt without undue delay. I accordingly reject the submission that the firm is entitled, given the existence of the standard securities, to have further time during which it can take the further steps proposed by counsel. It is to be noted that counsel expressly did not submit that the claim for damages by the firm against the Bank could be set off against the debt owed to the Bank, and consistently with this he did not dispute that apparent insolvency had been established. Nor did he suggest that all the security subjects were capable of being sold forthwith.
[12] In light of this, it does not seem to me to be necessary to go into the detail of various valuations which were lodged on behalf of the firm, and which were not accepted by the Bank as representing the current market value of all the security subjects. Counsel for the firm sought to demonstrate that, if all the security subjects were sold for the amounts given in the valuations, the debt could be paid. This however depends on a number of events, most obviously the emergence of purchasers willing to pay the prices indicated by the valuations. There is an obvious difficulty about the villa presently occupied by Mr and Mrs Duffy. The villa would require to be sold for about £200,000, along with the remainder of the security subjects, for the debt to the Bank to be paid. As appears from the valuation relating to it, a swimming pool has yet to be completed, and the value of £200,000 is dependent on this. No indication was given as to when this would be done. Moreover, the villa could only be sold if Mr and Mrs Duffy were willing to vacate it, which is not their current position, as I have already mentioned. Counsel for the firm suggested, indeed, that Mr and Mrs Duffy were trying to raise the money to buy the villa themselves. Counsel also mentioned that the firm itself was seeking to refinance the developments. He referred to a letter (which was not lodged) from a broker, indicating that a loan or loans might be available from an unnamed lender or lenders. No reason was given to me why I should regard this as a realistic prospect, which would enable the firm's debt to the Bank to be paid off forthwith, particularly as I understood that the proposal was conditional upon recall of the appointment of the interim trustee. I am entirely satisfied that, following what in my view is the correct approach, the firm has failed to bring itself within the provisions of section 12(3A)(b) of the Act. Accordingly, I am bound to award sequestration in accordance with section 12(3).
[13] One remaining issue relates to the identity of the person who should be appointed as permanent trustee. I have already mentioned the appointment of Mr McGruther as interim trustee. As well as being a chartered accountant he is a licensed insolvency practitioner and he complies with all the formal requirements for appointment. What was said to be the difficulty about his appointment is that he is a member of Grant Thornton, C.A. Counsel for the firm told me that the firm had consulted someone else in the same office of Grant Thornton about its current difficulties, which placed Grant Thornton in a confidential relationship with the firm. Although it was not suggested that Mr McGruther had had any direct involvement in this, or indeed knew anything about it, counsel submitted that "he comes with the baggage of his firm" and that this precluded him from appointment as permanent trustee. I do not regard this as a real difficulty. The appointment of an interim trustee or a permanent trustee is in every case the appointment of an individual, and the question must be whether circumstances exist which might affect his ability to perform his statutory functions (under section 2(4) of the Act in the case of an interim trustee and under section 3(1) in the case of a permanent trustee). No doubt it depends on the circumstances of each particular case whether a particular person is or is not suitable for appointment, but in the circumstances of the present case I have no reservations about Mr McGruther's appointment. Situations such as this are bound to arise from time to time when there are a relatively small number of large firms of accountants, and it would in my view require some form of direct personal involvement giving rise to a conflict of interest in the individual before it would become necessary to regard him as unsuitable for appointment. I shall accordingly appoint Mr McGruther as permanent trustee. I would add that counsel for the firm put forward the name of another licensed insolvency practitioner who was qualified and willing to accept appointment as permanent trustee. While intending no criticism of him, I think that the appropriate course, where there is a dispute about the appointment of the person named by the petitioning creditor, is for the court to make its own selection rather than choose one of two rival nominees.
[14] For these reasons I shall therefore repel the pleas-in-law for the firm and grant the prayer of the petition.