Lomax Leisure Ltd v Miller & Anor

This action raises issues as to the finality of a dividend declared in favour of creditors by liquidators in a members’ voluntary winding-up, and the effect of the liquidators countermanding cheques sent to creditors in payment of the dividend in circumstances in which it subsequently transpires that another creditor has appealed the decision of the liquidators to reject its proof, but the relevant application had not been served on the liquidators or been brought to their attention at the time that they declared the dividend.

It is contended by the Claimant, Lomax Leisure Limited (“Lomax”), that the liquidators are liable on the cheques, and also for damages for breach of duty said to be owed to the relevant creditors in failing to make the dividend payments once the dividend had been declared.

The facts are not in dispute and were taken as agreed for the purposes of the hearing.

Lomax entered into administration on 22/04/99 when the Defendants, Nicholas John Miller and Timothy James Bramston were appointed as joint administrators. The Defendants effected an asset sale that resulted in what was thought to be a surplus for creditors. The exit route from administration was thus a members’ voluntary liquidation. On 23/08/99 the Defendants were appointed as joint liquidators.

On 26/08/99 the Defendants, as joint liquidators of Lomax, gave notice pursuant to Rule 11.2(1) of the Insolvency Rules 1986 (“IR”) of their intention to pay a “first and final” dividend within 4 months of the last date for proving, which was taken to be 30/09/99. The notice also made reference to IR 4.182A(1), relating to members’ voluntary liquidations.

On 17/09/99, Marpaul South Limited (“Marpaul”), a company claiming to be a creditor, submitted a proof. By letter dated 28/09/99, the Defendants rejected the proof and gave their reasons for doing so in accordance with IR 4.82(2). It is common ground that it is likely that Marpaul received this letter on 30/09/99, and thus that, in accordance with IR 4.83, Marpaul had until 21/10/99 to apply to the Court to reverse the Defendants’ decision.

On 20/10/99, ie. just in time, Marpaul issued an originating application returnable on 12/11/99 by which it so appealed against the rejection of its proof. In accordance with IR 7.4(5), the application ought to have been served 14 days before the hearing. However it was not served until late in the afternoon of 08/11/99.

In the meantime, on 03/11/99, the Defendants, not being aware that any such application had been issued, resolved pursuant to IR 11.5(1) to pay a dividend of 100p in the pound and, the following day, sent letters to all creditors whose proofs had been admitted, enclosing notice of declaration of the dividend and also cheques in payment. The cheques were drawn on an account held in the name “NJ Miller and TJ Bramston Joint Liquidators of Lomax Leisure” at the Berkeley Square branch of Allied Irish Bank.

When Marpaul’s originating application arrived at the Defendants’ offices on the afternoon of 08/11/99, the Defendants’ manager, Lee Pryor, first telephoned and then sent a fax to the bank, requesting that the dividend cheques be stopped. Had this not been done, then Lomax/the Defendants would certainly have had insufficient funds to meet any substantial award in Marpaul’s favour should its appeal have been successful.

On 09/11/99, the Defendants wrote to the creditors who had been sent cheques informing them of events, and of the Defendants’ decision in the light thereof to defer payment of the dividend.

The issues arising on Marpaul’s appeal were dealt with by submitting the same to arbitration. Ultimately a not insubstantial award was made in Marpaul’s favour and the net effect of this, and of the costs incurred in the process, was that Lomax had insufficient funds to pay creditors in full. The liquidation was thus converted into a creditor’s voluntary liquidation, and on 28/07/03 Stephen Hunt (“Mr Hunt”) was appointed as liquidator in place of the Defendants.

It forms no part of the present claim that the Defendants acted other than properly in relation to the conduct of the liquidation following the stopping of the cheques, and it is common ground that I should proceed for present purposes on the basis that no claim lies against them in respect thereof.

