EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Clarke Lady Smith Lord McGhie	[2013] CSIH 20 A173/11 OPINION OF THE COURT delivered by LADY SMITH in the reclaiming motion MAUREEN LESLIE, LIQUIDATOR OF 3G DESIGN ENGINEERING LTD Pursuer and Respondent; against ALISTAIR WHITE Defender and Reclaimer: _______________

Act: Wilkinson, Solicitor Advocate; Cannons Law Practice (Pursuer and Respondent)

Alt: Party (Defender and Reclaimer)

1 March 2013
Introduction

[1] This is a reclaiming motion from the Lord Ordinary's interlocutor of 26 July 2012 which followed a debate on the pleadings, in terms of which he sustained certain aspects of the pursuer's pleas in law and granted decree against Mr White for payment of £9,000 to the Liquidator of 3G Design Engineering Ltd ("3G").

Background

[2] Mr White was a director of 3G as at 15 April 2009. It is not a matter of dispute that, on that date, he (a) transferred £9,000 from 3G's bank account to his own account and (b) signed a resolution under section 122 (1)(f) of the Insolvency Act 1986 stating that 3G was insolvent and unable to pay its debts as they fell due and that solicitors be authorised to present a petition for the winding up of the company.

[3] The liquidator contends that the above payment constituted an unfair preference which prejudiced the general body of creditors, relying on the provisions of section 243 of the 1986 Act. Mr White's response is:

"In respect of the withdrawal of £9, 000 by the defender...... the Company was generally funded (to a greater or lesser extent from time to time) by a series of short term loans by inter alios the Defender. Immediately before the withdrawal of the sum of £9, 000, the Company owed the defender the sum of £42,000, by way of director's loans. A copy statement showing the defender's director's loan account is produced herewith and referred to for its terms which are held to be incorporated herein brevitatis causa. As the statement shows, monies were regularly lent to the Company by the defender and, equally, monies were regularly repaid to the defender. The company and the defender did not enter into any written agreement regarding the making of such loans. Rather, as the Company Bank Account shows, the loans made to the Company by the Defender personally were repaid within short order, as and when the Company was able to make such repayment. The sum of £9,000 was repaid on that basis. It was a short-term loan which was due to be repaid when the company was able to do so. The defender was not in the habit of issuing written demands to the Company. Such an approach would have been artificial and unrealistic in small private companies such as the Company. The defender has borrowed the sum of £9,000 via a credit card held by him. Having borrowed that sum of money and, in turn, lent it to the Company, its repayment was necessarily made for adequate consideration, given that the defender lent that sum to the pursuer and indeed was still owed some £33,000 even after the sum of £9,000 was repaid to him.......... in the circumstances hereinbefore condescended upon, the withdrawal was a transaction falling within each of paragraphs (a), (b), and (c) of Section 243(2) of the Act. Accordingly the transaction is not challengeable." (Ans 4)

[4] The director's loan account incorporated into Mr White's pleadings contains 19 entries for the period 14 January 2008 to 15 April 2009, seven of which are shown as repayments to Mr White in March, April, May, July, and September 2008, and March and April 2009. The last of these is the payment of £9,000. Copy bank statements included in the joint inventory of productions also show that withdrawal of £9,000 by Mr White on15 April 2009.

[5] As to the particular events of 15 April 2009, Mr White avers:

".... the Defender met the Pursuer's staff on 15 April 2009 with a view to discussing the liquidation of the Company. At that meeting, the defender told the pursuer's staff about the two payments. He did not consider that he had, and nor did he have, anything to hide in that respect." (Ans 3)

The reference in that passage to "two payments" includes a reference to the payment of £9,000.

[6] Accordingly, Mr White offers to prove (a) that his withdrawal of £9,000 on 15 April 2009 took place prior to the resolution to wind up 3G - it had occurred before the discussion about the possibility of liquidation, and (b) that that payment to him was a transaction in the ordinary course of business (see: sec 243(2) (a) of the 1986 Act).

