House of Lords
|Session 2001- 02
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|Judgments - Smith (Administrator of Cosslett (Contractors) Ltd (Appellant) v. Bridgend County Borough Council (Respondents)
HOUSE OF LORDS
Lord Bingham of Cornhill Lord Browne-Wilkinson Lord Hoffmann Lord Scott of Foscote Lord Rodger of Earlsferry
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
SMITH (ADMINISTRATOR OF COSSLETT (CONTRACTORS) LIMITED
BRIDGEND COUNTY BOROUGH COUNCIL
ON 8 NOVEMBER 2001
 UKHL 58
LORD BINGHAM OF CORNHILL
1. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Hoffmann. I am in full agreement with it and for the reasons which he gives I would allow the appeal and make the order which he proposes.
2. I have had the advantage of considering the speech of my noble and learned friend, Lord Hoffmann, in draft. I agree with it and for the reasons he gives I too would allow the appeal.
3. This appeal raises two questions of general importance. The first is whether a standard condition in the Institution of Civil Engineers form of contract which allows the employer, in various situations of default by the contractor, to sell his plant and equipment and apply the proceeds in discharge of his obligations, is a floating charge which should be registered under section 395 of the Companies Act 1985. The second is the effect of a failure to register when the contractor has gone into administration but the employer has nevertheless purported to exercise the power of sale.
4. The contract, dated 28 January 1991, was for engineering works to rehabilitate an area of 141 hectares of the upper Garw valley which had been disfigured by derelict coal dumps. The employer was the Mid-Glamorgan County Council, which disappeared on a reorganisation of Welsh local government and was succeeded for this purpose by the Bridgend County Borough Council. I shall refer to both as "the council". The contractor was Cosslett (Contractors) Limited, which I shall call "the company".
5. The largest items of equipment brought on site by the contractor were two coal washing plants which were used to separate usable coal from residue. The council had advanced about £1.8 million to the company to enable it to buy the washing plants and the contract provided for repayment by way of deduction from the sums which would periodically become payable to the company over the term of the contract, which was expected to last about four years.
6. Condition 53(1) of the standard ICE conditions has a definition of "plant" and 53(2) provides that all plant, goods and materials owned by the contractor "shall when on the site be deemed to be the property of the employer". In this case, however, the parties had amended the definition of plant to include a specific reference to the coal washing plant:
"Constructional plant" has its own definition in condition 1(1)(o):
That seems easily wide enough to accommodate the washing plant and so it is not clear why they needed a special mention in condition 53(1). Perhaps the draftsman of the amendments did not notice that constructional plant was a defined expression. In any event, I do not think that it made any difference.
7. Clause 53(2), which, as I have said, provided that the contractor's plant goods and materials should, when on site, "be deemed to be the property of the employer", was amended to add "The washing plant must be owned by the contractor or by a company in which the contractor has a controlling interest". This condition was observed. The washing plant was at all times owned by the company.
8. Also relevant are conditions 53(6) and (7):
9. Thus the status of being deemed to be property of the employer attached to plant etc when it was brought onto the site and ceased to attach when, subject to the consent of the engineer, it was removed from the site.
10. The condition which gives rise to the present dispute is 63(1):
11. After about two years of operating the contract the company found that selling the recovered coal was not as profitable as it had expected. In the summer of 1993 it told the council that it appeared to be heading for insolvency and would not be able to carry on with the contract. On 4 August 1993 it abandoned the site and on 6 August the engineer gave a certificate to that effect in accordance with condition 63. On 12 August the council gave 7 days notice of its intention to enter upon the site. It found another contractor, Burrows Brothers (Sales) Limited ("Burrows") and entered into a provisional agreement under which they started work at the end of August, using the company's washing plant.
12. On 8 September 1993 the company went into administration. Mr Ian Clark was appointed administrator. He demanded the immediate return of the plant or payment of a substantial hire fee for its use. When the council replied that it was entitled under condition 63 to use the plant, Mr Clark said that the condition was an unregistered floating charge and void against him under section 395(1) of the Companies Act 1985. On 22 November 1993 he commenced summary proceedings under section 234 of the Insolvency Act 1986 for delivery up of the washing plant.
13. On a date in January 1994, while the proceedings under section 234 were pending, the council replaced the provisional arrangements under which Burrows had been employed with a "continuation contract" for the completion of the works. One of the terms of that agreement was that when the works had been completed, Burrows would become owners of the washing plant and could remove and dispose of it.