The total value of creditors whose claims had been admitted to proof and who were sent cheques was £842,333. Creditors with a total value of £814,782 54 have subsequently assigned their claims to Lomax. The present claim is thus brought by Lomax, at the direction of Mr Hunt, as assignee of these creditors. There is no challenge to the validity of the relevant assignments.

It is a striking feature of the present case that, so I am told by Mr Matthew Collings QC for Lomax, Mr Hunt accepts that, had he been in the same position as the Defendants on 08/11/99, he would have taken the same action in stopping the cheques and that is what one would ordinarily have expected a liquidator to do in the circumstances. It is thus not contended that the Defendants fell below any required standard in the way that they dealt with matters, but that, having declared the dividend, they were under a strict duty to pay it.

Before turning to Mr Collings QC’s submissions on behalf of Lomax, it is necessary to have in mind the framework under the Insolvency Act 1986 (“the 1986 Act”) and IR for the settling of creditors’ claims and the payment of dividends.

Section 107 of the 1986 Act provides that, subject to the provisions relating to preferential payments, the company’s property in a voluntary winding up shall in the winding up be applied in satisfaction of the company’s liabilities pari passu, and subject thereto distributed amongst the members according to their rights and interests in the Company.

IR 4.73 to 4.85 deal with the process of proving for a debt in a liquidation.

IR 4.175 to 4.186 deal with the collection and distribution of a company’s assets by liquidator. Specifically:

IR 11.1 to 11.11 are then expressed by IR 11.1 to be of general application in respect of “the declaration and payment of dividends in companies winding up and in bankruptcy”.

The basic scheme of these rules, so far as is relevant, is as follows:

As to the claim for dishonour of the cheques, Lomax relies upon the principle that a cheque, at least when supported by consideration, should be treated as cash as explained in Nova (Jersey) Knit Ltd v. Kammgarn Spinnerei GmbH [1977] 1 WLR 713, per Lord Wilberforce at page 721.

Mr Collings QC, on behalf of Lomax, accepts that a cheque, to be capable of being sued on, requires to be supported by consideration, but says, correctly, that consideration is to be presumed - Section 30 of the Bills of Exchange Act 1882 (“the 1882 Act”). Further, Mr Collings QC argues that the cheques were, in the present case, supported by consideration. He formulated the consideration relied upon in the following terms, namely the Defendants…”being absolved from being forced to pay the dividend to which the cheques relate”. The Particulars of Claim had referred to the cheques being drawn “… in respect of the payment of the dividend”, so this was, perhaps, something of a development on the pleaded case.

Mr Collings QC points to the fact that consideration is, for the purposes of a bill of exchange or cheque, given an extended definition by Section 27 of the 1882 Act such that it extends not only to consideration sufficient to support a simple contract, but also extends to any antecedent debt or liability in respect of which the cheque is tendered.

Mr Salter QC referred me to a line of authorities to the effect that the antecedent debt or liability must be that of the party drawing the cheque and not some third-party - see Chalmers and Guest on Bills of Exchange, 16^th edn (2005) at paragraph 4-023 referring to cases such Hasan v. Willson [1977] 1 Lloyd’s Rep 431 and MK International Development Co Ltd v. Housing Bank [1991] 1 Bank LR 74. However, Mr Collings QC, in response, referred me to the “robust” approach to consideration taken by Mr Jonathan Gaunt QC sitting as a Deputy Judge of this Court, in Autobiography Limited v. Byrne [2005] EWHC 213, referred to in Byles on Bills of Exchange, 28^th edn (2007) at 19-011.

In this case a wife drew a cheque on a joint account with her husband to meet a debt of a company in which they were both shareholders, and of which the husband was a director. The cheque was held to be sufficiently supported by consideration because in the “commercial context” of the cheque not being intended to be a gift consideration had moved to the wife in that it was “unrealistic to suggest that no benefit was conferred on Mrs Byrne given her interest in the Company”. Mr Collings QC says, in short, that there was benefit to the Defendants in the dividend being paid because then they would be absolved from being forced to pay the same.