The Lord Ordinary's Opinion

[7] The discussion before the Lord Ordinary focused on Mr White's averment that the loan was repayable "when the company was able to make such repayment". Parties appear to have concentrated on the possible applicability of sec 243(2)(b) of the 1986 Act rather than, as was the case in the debate before us, on sec 243(2)(a), despite the fact that the pleadings covered both. It was argued for the liquidator that in the circumstances where there was a contemporaneous resolution to wind up the company it could not be said, in defence, that the company was able to make the repayment. The Lord Ordinary was persuaded that that line of defence was irrelevant, the result of which was that the payment was an unfair preference giving rise to a right of redress under sec 243(5) of the 1986 Act. Hence the decree for £9,000. In particular, the Lord Ordinary relied on the case of Rose v Falconer (1886) 6M 960 and said:

"At its best, the arrangements between the company and the defender was as loose and open ended as that which was before the court in Rose. In any event, how can the defender realistically hope to prove the alleged condition precedent for an enforceable obligation, given the contemporaneous resolution of an inability to pay the company's debts as they fell due?" (para 8)

[8] The Lord Ordinary had also been referred to the case of Nordic Travel Ltd v Scotprint Ltd 1980 SC 1 but he found it to be of no assistance as the facts were, he said, very different from those in the present case. He added:

"even leaving aside the voluntary nature of the payment, I can identify no relevant or sufficiently specific averments behalf of the defender which support any case that the withdrawal of £9,000 and the payment to the defender was part of a transaction in the ordinary course of trade or business. On any view it would take very specific averments to justify the repayment of the director's loan on the very day that the company declared itself insolvent and instructed solicitors to petition the court for its winding up."

Relevant Law

[9] The provisions of sec 243 of the 1986 Act, insofar as relevant, are:

"243. - (1) Subject to subsection (2) below, subsection (4) below applies to a transaction entered into by a company, whether before or after 1 April 1986, which has the effect of creating a preference in favour of a creditor to the prejudice of the general body of creditors, being a preference created not earlier than six months before the commencement of the winding up of the company or the company enters administration.

(2) Subsection (4) below does not apply to any of the following transactions-

(a) a transaction in the ordinary course of trade or business;

................

(4) A transaction to which this subsection applies is challengeable by -

(a) in the case of a winding up-

(i) ....

(ii) the liquidator....

......

(5) On a challenge being brought under subsection (4) above, the court, if satisfied that the transaction challenged the transaction to which this section applies, shall grant the degree of reduction or for such restoration of the property to the company's assets or other redress as may be appropriate......"

[10] In the case of Nordic Travel Ltd v Scotprint Ltd, a Mr Watt was a director of both companies. It was resolved that Nordic should be wound up on 28 September 1973. Nordic's liquidator challenged a series of payments made by Nordic to Scotprint between 17 January and 19 September 1973 in respect of sums due to Scotprint for their having printed brochures required by Nordic. Nordic had been in a state of absolute insolvency from a date in 1971. There was an understanding between the two companies that, although the relevant work was invoiced at the end of 1972, it would be paid for out of cash flow as from the spring of 1973. Hence the payments that were spread over that year. The court was not persuaded that mere knowledge by the creditor that his debtor is insolvent always necessitated the conclusion that payment by the latter was a fraudulent preference. Nor did knowledge by the debtor of his own insolvency necessarily lead to that conclusion either. At p.18 - 19, the Lord President (Emslie) said this:

"In my opinion it is abundantly clear that payment by an insolvent, conscious of his absolute insolvency, of a debt past due in ordinary course of business, is not a fraudulent preference at common law and the fact that the receiving creditor is aware of this insolvency is quite irrelevant. The position is no different even if the debtor's position is one of irretrievable insolvency unless, of course, the pursuers are well founded in saying that if the creditor is aware of this position his knowledge demonstrates 'collusion' and mala fides. Before turning to this particular submission I have only two observations to make. The first is that I very much doubt whether the Lord Ordinary's findings in this case demonstrate that Nordics position had really reached the stage of irretrievable insolvency. The second is that acceptance of the pursuer's fundamental proposition would place intolerable constraints upon those insolvent persons who wish to continue to trade in the hope that their insolvency will pass, and create real practical difficulties for those who deal with persons known to be insolvent, for it would impose upon them the unacceptable burden of inquiring (a) into the particular degree of the insolvency and(b) into the insolvent's purpose in continuing to trade and, (c ) if that purpose was to try to get out of his financial difficulties, into the reasonableness of his actions."

