Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 54
CA190/09	OPINION OF LORD HODGE in the cause GRAHAM HUNTER MARTIN AND LAURIE KATHERINE MANSON JOINT LIQUIDATORS OF SIMCLAR (AYRSHIRE) LIMITED Pursuers; against (1) SIMCLAR GROUP LIMITED (2) JOHN IAN DURIE (3) STEPHEN PETER DONNELLY AND (4) SAMUEL JOHN RUSSELL Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: Dean of Faculty, Q.C., Walker; MacRoberts LLP

Defenders: Johnston, Q.C., Munro; Semple Fraser LLP

22 March 2011

[1] The pursuers are the joint liquidators of Simclar (Ayrshire) Limited ("SAL") and SAL. The defenders are Simclar Group Limited ("SGL"), which is the ultimate holding company of SAL, and the former directors of SAL.

[2] The pursuers aver that in October 2006 SAL sold its shares in its Chinese subsidiary, Simclar (Tianjin) Limited ("Tianjin"), to SGL. Under that agreement SGL became liable to SAL for a debt of £3.3 million due by Tianjin to SAL. The pursuers challenge the lawfulness of a dividend of £3 million which SAL declared in June 2006 and purported to implement in October 2006 by setting it off against SGL's liability to SAL for the Tianjin debt. The pursuers seek payment of £3 million from the defenders.

[3] SGL and the former directors have defended the action. One of their defences is the plea that the pursuers have no interest to sue. The defenders argue that there is no purpose in the action because any sums recovered by the pursuers will have to be paid back to SGL. In accordance with the maxim, frustra petis quod mox es restiturus, the law would not allow circularity of action. The averred facts and undisputed information, which are relevant to the plea, are as follows.

[4] The directors of SAL appointed joint administrators to the company by notice of appointment dated 29 January 2007. Shortly thereafter, SGL on 8 February 2007 undertook to pay the Bank of Scotland ("the Bank") on its demand all sums which SAL owed to the Bank

"to the extent (and solely to the extent) that such amounts owing to BoS are not recovered by BoS from SAL."

SGL gave this undertaking in the context of the contemporaneous grant by the Bank to it and other related companies of a working capital facility of £8,420,000 and the purchase by SGL of SAL's assets from the joint administrators of SAL. At the commencement of the administration SAL owed the Bank approximately £12 million, for which SAL had granted a security over its assets by a floating charge. At the end of the administration approximately £4.2 million of that debt remained outstanding. The joint liquidators were appointed on 21 February 2008 on a petition for winding up by the landlords of the premises which SAL occupied. The landlords are funding the liquidation. At the start of the liquidation the joint liquidators estimated the shortfall for ordinary creditors at approximately £23 million.

[5] The Bank demanded from SGL £5,198,989.20 as the outstanding amount due by SAL, and SGL paid that sum on 29 January 2008. The defenders have produced vouching of that demand and SGL's payment of that sum, which included interest and costs which the Bank was not entitled to recover from SAL in its administration. By letter dated 2 December 2008 the Bank advised the pursuers that it did not have:

"any current shortfall following the administration of [SAL] as we have been reimbursed by [SGL] pursuant to an arrangement which it entered into which was to meet any shortfall remaining following the Ayrshire administration."

[6] This action was raised in December 2009. On about 19 May 2010 the Bank assigned to SGL all right, title and interest in and to the floating charge which SAL had granted to it in August 2002. The assignation narrated that SGL had paid the Bank an amount equal to SAL's debt outstanding at the conclusion of the administration. SGL intimated the assignation to the pursuers on 27 May 2010 and in October 2010 claimed £4,396,225 in the liquidation.

[7] The defenders aver:

"Accordingly, esto the claim for payment of £3 million (either as directed against the first defender or as directed against the Directors) has any merit, which is denied, any sums recovered by the pursuers will be payable to the first defender."

The parties agreed that this defence and the related plea of no interest to sue should be debated as a preliminary issue before the parties spent further sums in exploring the other issues in the action.