Further Mr Collings QC maintains that the cheques are not impeachable on the grounds of mistake, quite simply because, so he submits, there was no mistake involved in drawing the cheques. Giving IR 11.5 the construction that Mr Collings QC submits it ought to have, as the application appealing the rejection of Marpaul’s proof had not been served, there was no reason not to declare and pay the dividend in accordance with IR 11.5, and consequently, submits Mr Collings QC, no mistake was involved in paying it.

As to the construction and effect of IR 11.5, Mr Collings QC submits that the Rules relating to dividends in a liquidation taken as a whole point to an intention to achieve finality with the declaration of a dividend pursuant to IR 11.5(1). Consequently, so he submits, the liquidator’s power to postpone or cancel a dividend under IR 11.4 is superseded once a dividend is declared pursuant to IR 11.5(1), and the words “there is pending any application” in IR 11.5(2) should be construed as meaning that an application should not only have been issued, but served as well.

Consequently, it is argued by Mr Collings QC that, as Marpaul’s application had not been served, there was no “pending” application to appeal, and thus no good reason for the Defendants not to declare the dividend and cause the cheques to be paid.

It is then argued by Mr Collings QC that where rules such as IR provide for the making by an office holder of certain payments to creditors or a class of creditors, failure, contrary to the rules to effect the relevant payment will be actionable by the individual creditor or creditors in question. Mr Collings QC points to cases such as IRC v. Goldblatt [1972] 1 Ch 498 where a successful claim was brought against receivers by preferential creditors when a secured creditor had been wrongly paid to the loss of the preferential creditors.

Further Mr Collings QC relies upon a line of authorities going back to Pulsford v. Devenish [1903] 2 Ch 625, where the liquidator had negligently omitted to inform the company’s creditors of the liquidation, and distributed assets to contributories without regard to the creditors’ claims. Farwell J held that the creditors had a personal claim against the liquidator and Farwell J, at 633 observed:

“But the duty to pay the debts … is an absolute statutory duty … it is not necessary to resort to trusteeship or equitable doctrines”.

Mr Collings QC also referred me to A & J Fabrications Ltd v. Grant Thornton [1998] 2 BCLC 227, and the way that Jacob J, at 231, applied not only Pulsford v. Devenish, but also James Smith & Son (Norwood) Ltd v. Goodman [1936] Ch 216 where at 231 - 232 Lord Harworth MR had said this:

“The cases that we have looked at are sufficient to show that if a creditor has been injured by the failure of the liquidator to take the steps that he ought to have taken, and has suffered damage, he can “succeed on an action on the case” … in establishing a liability against a liquidator.”

Thus, as assignee of the relevant creditors, Lomax claims to be entitled to enforce the statutory duty that it say arose under Rule 11.5 to pay the dividend once it has been declared by seeking, to quote from the prayer to the Particulars of Claim:

“(2)

Payment of, and/or damages or compensation in equity in respect of each of the dividends declared in favour of (and paid) to creditors in respect of which the creditor’s cause of action has been assigned”

The gist of Mr Salter QC’s submissions on behalf of the Defendant were as follows:

It is, to my mind, necessary to begin with a consideration of the nature of the obligation on the liquidator to pay a dividend out of realisations of the company’s assets once a dividend has been declared. The position is, as I see it, as follows:

It follows from the above that Lomax’s claim for “payment … and/or damages or compensation in equity” must fail on the basis that the Defendants owed no personal obligation to the relevant creditors to pay the dividend, and those creditors have no personal claim to damages or equitable compensation for breach of any duty owed to them.

It may be that, if IR 11.5 is to be construed in the manner intended for by Lomax the creditors could, whilst the Defendants were still in funds, have applied to the Court for an analogous order to IR 4.182(3) requiring the dividend to be paid. But thereafter, any claim would in my judgement, have had to have been a misfeasance claim based upon the circumstances of the subsequent dissipation of assets, and that is beyond the scope of the present claim.