14. The administrator's application came before the court in December 1995, when Burrows was using the plant under the continuation contract. The council's first line of defence was that the provision in condition 53 by which the plant, when on site, was "deemed to be the property of the employer" meant that it actually became their property. The company lost all title. The judge rejected this argument. He said that condition 63 created a charge over the company's property. But he held that the charge was fixed, not floating. In his opinion condition 53(6) gave the employer an absolute right to refuse to allow any plant to be removed from site and therefore from the scope of the charge if it was immediately required to complete the works and a right to refuse in any other circumstances if it was not unreasonable to do so. This meant that the contractor did not have that freedom to deal with the assets until crystallisation which was the badge of a floating charge. As a fixed charge, it did not need to be registered. On that ground, he dismissed the application.
15. The administrator appealed. By the time the case got to the Court of Appeal in July 1997, the works had been completed and Burrows had either removed or were just about to remove the washing plants from the site. In fact they sold them to a third party for their own account. The administrator does not appear to have had much information about what was happening and the Court of Appeal was invited to deal with the appeal on the basis that the council was still exercising its right to use the plant but, for the avoidance of further litigation, to express a view about what the position would be if the council exercised the power of sale.
16. The Court of Appeal (Evans and Millett LJJ and Sir Ralph Gibson) said that one had to distinguish between the two rights which condition 63 conferred upon the employer. The right to use the plant to finish the works could not be a charge. It was simply a contractual right which continued to be exercisable whether the company was in administration or not. On that ground, the Court dismissed the appeal. On the other hand, they agreed with the judge that the right to sell the plant and apply the proceeds to discharge any debt from the company to the council was a charge. But they did not agree that it was a fixed charge. Millett LJ, with whom the other two judges agreed, pointed out that power to refuse consent to the removal of the plant, which the judge had treated as vested in the employer, was actually conferred upon the engineer. This suggested that the discretion was to be exercised independently on operational grounds and not as a method of enforcing the employer's security for the payment of money. It therefore did not give the employer such control over the plant as to create a fixed charge in advance of crystallisation.
17. The result was that the power of sale was void against the administrator under section 395(1). In the course of discussion after judgments had been handed down, counsel told the court that according to their information, the plant had been sold. Millett LJ remarked that "on our judgment, as it stands at the moment, you would be entitled to an Order 14 judgment."
18. The administrator took the judge at his word and issued a fresh writ claiming damages for conversion of its plant, followed by an application for judgment under Order 14. Judge Toulmin QC gave judgment for damages to be assessed and an interim payment of £389,000. The council appealed and the Court of Appeal (Lord Woolf MR, Ward and Laws LJJ) set aside the judgment on entirely new grounds. Laws LJ (with whom the other judges agreed) said that section 395(1) made the floating charge void against the administrator but not against the company. This meant that in cases in which the administrator had a personal cause of action (such as to recover the company's property in specie by summary proceedings under section 234 of the 1986 Act) he could disregard the charge. But the right to sue for conversion of its property vested in the company, not the administrator. The power of sale remained valid against the company and was an answer to the claim for conversion. The Court of Appeal therefore allowed the appeal and struck out the action. Against that order the administrator appeals to your Lordships' House.
19. My Lords, I shall first address the grounds upon which the Court of Appeal decided the case. They are in my view startling and unorthodox. Section 395, which can be traced back to the Companies Act 1900, (63&64 Vict, c 48), was intended for the protection of the creditors of an insolvent company. It was intended to give persons dealing with a company the opportunity to discover, by consulting the register, whether its assets were burdened by floating and certain fixed charges which would reduce the amount available for unsecured creditors in a liquidation. Whether this was a realistic form of protection and whether the choice of registrable charges was entirely logical is not presently relevant. The plain intention of the legislature was that property subject to a registrable but unregistered charge should be available to the general body of creditors (or a secured creditor ranking after the unregistered charge) as if no such charge existed.
20. When a winding-up order is made and a liquidator appointed, there is no divesting of the company's assets. The liquidator acquires no interest, whether beneficially or as trustee. The assets continue to belong to the company but the liquidator is able to exercise the company's right to collect them for the purposes of the liquidation.
21. It must in my opinion follow that when section 395 says that the charge shall be "void against the liquidator", it means void against a company acting by its liquidator, that is to say, a company in liquidation. In In re Monolithic Building Company  1 Ch 643, 667 Phillimore LJ said of a predecessor of section 395:
The last sentence shows some degree of confusion because of course the liquidator is not a successor of the company. But Phillimore LJ was quite right in saying that section 395 does not invalidate a charge against a company while it is a going concern, that is to say, when it is not in liquidation. On the other hand, once the company is in liquidation and can act only by its liquidator, there seems to me little value in a distinction between whether the charge is void against the liquidator or void against the company. It is void against the company in liquidation.
22. In Independent Automatic Sales Ltd v Knowles & Foster  1 WLR 974 a company in liquidation which had sold machines on hire-purchase brought an action against a finance company to recover hire-purchase agreements and other securities which it had charged to secure the repayment of advances. When the finance company relied upon the charge, the plaintiff replied that it was void because it should have been registered as a charge over book debts under a predecessor of section 395. The plaintiff named in the writ was the company. Mr Arthur Bagnall QC for the defendant took the preliminary point that as the liquidator was claiming that the charges were void as against him, he should have been the plaintiff. Buckley J agreed but allowed an amendment to join the liquidator as an additional plaintiff and the action proceeded.
