IN THE SUPREME COURT
OF JUDICATURE
CHANCERY DIVISION
KEVIN GARNETT QC SITTING AS A DEPUTY JUDGE OF THE HIGH COURT
Thursday 12th February 2004
Paul Chaisty
QC (Michael A Leckey) for the applicant
Gabriel Moss QC (Allen & Overy) for the respondent
1. This is the trial of certain preliminary issues pursuant to the Order of Mr Registrar Simmons dated 24th September 2003.
2. The core facts are not in dispute and, as to the matters that are in dispute, it is agreed that I should determine the issues on the basis of certain assumptions. It has therefore not been necessary to hear any oral evidence.
3. The agreed facts are very simple. In 1991, BHT (UK) Ltd ('the Company') guaranteed a loan which had been made to its parent, BHT (Holdings) Ltd by Natwest Finance Ltd ('NFL'). The guarantee was secured by way of a debenture dated 23rd August 1991 ('the Debenture') by which, amongst other things, the Company created a charge over its book debts in favour of NFL.
4. On 22nd July 1992 a winding up petition was presented against the Company by a trade creditor and on 5th November 1992 NFL appointed administrative receivers in respect of the Company under the terms of the Debenture. On 4th February 1993 a winding up order was made on the petition and on 19th July 1994 the applicant, Mr James Duckworth ('the Applicant'), was appointed liquidator. The Statement of Affairs indicated a deficiency of some £ 5.5m.
5. In 1996, having taken advice, the receivers took the view that the debenture had created a fixed charge over the Company's book debts and proceeded to make two distributions to NFL out of the proceeds, namely £ 657,500 in late 1997 and £ 30,520.12 in July 2000. There is a debate, which I do not have to resolve, as to whether the receivers gave the preferential creditors prior notice of their intention to make these distributions. The Company's indebtedness to NFL remained undischarged. The receivers ceased to act in August 2000.
6. The position as at March 2003 was that there were outstanding preferential creditors of the Company of about £ 1.08m, the majority of whom are Crown Departments, and unsecured creditors totalling some £ 4.9m. This position has not materially altered since then and there is no prospect of any return to ordinary unsecured creditors.
7. In June 2001 the Privy Council gave judgment in Re Brumark Investments Ltd, Agnew v. Commissioners of Inland Revenue [2001] UKPC 28, [2001] 2 A.C. 710, a decision that caused practitioners to look again at the whole question of fixed and floating charges, and to question the status of the decision of Slade J., as he then was, in Siebe Gorman & Co Ltd v. Barclays Bank Ltd [1979] 2 Lloyd's Rep. 142, where he had decided that a charge over a company's book debts was, in the circumstances of that case, a fixed and not a floating charge.
8. On 13th March 2003, the present Application was issued. It is described as an Application for directions and, so far as appropriate, orders, in the following terms:
a. Whether the Debenture created a fixed or floating charge over the book debts of the Company which were (a) collected or (b) uncollected at the time of the receivers' appointment;
b. Whether NFL was liable to repay to the Applicant the sums paid to it by the receivers as set out above and, if so, an order that NFL do repay those sums;
c. If NFL was not liable to repay these sums by reason of the fact that the debenture created a fixed charge rather than a floating charge, that an account be taken as to how much of the money received by NFL was attributable to work in progress at the date of the receivers' appointment, rather than to book debts existing at that time.
9. I have not been concerned in this trial with the issues raised by (c).
10. The Application was supported by a witness statement by the Applicant in which he said that in the light of the Brumark decision he was 'concerned that what may have appeared to have been a doubtful claim to a fixed charge before Brumark appears even less plausible in the light of the judgment in Brumark'.
11. I pause to note that none of the preferential creditors was made a party to the Application, nor were the receivers made respondents.
12. Because of the Brumark decision there was general concern that distributions which had already been made by administrative receivers might be re-opened at the suit of preferential creditors. As a result of this the Inland Revenue, HM Customs and Excise, and the Redundancy Payments Service jointly issued a policy statement, the relevant extracts of which are as follows:
Where an insolvency practitioner causes a company to make a distribution of book debt proceeds subject to a purported fixed charge, or proposes to do so, the Crown Departments as creditors reserve the right to challenge such a distribution or proposed distribution if they believe that the charge in question was actually a floating charge.
... the Crown Departments consider that where a charge had been operated so that the chargor has been allowed an unfettered right to draw on the proceeds of the book debts without the specific consent of the chargeholder, this does not constitute sufficient control to qualify as a 'fixed charge' over such book debts.