The submissions of the parties
[8] The Dean of Faculty advanced two alternative legal analyses on behalf of the pursuers.

[9] First, in his written note of argument, he submitted that SGL's payment to the Bank had discharged the principal debt, that the pursuers had ratified that discharge and that the Bank accordingly had no claim in the liquidation which it could assign to SGL. He argued that debt was a bilateral contract and that SAL had to consent or ratify the discharge of its debt. The pursuers had done so as they did not list the Bank as a creditor after they had written to it to enquire if it was a creditor and had received the reply dated 2 December 2008. The case of McCutcheon v McWilliam (1876) 3 R 565, to which the defenders referred in their first note, could be distinguished on its facts; in any event, if the assignation of the charge were sufficient to transfer an underlying debt, in this case the debt no longer existed. If, which was denied, SGL had a claim against SAL on the basis of unjustified enrichment, it was only as an unsecured creditor. However in his oral submissions, he observed that the defenders had not advanced the argument that the assignation of the charge carried the debt and he departed from the argument that SAL had consented to SGL's payment of the debt to the Bank. He submitted, on the contrary, that that payment was part of a private arrangement between SGL and its bankers which SGL had entered into in its own interests and that SAL had no part in it.

[10] Secondly, he submitted that if SAL's debt to the Bank had not been discharged and the Bank remained the first ranking creditor, SGL was not subrogated to the Bank's claim as its payment to the Bank was voluntary. SGL was neither a cautioner of SAL nor a co-obligant. SGL's decision to repay its subsidiary's debt to the Bank was driven by its own commercial interests and was simply a voluntary payment. As such it gave rise to no equitable claim for relief: Owen v Tate [1976] 1 QB 402. SAL was not consulted on the arrangement. SGL did not intend to confer a benefit on SAL; it made the payment in its own commercial interest to protect its group's banking facilities in the context of the pre-pack administration of SAL. In his written note of argument it was argued that there was no valid claim for SGL to stand in the bank's shoes as a first ranking creditor by virtue of subrogation (a) because SGL had not claimed in the name of the party indemnified, namely the Bank, (b) because subrogation would result in the indirect enforcement of an illegal transaction, which was the payment of the dividend, and (c) because the payment was voluntary: Esso Petroleum Co Ltd v Hall Russell & Co Ltd 1988 SLT 874.

[11] He submitted that the cases and texts on which the defenders relied, to which I refer below, did not support their argument because SGL was neither a cautioner nor co-obligant and had no claim for relief. The right of relief depended on establishing that SGL's liability was secondary or accessory to that of SAL. That had not occurred; SGL had entered into an independent obligation in its own interest. See Gloag & Irvine, Law of Rights in Security at p.656; Bell's Commentaries I.407 (McLaren's Note on the Mercantile Law Amendment Act).

[12] The Dean of Faculty accordingly submitted that the defenders' averments in Answer 11(i) which supported this defence should be excluded from probation.

[13] In the defenders' first note of arguments they took the stand that SGL was a first ranking creditor in the liquidation as it had a secondary liability for SAL's debt and could stand in the shoes of the Bank but that it was not a cautioner. That stance was also implicit in their second note of arguments. The alternative analysis was that SGL's undertaking to the Bank was of the nature of an indemnity and the principle of subrogation applied although SGL was not an insurer of the Bank. But Mr Johnston QC for the defenders in his oral submissions expressed the issue as being whether SGL was entitled to claim in its own name by way of relief as a co-obligant of the Bank with a liability which was secondary to that of SAL. He submitted that SGL had a right of total relief to reverse the unjustified enrichment of SAL. He referred to Moss v Penman 2003 SC 300, Gloag & Irvine (above) at p.796 and Mitchell and Watterston, Subrogation: Law and Practice.