And, at p.29, Lord Cameron said:

"There cannot be a rigid and inflexible rule against which payment in cash can be measured so as to enable an affirmative or negative answer to be given as to whether the payment in question is one which can claim to be one in the ordinary course of trade. The individual circumstances are all relevant in the determination whether the particular cash payment is one which can claim to be one in the ordinary course of trade."

Plainly, much depends on the facts and circumstances of the individual case. The decision of the court in Nordic was arrived at after a proof before answer had taken place.

[11] The case of Rose v Falconer which was referred to and relied on before the Lord Ordinary is not, we consider, in point. It concerned early payment on a three‑month bill and a verbal indication by the debtor that he would pay as soon as he could. But that indication did not detract from payment having been made before the due date at a time when the debtor was under no obligation to pay. The import of that was that the payment was an unfair preference struck at by the Act of 1696.

[12] Finally, in the case to which resort is often had at debate stage - Jamieson v Jamieson 1952 SC (HL) 44, - it was confirmed that the test to apply when deciding whether a case should be disposed of on relevancy without enquiry into the facts is that it requires to be shown that even if the party whose pleadings are under scrutiny succeeds in proving all that he avers, still his case must fail (Lord Reid at p.63).

The Reclaiming Motion

[13] At the end of the hearing of the reclaiming motion on 1 March 2013, we indicated that we were minded to allow the reclaiming motion and also allow a proof before answer. Mr White moved for the expenses of the reclaiming motion and of the debate, the expenses of the latter having been reserved by the Lord Ordinary, and Mr Wilkinson did not, in these circumstances, oppose Mr White's motion.

[14] Mr White had three grounds of appeal:

(i) In asking the rhetorical question: "How can the defender realistically hope to prove the alleged precedent for enforceable obligation" (para 8), the Lord Ordinary erred. He had strayed into factual matters more properly addressed in proof before answer;

(ii) The Lord Ordinary had erred in failing to apply Nordic; an agreement that the creditor should be paid as and when funds become available does not necessarily take the payment out with the ordinary course of business; and

(iii) the Lord Ordinary erred in failing to find relevant or specific averments within the pleadings to support his case that the withdrawal of £9,000 was part of a transaction in the ordinary course of trade and business.

[15] Mr White made clear and careful submissions in support of those grounds. There was, he said, a material difference between an agreement based on cash flow, such as in Nordic and in the present case, and one of the early payment as in the case of Rose. Here, payment was due as when the company was able to pay. Proof was required. This was an ordinary course of business case. Bank statements and a copy of the relevant director's loan account had been produced to show that.

[16] Mr White said that there had been ongoing efforts at the relevant time to see if an improved situation could be achieved. The thrust of his submissions was that liquidation was not a foregone conclusion even immediately prior to the signing of the resolution to wind up the company.

[17] Mr White also submitted that the Lord Ordinary should not have allowed for interest at the rate of 8% since he had made efforts to draw the case to a conclusion 33 months ago. He did, however, accept that no argument about interest was raised before the Lord Ordinary and the matter was not, accordingly, pressed.

[18] In summary, Mr White submitted that the Lord Ordinary failed to apply the Jamieson test, that he had strayed from legal relevance into matters of fact, and that he unreasonably found that his averments could not be correct. Mr White said that his intention was that his averments entitled him to a proof before answer and moved us to uphold the reclaiming motion and find him entitled to expenses.

[19] For the liquidator, Mr Wilkinson submitted that the key issue was whether the reclaimer had a pled a relevant case that the exemptions in sec.243(2) on which he founded, applied. The case of Nordic was not in point although the passage at the foot of p.10 showed that the critical test was whether the payment had been granted voluntarily - it was for the liquidator to prove that the payment was involuntary.