Distributions made or proposed to be made to chargeholders after the date of the Privy Council decision in Brumark based on a charge such as described above and other types of purported fixed charge which in reality are floating charges are therefore liable to challenge from any of the Crown Departments. (emphasis added)
13. This statement was subsequently clarified, as can be seen from a letter dated 23rd January 2004 from the Inland Revenue to the respondent's solicitors in these proceedings:
The position of the Crown ... was that it was the policy of the Crown not [to] seek to examine distributions made prior to 5 June 2001 solely for a Brumark related reason. This was intended to give reassurance to insolvency practitioners that they would not face direct action from the Crown in respect of any distributions made prior to 5 June 2001 if they had relied solely on Siebe Gorman. Those statements did not prevent insolvency practitioners from bringing any action to recover any wrongful distributions; indeed, for instance when acting as liquidators, their duty to other preferential creditors and liquidation expense creditors may well oblige them to bring such proceedings. If they decided to take such proceedings, the Crown is entitled to share in any recoveries made to the extent that the Crown is a preferential creditor or liquidation expense creditor. In such cases, the Crown intends to take the benefit of any such entitlement it has to any recoveries.
14. Indeed, in the present case, the Crown preferential creditors, while not parties to the Application, have made it clear, hardly surprisingly perhaps, that they will accept payment of their preferential claims out of funds recovered by the Liquidator, if his application is successful.
15. I have dealt with this aspect of the matter because it took up a good deal of space in the skeleton arguments and it was a matter of complaint before me by Mr Moss QC, who appears for NFL, that the Applicant was in reality seeking on behalf of the preferential creditors to do precisely what they said they would not do, namely to reopen pre-5 June 2001 distributions which had been based on Siebe Gorman type charges. The response of Mr Chaisty QC, who appears for the Applicant, was that (a) it is not accepted that the Debenture did create a fixed charge even if the law as understood in the light of Siebe Gorman were to be applied, and (b) all that the Crown departments had indicated was that they would not proceed against insolvency practitioners; they said nothing about not proceeding against recipients wrongfully paid under a floating charge, which was what the present case was about.
16. I do not have to reach any conclusion about this because the matter became irrelevant once the true nature of the potential claim against NFL, and NFL's response, emerged.
17. As a result of NFL's contentions that it could not be liable to the Applicant even if the Debenture had created a floating charge, it was ordered that certain preliminary issues be tried. This was to avoid, it was hoped, the expensive exercise of investigating the true nature of the charge. The issues which were ordered to be tried were framed as follows:
Even if the distributions were made out of floating charge realisations (which is denied by NFL):
a. Is the statutory duty to pay preferential creditors a duty that is owed to the Applicant?
b. Is the statutory duty to pay preferential creditors a duty that is owed by NFL?
c. Does the Applicant have sufficient standing to bring and pursue the present Application against NFL?
d. Could such an application only be made by some other party and, if so, what is the identity of that party?
e. Is NIL a proper respondent to the Application or is the Applicant, or some other party in place of the Applicant, required and entitled to pursue only the former administrative receivers?
18. I have reservations whether some of these questions are really appropriate for me to decide on this application but the major problem is that they do not accurately reflect the issue between the parties as it finally emerged, in particular in the light of the references in the questions to 'the statutory duty'. With hindsight, it might have been better if a direction had been made for the exchange of some form of particulars, however brief, which would have identified the nature of the potential claim which the Applicant had in mind. Even sequential, rather than simultaneous, exchange of skeleton arguments would have helped.
19. As it emerged in Mr Chaisty's skeleton argument and then more clearly during the hearing, the basis of the Applicant's potential claim is solely one for repayment to the Company on the basis of unjust enrichment. If the charge was a floating charge, Mr Chaisty argues, NFL was not entitled to receive the book debt realisations from the receivers, and they were only paid to NFL based on a mistaken view of the law. NFL should therefore return the money to the Company because it has been unjustly enriched. Mr Chaisty made it clear that the claim was not being made on behalf of the preferential creditors and that no remedy under the Insolvency Act 1986 was relied on. Indeed, he argued that had there been no liquidation the Company would have been just as entitled to bring the claim.