Further, even if, contrary to my above finding, the stopping of the payments did give rise to an actionable misfeasance under Section 212 of the 1986 Act, or a even if a claim for damages by individual creditors did lie based upon the non-payment of the dividend, I consider that it must be an answer thereto that no loss was occasioned thereby because the net effect of the actions complained of was that the liquidators retained the relevant funds. Consequently, any proper claim for damages must, as I see it, depend upon the circumstances of the subsequent application of those monies, and as to whether any misfeasance was involved, which is, as I have said, beyond the scope of the present proceedings.

Mr Collings QC is correct that the provisions of IR that I have referred to above do provide for a scheme that seeks to achieve finality so far as payment of dividends is concerned, and I agree that there are good policy reasons why that should be the case.

However, it is also clear that emphasis is placed by IR upon seeking to protect the position of a creditor who has submitted a proof in time, including specifically in circumstances where that creditor appeals against the rejection by the liquidator of his proof - see IR 11.4 and 11.5(2).

Balancing these competing interests, common sense does, in my judgement suggest that a good reason for postponing finality is to await the result of an appeal against the rejection of a proof whatever the circumstances of that appeal are, so long as it is properly constituted and there is some merit in it.

The ordinary and natural meaning of “pending” in IR 11.5(2) is, as I see it, that an appeal against the rejection of a proof is on foot, without it being an additional requirement that, as contended by Lomax, the relevant application should have been served on the liquidator. Thus one must ask whether, in the present circumstances, there is good reason to displace this natural meaning?

In my view there is not. The requirement for finality does not, in my judgement, sufficiently outweigh the need to protect the position of a creditor such as Marpaul that has appealed in time the rejection of its proof. It is right that, in the present case, there may be an element of default on the part of Marpaul in that service was not effected more than 14 days prior to the first return day of 12/11/99. However the relevant originating application had only been issued on 20/10/99, and it is at least possible that there was some delay in the originating application being returned for service. Further, the present difficulty may well still have occurred without any fault on the part of Marpaul, eg. if the Court had, say, fixed a return day of 22/11/99, in which case there would have been no requirement to have served prior to 08/11/99. The correct answer cannot sensibly depend upon a distinction of this kind.

Further, as to the finality or otherwise of the act of declaring a dividend pursuant to IR 11.5(1), I consider that there is force in Mr Salter QC’s point that the fact that the provisions of IR do, in certain instances, specifically provide for finality in respect of a dividend or distribution, see eg. IR 4.182(2), 4.182A(4) and 11.8(1), does point to there being no general presumption as to finality from the mere fact of the declaration of a dividend.

Thus I consider that the proper construction of IR 11.5(1), applied to the facts of the present case, in that, because the Defendants, albeit unknown to themselves, at the time that the dividend was declared had cause to postpone or cancel the same pursuant to IR 11.4 as a result of Marpaul’s appeal, the Defendants were under no duty to declare the dividend, and, in fact, as a matter of true construction of IR 11.5(2), the dividend ought not to have been declared at all.

Further, I consider that, as a matter of true construction of IR 11.4, it was open to the Defendants to postpone or cancel the dividend, not least because it has not been validly declared pursuant to IR 11.5, and to do so certainly at any time prior to payment of monies into the hands of creditors, if not thereafter, so long as the postponement or cancellation takes place within the four month period provided IR 11.2.

On this further basis, I do not consider that it is open to seek “payment … and/or damages or equitable compensation” against the Defendants.

I am of the firm view that there was no consideration in the extended sense provided for by Section 27 of the Bills of Exchange Act 1882 sufficient to support the cheques. There plainly was no consideration of a kind sufficient to support a simple contract, and Mr Collings QC’s formulation of the consideration that he seeks to rely upon is, as I see it, reflective of this.