[14] Mr Johnston invited the court to approach the concept of common obligation broadly, as Lord Ross had done in B.P. Petroleum Development Ltd v Esso Petroleum Co Ltd 1987 SLT 345, at p.348: the liability of co-obligants could derive from different sources. The liability of SAL to the Bank and SGL's undertaking to pay the Bank any shortfall on the administration were liabilities of the same nature. He referred to an article by Charles Mitchell in (2001) Edinburgh Law Review 186, entitled "Claims in unjustified enrichment to recover money paid pursuant to a common liability" and the English case of Niru Battery Manufacturing Co v Milestone Trading Limited (No 2) [2004] 2 Lloyd's Rep 319.

[15] The present case was to be distinguished from the circumstances of Owen v Tate (above). He explained that the Bank had given SGL a working capital facility to purchase SAL's assets and thus enhance the recovery in the administration of SAL. He accepted that where a liability was not truly an accessory obligation as where the promiser had a liability to the creditor apart from the liability of the third party debtor, the obligation would not be one of cautionry in terms of the Mercantile Law Amendment (Scotland) Act 1856: Wallace v Gibson (1895) 22 R (HL) 56, Lord Kinnear at p.61; Gloag & Irvine (above) pp.658-659. But cautionry was not the only form of accessory obligation.

[16] SGL was entitled to claim in SAL's liquidation as a secured creditor by virtue of the assignation of the Bank's floating charge. Payment of SAL's debt to the Bank had entitled SGL to demand the assignation of the Bank's rights against SAL: Gloag & Irvine (above) at pp.803-804 and the authorities which the authors cited. There was no need to assign the underlying debt as the security was available to support the independent right of relief. Indeed, without formal assignation the security was kept alive to allow the payer to benefit from it through assignation by operation of law or reviving subrogation. He referred to the article by Mitchell (above) at p.205, Mitchell and Watterston, chapter 8 (especially paragraphs 8.12 and 8.22), Esso Petroleum Company Ltd (above), Lord Jauncey at p.882, Caledonia North Sea Ltd v London Bridge Engineering Ltd 2000 SLT 1123, the Lord President (Rodger) at pp.1138-1141 and 1144, Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 and Niru Battery Manufacturing Co (above).

Discussion
[17] A cautioner has right to total relief against the principal debtor, whether the cautioner is bound by proper or improper cautionry. A cautioner is not the only person entitled to such a right: Esso Petroleum Co Ltd (above), Lord Jauncey at p.882. In the event there was no dispute that, if SGL were entitled to such relief from SAL, it would also be entitled to obtain the benefit of the Bank's security.

[18] When a cautioner or co-obligant pays off the creditor and thus discharges his debt, the rights of the paid out creditor survive so that the cautioner or co-obligant can work out his right of relief. The principal issue in this case is whether the defenders have established on the pleadings and the agreed documents alone that SGL is entitled to that relief and can assert its status as a secured creditor in SAL's liquidation. In particular the question is whether it has been established on those documents that, in a question with SGL, SAL is to bear the primary and ultimate responsibility for paying the debt which it owed to the Bank. The secondary issue is the mechanism by which the rights of the creditor who has been paid out are transferred to the payer.

(i) Relief among co-obligants

[19] The right of relief as between co-obligants in a joint and several contractual obligation entitles the obligant who has paid more than his pro rata share to recover the excess from his co-obligants. That right is based on an obligation to reverse unjustified enrichment, which formerly was described as an obligation of recompense. See Stair, Institutions of the Law of Scotland (tercentenary ed.) I.viii.9; Bell's Commentaries I.364; and Moss v Penman (above), the Lord President (Hope) at pp.303-304. A similar approach is taken in relation to joint wrongdoers: Palmer v Wick and Pulteneytown Steam Shipping Co Ltd (1894) 21 R (HL) 39, Lord Watson at pp.44-45. The obligation to reverse unjustified enrichment is not confined to co-obligants under the same contractual obligation. Thus where the operators of a jetty were liable in contract to a harbour authority and the owners of an oil tanker had a statutory liability to the same authority for the same damage, Lord Ross held that their liability was of the same nature and to the same extent. Each was a debtor under a common obligation and the jetty owner had stated a relevant case for pro rata relief: B.P. Petroleum Development Ltd v Esso Petroleum Co Ltd (above).