20. Little authority was cited on the point. Mr Chaisty pointed out that the decision in IRC v. Goldblatt [1972] Ch. 498, did not affect the question. There, Goff J. had held, following Woods v. Winskill [1913] 2 Ch 303 and Westminster v. Haste [1950] Ch. 442, that a receiver appointed under a debenture secured by a floating charge had a statutory duty under section 94(1) of the Companies Act 1948 to apply the floating charge realisations in satisfaction of the claims of preferential creditors in priority to all other creditors. If he did not do so, and instead paid the debenture holder, the preferential creditors had a claim in damages against him for that tortious breach of statutory duty. Goff J. went on to hold that the preferential creditors also had a claim against the debenture holder who had been wrongfully paid, either because on the facts of the case the debenture holder held the proceeds on trust for them having notice of or being party to the breach of the receiver's statutory duty, or because on the wording of the section he himself owed a statutory duty to the preferential creditors. As Mr Chaisty said, that decision says nothing about whether the company or its liquidator might have a claim against the debenture holder in the assumed circumstances of the present case.
21. Mr Moss' riposte, leaving aside for the moment any defence on the facts which NFL might have to an unjust enrichment claim, was that such a claim required that any enrichment be at the expense of the claiming party. See Banque Financière de la Cité v. Parc (Battersea) Ltd [1999] 1 A. C. 221, at 227, per Lord Steyn. In this case this condition was not satisfied, for two reasons.
22. First, as a matter of the general law, once any floating charge crystallised, the book debts became the property of NFL. True, they are no longer to be regarded as wholly belonging to the debenture holder, since they had to be applied in payment of the costs and expenses of the winding up and then in payment of the preferential creditors, but these are matters which have been grafted onto the general law by successive Companies Acts, now represented by sections 40 and 175 of the Insolvency Act 1986. The underlying law remained unchanged, however. The position was summarised by Lord Denning in Re Barleycorn Enterprises Ltd, Mathias & Davies (a firm) v. Down [1970] Ch. 465, at 473 - 474:
[In the days of the Companies Act 1862] it was held that, when there was a debenture which gave the creditor a floating charge over the property of the company, then, as soon as the charge crystallised on a winding up, the property did not belong to the company but to the debenture holder.
In Re Brumark, the Privy Council put the position as follows, at para. 7:
A fixed charge gives the holder of the charge an immediate proprietary interest in the assets subject to the charge which binds all those into whose hands the assets may come with notice of the charge. Unless it obtained the consent of the holder of the charge, therefore, the company would be unable to deal with its assets without committing a breach of the terms of the charge.
In Re Barleycorn, Lord Denning went on to explain that the changes to the Companies Acts had made successive inroads on that position, such that:
... the legislature no longer regards the property as belonging wholly to the debenture holder. The property which is subject to the charge forms part of the 'assets' of the company which are to be applied first, in payment of the costs and expenses of the winding up, second in payment of the preferential claims, and only third in payment of the debenture holder.
See also the judgment of Chadwick L.J. in Re Leyland Daf Ltd, Buchler v. Talbot [2002] 1 BCLC 571.
23. It is not part of Mr Chaisty's case that, at the date of the distributions, any floating charge realisations should have been paid to the Applicant to be applied in payment of the costs and expenses of the winding up.
24. I did not understand Mr Chaisty to dispute the above analysis of the general law. In my judgment, Mr Moss is correct to submit that NFL has not, on the assumed facts, been enriched at the expense of the Company. In the circumstances of this case, the Company would never have been entitled to receive any part of the book debt realisations.
25. Mr Moss also submits, I think as another way of saying much the same thing, that since anything recovered from NFL would, subject no doubt to any unpaid costs of recovery, go straight to the preferential creditors, the Company has suffered no loss. Its balance sheet position is unaffected by what has happened. He points to the decision of in National Employers' Mutual General Insurance Association Ltd v. AGF Holdings (UK) Ltd [1997] 2 B.C.LC. 191 where, on the very complicated facts of that case, Lightman J. held that the liquidator's claim for breach of contract should be struck out because the company had suffered no loss. The only parties to have suffered loss were certain creditors of the company and it was not sufficient for the purposes of a breach of contract claim that the liquidator would apply certain reinsurance proceeds amongst all the creditors in accordance with the statutory scheme. The company had been made no worse off by any breach.
26. Mr Chaisty submits that that case was one for breach of contract whereas the present claim would be for unjust enrichment, but that does not seem to me to be a material difference. The Company here suffered no loss by any wrongful payment to NFL. I accept Mr Moss' submission.
27. This is not a case in which, if there has been a wrong, there is no remedy. The preferential creditors are perfectly well able to pursue whatever claims they may have against NFL.
28. Subject to hearing counsel, my answer to the modified question, namely, even if the distributions were made out of floating charge realisations, does the Applicant have a claim against NFL for the repayment to the Company of those sums, is therefore, no.
29. I will hear counsel as to what answers, if any, are appropriate in relation to the other issues. I will also hear counsel as to what future role NFL should play in these proceedings.