Webster & Anor v Mackay

This is an appeal from the refusal of Chief Registrar Baister to annul or rescind bankruptcy orders.

The bankruptcy orders were made on 2 March 2012. There are two orders, one against David Webster and the other against his wife Christina Webster. The annulment applications were made on 19 February 2013. It is said that the bankruptcy orders ought never to have been made. The application was therefore made pursuant to section 282(1)(a) of the Insolvency Act 1986 (“the Act”), which reads as follows:

There is a separate ground not relied upon in this case in section 282(1)(b) of the Act, which reads as follows:

The reason it is said the orders ought not to have been made is that in each case the petition debt was not, it is said, a liquidated debt and therefore Mr Mackay had no standing to petition. Section 267(2) of the Act provides that a creditor's petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented... "(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor..."

That, therefore, raises an issue as to the status of the petition debt. The petition debt was said in each case to arise out of a document described as a promissory note, which is not (for technical reasons which do not matter) strictly speaking a promissory note in point of law but which nonetheless plainly acknowledged a debt and promised to pay it. The document in question is dated 31 July 2006 and in material part reads as follows:

There were attached a number of additional terms, one of which was to secure for Mr Mackay a profit share over and above the 10 percent should that be achieved. It was provided in that connection that no later than 90 days after completion of each accounting year the Websters should arrange for a firm of accountants to produce a set of trading accounts which would enable Mr Mackay’s loan profit to be calculated.

It is not disputed that the sum of £200,000 was in fact lent, as the document recorded.

On 4 August 2008 Mr Mackay requested, in a relatively informal way but clearly enough, repayment under the terms of this document which meant that the debt fell due one year later. The request for repayment also produced a written acknowledgement from the Websters that repayment would be made, hopefully in stages before the repayment date, though the acknowledgement also recognised that market conditions were such that there might be some delay.

By a letter dated 23 January 2009 Mr Mackay’s solicitors purported to accept the Websters' repudiatory breach of the loan agreement, consisting of their failure to provide accounts. They did, however, also say at the end of the same letter that this was without prejudice to the right to repayment, in accordance with the notice that had already been given. There was a reply from Mr Webster denying breach, but saying "we will settle the promissory note in line with the terms of the agreement and had never had any intention of doing otherwise".

There followed a brief correspondence in which the allegation of repudiatory breach was repeated and once more denied. It was reasserted again towards the end of February by Mr Mackay's solicitors and there the matter appeared to rest.

The Chief Registrar in his judgment proceeded on the basis that it was strongly arguable that the effect of the petitioner's apparent acceptance of a repudiatory breach was to limit the petitioner to a claim in damages which could not be anything other than a claim for unliquidated damages, even though it was precisely calculable. That point had not been taken previously, when the bankruptcy order was made. On the contrary, Mr Webster on behalf of himself and his wife then clearly acknowledged that the debt was due and their counsel in his skeleton argument described Mr Mackay as being in a position of strength as he had a liquidated debt which was plainly due.

In my judgment, there never was anything in the point that the loan agreement was repudiated by the failure to provide accounts. As is well known, not every breach operates as a repudiatory breach. I was referred in this connection to Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1979] AC 757, in particular the passages starting at 778 onwards in the speech of Lord Wilberforce. Those passages reaffirm in differing language from citations of various judges what is required. A 19^th Century formulation was that an intention to abandon and altogether to refuse performance of the contract must be demonstrated. More recently, it has been said that the threatened breach must be such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract. The reference there was to threatened breach, because an anticipatory breach was being considered, but the same approach applies in the case of any other breach of contract.

The failure to provide accounts (assuming there had been such a failure) could be remedied, or enforced, and would not without more entitle the injured party to treat the contract as at an end. At the very least, a formal demand would be needed, requiring the omission to be remedied within a reasonable time. I need not decide whether even that would be sufficient to make time of the essence, as there was nothing of that sort here. The Websters’ position was that no additional profit share was due, and that accounts were pointless. This was not a case where the Websters were refusing to pay an admitted profit share. In my judgment, the failure to provide accounts was obviously not a repudiatory breach in the circumstances.

Moreover, the Websters did not accept that they had been guilty of a repudiatory breach, and both sides, after the spat of correspondence in January and February 2009, proceeded on the basis that the contract was on foot. In particular, there is a letter of 31 July 2009 acknowledging, as it was put, that the loan note was then due. In fact, the sums only fell due for payment a few days later, as perusal of the 31 July 2009 letter, which referred to the previous request of 4 August, effectively recognised. The statutory demands were subsequently made on 13 February 2010. By that date, there were plainly sums due and payable under the so-called promissory note.

The Websters (then acting in person) applied to set aside the statutory demands. These applications were withdrawn and a costs order was made against them. Mr Mackay then presented petitions on 18 March 2011, which were opposed. £105,000 was paid by the Websters as admittedly due (including a sum which had been ordered to be paid on account of costs following the withdrawal of the statutory demands).

The bankruptcy petitions came on before Registrar Derritt, who handed down a reserved judgment on 2 March 2012, when bankruptcy orders were made.

It was not until almost a year later that the applications to annul were made. It appears that within seven days of the bankruptcy orders Mr Webster received an indication that finance to pay off his debts was available from an entity called Gulf Stream, but nothing came of that. The reason, I am told, was that the then intended strategy of seeking an annulment under section 282(1)(b) was frustrated by the activities of a Mr Davies, in circumstances I shall briefly relate.

Mr Davies had a judgment against Mr Webster which had been reduced by consent on appeal to a sum just below £44,000 (with a proviso for set-off) and the costs that Mr Webster was ordered to pay. The sum of £100,000, the order recited, had already been paid to Mr Davies in May 2011. It was possible that nothing might on balance be owed. Yet Mr Davies claimed in the bankruptcy the maximum amount of his debt, before the reduction on appeal, and ignoring the set-off.