As to whether there is consideration as constituted by an antecedent debt or liability, it is, in my judgement, critical that the Defendants had no debt or liability to the creditors for the dividend, and thus, prima facie, the authorities cited by Mr Salter QC and referred to in paragraph 24 above apply.

The issue is, essentially, as to whether, in support of his suggested consideration of “being absolved from being forced to pay the dividend to which the cheques relate”, Mr Collings QC can successfully pray in aid the “robust” approach to consideration taken in Autobiography Ltd v. Byrne. In my judgement he cannot, the position in Autobiography Ltd v. Byrne being readily distinguishable. Given her interest in the relevant company, Mrs Byrne stood to gain from a commercial perspective from the payment of the company’s debt. The Defendants in the present case, were in a very different position. They did not stand to gain personally from the making of the payment, and the making of the payment simply represented what the Defendants reasonably considered to be the performance of their statutory functions. Further they were, at the relevant time, under no threat to make the payments.

Consequently, I consider that Lomax has failed to establish that the cheques were supported by consideration (in the extended sense). Whilst there is a presumption as to consideration, once I have found that the only form of consideration specifically alleged is insufficient, then it is open to me to find that there was no sufficient consideration to support the cheques. The effect thus is that the cheques merely amounted to revocable instructions to AIB to make the payments.

Even if there were sufficient consideration to support the cheques, I consider that Mr Salter QC’s submissions as to mistake are also well made out.

As to principle, Mr Salter QC refers me to Chitty on Contracts, 29^th edn at paragraph 29-04 discussing the practical effect of the decision of the House of Lords in Kleinwort Benson Ltd v. Lincoln City Council [1999] 2 AC 349:

“It was held that the questions raised in a claim for restitution of money paid under a mistake of law are the same as those raised in a claim for restitution of money paid under a mistake of fact: was there are mistake: did the mistake cause the payment: and did the payee have a right to receive the sum which was paid to him? Retention of the money is prima facie unjust if the payer paid because he thought he was obliged to do so and it subsequently turns out that he was not … the suggestion that restitution is barred where the payee honestly believes that he was entitled to the money, which would exclude recovery in a large proportion of cases, was rejected”.

On the basis of my findings above, had the cheques been paid and the monies received by the creditors, and had a claim for recovery been advanced before any question of change of position had arisen, then a good claim for recovery on restitutionary grounds would, in my judgement, have arisen on the basis that:

If the cheques had been paid and the relevant monies paid over to the creditors, then the Defendants, subject to change of position defences, would have had a good claim to recover the same on the basis that they were paid under a mistake of fact and/or law. Applying the rule against circuity of action, as the monies were not in fact paid, the creditors ought to be in no better position by having a claim on the cheques, and thus a liability to honour the cheques never properly arose.

It follows that Lomax’s claim, on each of the two bases upon which it has been brought, must fail.

I indicated when I reserved judgment that I do not require attendance at the hand down of this Judgment.

I understand it to be common ground between Counsel that costs should follow the event. I will thus provisionally order that Lomax pay the Defendants’ costs of the claim to be assessed on the standard basis in default of agreement. However, given that the question of costs was raised at the end of the hearing, and there has been no argument thereon, if either party wishes to make further submissions as to costs, then I will deal with the same at a telephone hearing to be arranged through the usual channels. However the provisional order as to costs indicated will stand if neither party contacts Chancery listing to arrange a telephone hearing by 4.00pm on 19/10/07.

As to permission to appeal, I will entertain any application at a telephone hearing. If Lomax wishes to seek permission to appeal, then its Solicitors should contact Chancery Listing to arrange the same no later than 4.00 pm on 19/10/07. I will thus adjourn consideration of the question of permission to appeal to such a telephone hearing, and extend time for appealing and for seeking my permission to appeal to such a telephone hearing provided that Lomax’s Solicitors, no later than 4.00 pm on 19/10/07, contact Chancery Listing to arrange the same.

I conclude by thanking Counsel for their assistance and helpful submissions.