[20] On it being pointed out to Mr Wilkinson that the essence of Mr White's case was plainly that the payment was made in the ordinary course of business, he said that the payment had to be considered in the light of the admission that it was made on the same day as the resolution to wind up 3G. The contemporaneous nature of the payment showed, he submitted, that the payment could not have been in the ordinary course of business. There was, he said, no averment that payment predated the resolution and even if there had been, that would not be enough. We pause to observe that Mr Wilkinson seemed to have overlooked Mr White's averment that he told the liquidator's staff about the payments when he met them with a view to discussing the liquidation of 3G on 15 April, an averment which can be read as being indicative of the payment of £9,000 having predated the winding up resolution. Mr White's case on record is, accordingly, to the effect that the payment and winding up resolution were not contemporaneous occurrences.

[21] Mr Wilkinson added that, in circumstances where a defender was saying that, at one point in the day, the company had an ability to pay its debts and at another point in the day it did not have that ability, it would be for the defender to aver specifically how that could possibly have come about.

[22] Mr Wilkinson accepted that it was possible for a debt paid before its due date to have been paid in the ordinary course of business but if that was what was being said it was incumbent on the reclaimer to aver the particular circumstances on which he relied.

[23] Mr Wilkinson also submitted that the defender failed to aver the loan contract on which he was relying. He made a passing reference to the case of Rose. He said that the liquidator's position was that "to boldly aver a condition of 'ability to pay' was not enough". The fact that payment was actually made on 15 April did not show ability to pay either. Indeed, the director's loan account and bank statements demonstrated (a) that the £9,000 was advanced to 3G on 29 January 2009 and that there were various points at which, between then and 15 April, 3G had enough money in the bank to repay that sum. So, on Mr White's approach, even if there was a relevant condition that the money was payable when 3G was able to pay it, his documents demonstrated an ability to pay much earlier than 15 April 2009.

Discussion and Decision

[24] Mr White's answer to the liquidator's claim in relation to him having transferred £9,000 from 3G to himself on 15 April 2009 is that it was a payment in the ordinary course of business. He says that it was part of the ordinary course of business that 3G would repay the regular advances made by him as and when it was able to do so. He does not say that the advance by him of that sum was a separate "one off" loan. Also, he says that, put shortly, liquidation was not a foregone conclusion at the time of the transfer. There was a discussion still to be had to see whether liquidation could be avoided.

[25] All of the above is consistent with his averments, particularly those in Answers 3 and 4 to which we have referred. These are the matters which he offers to prove.

[26] Mr Wilkinson's approach was, rather, to approach Mr White's case on the basis that it was, principally, about a single loan of £9,000 on the basis that 3G would repay it when it was able to do so and that, insofar as it was an "ordinary course of business" case, that was defeated by reason of repayment and the winding up resolution being contemporaneous. We do not, however, accept that Mr White's averments necessarily require to be given such a restricted reading.

[27] Given the terms of sec 243(2) (a) of the 1986 Act and the discussion of relevant principle in the case of Nordic, to which we have referred above, we cannot, at this stage, conclude that Mr White's case that he can bring himself within the statutory exemption must necessarily fail. To the contrary, he makes sufficient relevant averments to justify an inquiry into the facts.

[28] Regarding Mr Wilkinson's submission that where the payment and resolution to wind up were made on the same day it was incumbent on Mr White to make very clear averments as to how they could have been in the ordinary course of business, that is what Mr White seeks to do in his averments in Ans 4. However unusual the circumstances and accepting that they raise a valid question as to whether it could truly be the case that payment that day was in the ordinary course of business, that is not a question which can be disposed of at this stage, on the pleadings. We are satisfied that the defender has said enough to justify an enquiry into the facts.

[29] We will accordingly issue an interlocutor allowing the reclaiming motion, recall the interlocutor of the Lord Ordinary and remit to the Lord Ordinary to allow a proof before answer in relation to the liquidator's second and third conclusions. We will also award the expenses of the reclaiming motion and of the debate to Mr White, the expenses of the latter having previously been reserved.