(ii) The entitlement to total relief of cautioners and others

[20] Where two people (A and B) are jointly and severally liable to the creditor (C) and B is the cautioner of A, if B pays off A's debt to C, he is entitled to total relief from A. In such circumstances it is the intention of the principal debtor, A, and the payer, B, that A should have the ultimate responsibility for paying the creditor, C. See Gloag & Irvine (above) p.796. Again, the entitlement to relief arises out of the obligation to reverse unjustified enrichment. But this right is not confined to cautioners. In other circumstances in which the law provides that one of two debtors has the ultimate responsibility for paying the creditor, the entitlement of the other to total relief arises: Caledonia North Sea Ltd v London Bridge Engineering Ltd (above), the Lord President (Rodger) at pp.1141-1142.

(iii) The right to the creditor's remedies

[21] As Lord Rodger explained in Caledonia North Sea Ltd (above) the same principles of indemnity underlie the law of cautionry and the law of insurance. The insurer can raise proceedings in the name of the assured when the assured has authorised him to do so and can retain for himself the proceeds of the claim. There are nonetheless some important differences between cautionry and insurance: when an insurer indemnifies his assured, the assured's claim against a third party is not discharged; the insurer is subrogated to the assured's rights against the third party.

[22] The insurer in such circumstances is a procurator in rem suam. In the days when personal rights were thought not to be transferable, making a person a procurator in rem suam was the form of assignation. Where the person seeking indemnification does not use subrogation in this sense, he can sue for relief in his own name and is entitled to require the assured to assign to him the debt and any security held for it: Bell's Principles, paragraph 255; Caledonia North Sea Ltd at p. 1142. A cautioner or co-obligant similarly can obtain an assignation of the rights of the paid out creditor either by being made his procurator in rem suam or by the modern form of assignation.

[23] When a cautioner or co-obligant pays off the debt of another, the rights of the creditor against the other are discharged. The law protects the right of the cautioner or co-obligant to enforce his claim for relief by entitling him to obtain an assignation of the rights of the creditor whom he has paid; it does so by treating those rights as surviving the payment. Thus Roman law recognised the right of the surety to demand from the creditor an assignation of his rights against the principal debtor in the beneficium cedendarum actionum and both French law and German law preserve the creditor's rights for the use of the payer. See Caledonia North Sea Ltd at pp.1143-1144. Among the authorities which Lord Rodger cited was Bell's Principles, which at paragraph 558 stated:

"Payment made by one interested in the debt (as co-obligant or surety) will take away the right of the creditor, but will not extinguish the debt of the principal obligant. The person so paying is entitled to an assignation, to the effect of operating his relief."

In the light of these authorities it is clear that the Dean of Faculty was correct in his decision to depart from his written argument so far as it suggested that, on payment of SAL's debt, the Bank had nothing to assign to SGL.

(iv) Whether SGL has a right of total relief against SAL

[24] It is clear from the cases which Gloag & Irvine cited on pp.656-660 that the court will not necessarily grant a payer relief against another obligant when the transaction is in the form of cautionry but its substance is otherwise. Thus in Erskine v Cormack (1842) 4 D 1478, a party (E), who signed as cautioner a bond of cash credit to be operated by a partnership of which his son was a partner was held not to be entitled to relief against one of the partners because the sums obtained under the bond were applied for E's benefit. In McMurray v McFarlane (1894) 31 SLR 531 the court again looked behind the form of the guarantee to the substance of the transaction in deciding whether the pursuer was entitled to total relief. In that case, McMurray initially agreed to lend his nephew, McFarlane, £5,000 towards the costs of establishing and operating a Gladstonian newspaper, the "Scottish Leader". The loan was not repayable if the newspaper was not financially successful. In the event, McMurray was unable to advance the whole sum and in place of a loan guaranteed an advance of £5,000 from a bank to McFarlane. The newspaper was not successful and McFarlane eventually sold it at a substantial loss. McMurray met his liability to the bank as cautioner and sued his nephew for relief. The Second Division rejected his claim, holding that the transaction was in substance a loan by McMurray which had been commuted at his instance and for his convenience into an advance by the bank under his guarantee. That arrangement did not supersede the agreement that McMurray would not be repaid if the newspaper failed.