Mr Davies also somehow managed to get himself appointed as trustee, though he resigned shortly afterwards in August 2012 under pressure from creditors, claiming to have run up costs recoupable from the bankruptcy of at least £60,000. Those were his own profit costs, and there were disbursements on top. This undermined the then strategy of the appellants to apply under section 282(1)(b) of the Act to annul the bankruptcy by paying off all the creditors, and costs, with the help of Gulf Stream. I am prepared to accept that this caused them real difficulties, but is irrelevant to the annulment application now made. I have found that there was no repudiation by the Websters of the loan agreement, from which it follows that Mr Mackay’s claim was for a liquidated debt which remained substantially due, notwithstanding the payment of £105,000 between the issue of the statutory demand and the making of the petition.

Further, even if there was (or was arguably) an accepted repudiation, that would not, on ordinary principles, affect vested rights. In my judgment, Mr Mackay had a vested right to payment at the expiry of 12 months by virtue of the service of his notice on 4 August 2008. A present right to future payment in not in my judgment transformed into a claim for damages upon acceptance of a repudiatory breach. Even if there had not been such a demand in August 2008, the vested right would have been for payment by (at the latest) the payment date of 31 October 2011 stipulated in the so-called promissory note. As the statutory demand pre-dated that date, it would not be appropriate to rely upon that vested right as a debt which could then be demanded. However, the note of 4 August 2008 was sufficient to trigger the right to payment one year later, so no repudiation in the meantime could take that right away.

I asked the Websters' counsel if he could point to any case where repudiation had turned what was at inception a loan into a claim for damages and he could not. He merely referred me, quite properly, to statements of principle found in cases such as Moschi v Lep Air Services Ltd [1973] AC 331 and McGuiness v Norwich and Peterborough Building Society, [2012] 2 BCLC 233, both cases on guarantees.

In my judgment a debt, including one payable at a future date, remains a debt following repudiation. This is not a case like Hope v Premierspace (Europe) Ltd [1999] BPIR 695, where the claim was a to compensate the aggrieved party for loss suffered by that party, which was characterised as unliquidated even though that loss could be precisely calculated down to the last penny. This is not and never was a compensation claim. It is and was a claim in debt.

It follows that it cannot in my judgment be said that the bankruptcy orders should not have been made. The appeal must therefore be dismissed as the condition for the exercise of the power to annul under section 282(1)(a) was not met.

This is not, as it happens, the basis upon which the Chief Registrar dealt with the case, though the point was raised by a respondent’s notice. As I have said, he proceeded on the basis that it was strongly arguable that Mr Mackay’s remedy was for damages only, meaning that the debt was unliquidated. He instead went on to reject the annulment applications on discretionary grounds.

Although I have decided the annulment appeal on a different basis, the way in which the registrar exercised his discretion is still relevant to the alternative claim for rescission under section 375 of the Act. Section 375(1) provides as follows:

There is no doubt that that enabled the Chief Registrar, if he thought fit, to revisit Registrar Derritt's previous orders and to rescind them, even though it could not be said that the orders should not have been made at the time. Although there is that formal discretion, it is a discretion which, as the Chief Registrar recognised, is to be exercised judicially. He cited extensively from the decision of Patten J (as he then was) in Ahmed v Mogul Eastern Foods [2007] BPIR 975, noting its extensive citation by Asplin J (as she now is) in Vaidya v Wijayardhana [2010] BPIR 1016. Amongst the cases considered in extenso by Patten J was the decision of Laddie J in Papanicola v Humphreys [2005] 2 AER 418, from which the following propositions emerged:

It is thus apparent that the Chief Registrar properly directed himself as to the relevant matters informing his discretion under section 375(1).

In paragraph 28 of his judgment, the Chief Registrar set out a number of factors which in his judgment militated against the exercise of the discretion to annul. The same factors are obviously relevant to the exercise of the discretion to rescind also. I need not repeat them in detail, but they included matters such as delay in taking the point, the change of position, the costs incurred by Mr Mackay, question marks over who would meet the trustees’ costs and the fact that at the time the bankruptcy order was made the applicants were cash flow insolvent, despite gallant efforts they had made to demonstrate balance sheet solvency, upon which question he thought they might well be right. I should say that, were I wrong on the question of whether or not the debt was liquidated, it would be very difficult if not impossible to interfere with the exercise of the Chief Registrar’s discretion on the annulment application. However, that point only now arises in the context of rescission. As to that, the Chief Registrar went on to say:

It is said against that that there was a significant new factor which emerged, namely the offer of further finance from Gulf Stream within a week of the hearing which was effectively undermined, it is said, by Mr Davies's extravagant claims. It is also said that that offer is still in principle on the table. Be that as it may, no offer for immediate payment has been advanced. If that were the position, one would expect the application to be made under section 282(1)(b), which was for a long time the preferred strategy as some months were spent by the Websters negotiating with creditors, in some cases to reduce the amounts claimed in the event of annulment. That route having proved fruitless for whatever reason, this new route of challenging the liquidated character of the debt was pursued instead, no doubt as a result of entirely competent legal advice given in good faith. The Chief Registrar was right to treat this as another, albeit different, bite of the cherry, insufficient to engage the exceptional jurisdiction of section 375.

The result is that the court can have no confidence, despite, as the Registrar put it, the gallant efforts of the Websters to demonstrate balance sheet solvency, that the undoubted substantial indebtedness owed both to Mr Mackay, and other creditors, much but not all of which is admitted, will be paid within any reasonable time frame. Given in addition that the bankruptcy was over a year old, it seems to me that the Registrar was entitled if not bound to dismiss the rescission claim too.

In those circumstances, the appeal is dismissed.