[25] The issue in this case is not whether SGL was a cautioner of SAL. Mr Johnston's case was that SGL was in a position similar to a cautioner as its liability was secondary and accessory to that of SAL. It is clear, as I have said, that there may be circumstances in which a person, who is not a cautioner and who does not enjoy a cautioner's rights in a question with the creditor, may nonetheless have a right of total relief against another debtor. Thus, in Union Bank v McMurray (1870) 7 SLR 596, M, a debtor of the bank, entered into a transaction to buy a mill and resell it at a profit to D. The bank lent money to M to purchase the mill and to D to purchase the mill from M. Both M and D granted a promissory note to the bank for £5,000 to cover part of the purchase price which D had borrowed from the bank and which comprised M's profit on the transaction. The First Division held that while M might be entitled to relief against D, he was not a cautioner in a question with the bank and could not plead that his obligation had been discharged when the bank gave time to D. The substance of the transaction was that the bank was accommodating M.

[26] McLaren in his notes on the Mercantile Law Amendment (Scotland) Act 1856 (in Bell's Commentaries I. 407) also recognised that a person who was not a cautioner might nonetheless be entitled to total relief under the beneficium cedendarum actionum. He stated:

"Wherever the obligation of a person for payment of a debt which is also due by another, arises from a cause or consideration passing between him and the creditor distinct from that of the principal or original debtor's liability, whether that distinct cause should have existed contemporaneously with, or have come into existence subsequent to, that of the principal debtor's liability, it is not cautionry. This liability may be contingent and conditional on the failure of the proper debtor to pay; the alleged cautioner ... may be entitled ... to the beneficium cedendarum actionum; - yet, if his liability be founded on a consideration proper to himself, distinct from the cause of the demand which the creditor has against his proper debtor, - if he contract, in respect of this separate cause, to pay on his own duty or obligation, and not merely as the surety of the other - then his obligation is not a proper cautionary obligation."

[27] In this case SGL undertook the obligation to the Bank in the context of a wider financial arrangement which included the provision of funds to SGL and related companies and the acquisition by SGL of SAL's assets from the joint administrators. It was not a cautionary obligation. It was an agreement to meet the shortfall to the Bank on SAL's insolvency. SAL was not a party to the arrangement. There was no contract between SAL and SGL which determined that one party's obligation was primary and the other secondary. The questions therefore are (i) what was the nature of the transaction as a whole and (ii) whether SGL's liability was truly secondary and accessory to that of SAL. Ultimately the question is whether SAL has been unjustifiably enriched by SGL's payment. In my opinion this question cannot be answered without an enquiry into the nature of the transaction between SGL, its associated companies and the Bank. In this regard I note that SAL's debt to the Bank could equally have been paid off if SGL had paid a higher price for acquiring SGL's assets as part of the transaction.

[28] Accordingly I am not persuaded that the defenders have made out their plea of no interest to sue on the pleadings and undisputed documents alone. I propose to reserve that plea for a proof before answer.

(v) Whether the Bank's debt has been assigned to SGL
[29] The second issue is whether SAL's debt to the Bank, which has been discharged in a question between SAL and the Bank, has been effectively assigned to SGL so as to enable it to claim as a secured creditor in SAL's liquidation by virtue of the assignation of the floating charge.

[30] In the debate the defenders, as I have said, did not advance the argument, foreshadowed in their first note of argument, that the assignation of the floating charge carried with it the assignation of the debt. Instead Mr Johnston submitted that the debt had been transferred by operation of law. He referred to the cases and texts set out in paragraph [16] above in support of this proposition.

[31] I have not heard a detailed argument on this matter; but I am not persuaded that the defenders' analysis is correct. It seems to me that while it is useful to look at English cases and texts to obtain guidance as to the circumstances in which the English courts have identified and reversed unjustified enrichment, the mechanisms by which the English law of restitution achieves an appropriate remedy differ from those which Scots law makes available. The concepts of (i) keeping a charge alive "as if the benefit of the charge had been assigned" of which Lord Hoffmann spoke in Banque Financière de la Cité (at p.236F-G) and (ii) an "equitable security interest" about which Mitchell and Watterston wrote in chapter 8 of their book, form part of the English law of equitable subrogation.

[32] Mr Johnston also referred to section 5 of the (English) Mercantile Law Amendment Act 1856. That Act and the Scottish Act in the same year were designed to assimilate certain aspects of the commercial law of the two jurisdictions. Section 5 provides:

Every person who, being surety for the debt or duty of another, or being liable with another for any debt or duty, shall pay such debt or perform such duty, shall be entitled to have assigned to him ...every judgment, specialty, or other security which shall be held by the creditor in respect of such debt or duty, ... and such person shall be entitled to stand in the place of the creditor, and use all the remedies, and, if need be, and upon a proper indemnity, to use the name of the creditor, in any action or other proceeding, at law or in equity, in order to obtain from the principal debtor, or any co-surety, co-contractor, or co-debtor, as the case may be, indemnification for the advances made and loss sustained by the person who shall have so paid such debt or performed such duty, and such payment or performance so made by such surety shall not be pleadable in bar of any such action or other proceedings by him:

Provided always, that no co-surety, co-contractor, or co-debtor shall be entitled to recover from any other co-surety, co-contractor, or co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties themselves, such last-mentioned person shall be justly liable."

Mr Johnston suggested that the section was a helpful statement of Scots common law at that time. I am not persuaded that that is correct if being "entitled to have assigned" means that the cautioner is treated as having the benefit of an equitable security. In my opinion our law has different mechanisms to reverse unjustified enrichment. In particular in Scots law the entitlement to an assignation has a more literal meaning.

[33] Scots law started with and has adapted the beneficium cedendarum actionum. That Roman law remedy entitled a cautioner to demand the assignation of the rights of action of the paid out creditor which the cautioner could use against his co‑cautioners. In Scots law the cautioner who pays out the creditor is entitled, subject to certain exceptions, to demand that the creditor assign to him both the debt and also any securities and other rights in relation to the debt. See Bell's Principles at paragraph 558 (which I have set out in paragraph [23] above) and the case of Guthrie and McConnachy v Smith (1880) 8 R 106 to which it referred. See also Gloag & Irvine (above) at pp.803-804 and Caledonia North Sea Ltd (above), the Lord President (Rodger) at p.1142 G-I. There are limited circumstances in which the creditor is entitled to refuse to assign the debt and securities: Guthrie and McConnachy (above), Sligo v Menzies (1840) 2 D 1478 and Gloag, Contract (2^nd ed.) pp.211‑213. See also Erskine's Institute, 3.5.11.

[34] Accordingly, in Scots law the debtor with the secondary or accessory liability has a right to sue the principal debtor for total relief in order to reverse unjustified enrichment. That is a personal right which is not acquired from the creditor and of itself confers no priority over the other creditors of the principal debtor. But, by obtaining an assignation of the creditor's debt (that is his right to demand payment from the principal debtor) and his securities in respect of that debt, the secondary or accessory debtor can obtain a prior ranking over the principal debtor's other creditors. The assignation of the debt and securities however avails only to the extent that the secondary or accessory debtor is entitled to relief: paragraph [23] above.

[35] There is no averment that the Bank has in fact assigned to SGL any interest which it had in the now discharged debt. It appears to me that the Bank can do so and protect itself by excluding the implied warrandice debitum subesse. That matter can be sorted out as the action progresses, thus leaving for determination the important question whether SGL's implementation of the obligation which it undertook to the Bank in its letter of 8 February 2007 has unjustifiably enriched SAL and thus given SGL a right of relief.

Conclusion
[36] As I am satisfied that the defenders have not made out their plea of no interest to sue on the pleadings and undisputed documents alone, I will have the case put out by order for further procedure.