23. As everyone knew that the company was in liquidation and suing by its liquidator, it is hard to see what the point of this manoeuvre was, unless the defendants had omitted or been unable to obtain an order for security for costs and hoped to be able to make the liquidator personally liable. (In the event they lost, so it did not matter). But I respectfully think that Buckley J was wrong. The cause of action was vested in the company. It owned the hire-purchase agreements. It should therefore have been the plaintiff. The liquidator was causing it to sue for the purpose of realising assets to be distributed in the liquidation. The fact that he relied upon the statute to invalidate what would otherwise be a defence open to the holder of the assets does not alter the nature of the proceedings or provide a reason why he should have to expose himself to personal liability for costs.
24. I express no view on the related question, which came before Knox J in Re Ayala Holdings Ltd (No 2)  1 BCLC 467 as to whether a liquidator (or administrator) can assign the company's right to recover property free from a charge avoided by section 395. Even if I am right in thinking that the proceedings in the Independent Automatic Sales case were properly brought in the name of the company, the decision of Knox J against such an assignment can be upheld on the ground that the right of avoidance under section 395 is not in itself an assignable item of property and can be claimed only by the company acting by its liquidator or administrator.
25. This brings me to section 234 of the 1986 Act, which Laws LJ treated as the only situation in which the administrator would be able to sue in his own name and therefore be able to rely upon the fact that the charge was void against him. This section can be traced back to section 100 of the Companies Act 1862 (25&26 Vict, c 89). Originally it was confined to applications against contributories and "any trustee, receiver, banker, or agent, or officer of the company". It provided a summary procedure by which they could be required to "pay, deliver, convey, surrender, or transfer" to the liquidator "any sum on balance, on books, papers, estate, on effects, which happen to be in his hands for the time being, and to which the company is prima facie entitled."
26. In its original form, such an application was not an originating process. It was an application in the liquidation, invoking the summary jurisdiction of the Companies Court against certain persons connected with the company and in possession of its money or property. Its purpose was to enable the liquidator to carry out his statutory functions. It did not necessarily involve a determination of title. If, for example, the liquidator appeared on affidavit evidence to be prima facie entitled to property, books or records which he needed to proceed with the liquidation, the court could in its discretion order the person in possession to hand over the property and argue about ownership later.
27. Plainly, therefore, when the Companies Act 1900 said that an unregistered charge should be void against the liquidator, it was not intending to confine the scope of that provision to cases in which the liquidator was making a summary application under section 100 of the 1862 Act. The registration provisions would have had little value if they applied only to charges in favour of the persons subject to the summary jurisdiction. It is to be observed that Independent Automatic Sales Ltd v Knowles & Foster  1 WLR 974 was an ordinary action commenced by writ.
28. The scope of the summary procedure was enlarged by provisions of the Insolvency Act 1985 which are now contained in section 234 of the 1986 Act. It is now available against any person who has in his control "any property, books, papers or records to which the company appears to be entitled". It remains, however, a summary discretionary remedy, obtainable by a liquidator or other office-holder for the purpose of enabling him to carry out his functions and which does not necessarily involve any determination of title.
29. When administration was introduced by the Insolvency Act 1985, section 395 of the Companies Act 1985 was amended simply by adding the words "or administrator" after the word "liquidator". This seems to me to indicate that the section was to operate in relation to a company in administration exactly as it had in relation to a company in liquidation. An administration order did not vest any of the company's property in the administrator any more than a winding-up order vested it in the liquidator. Instead, section 14 of the 1986 Act gave the administrator powers in many respects similar to those of a liquidator over the company's property:
30. Paragraph 1 of Schedule 1 gives the administrator power to "take possession of, collect and get in the property of the company and, for that purpose, to take such proceedings as may seem to him expedient" and paragraph 5 confers power to bring any action in the name and on behalf of the company.
31. Ordinarily, therefore, an action brought by an administrator to assert a claim on behalf of the company should be in the name of the company. The title to the claim will be vested in the company. In the present case, for example, section 14(1) and the Schedule gave the administrator ample power to cause the company to bring an action against the council for converting its property. If the defence to such a claim is a charge which is avoided by section 395, the company will be entitled to rely upon the section. As in the case of liquidation, I consider that "void against the administrator" means void against the company in administration or (another way of saying the same thing) against the company when acting by its administrator.
32. In fact, the title given to the writ in the proceedings under appeal was headed "Between Ian Clark, the Administrator of Cosslett (Contractors) Ltd and Bridgend County Borough Council." In my view, the proper heading should have been "Between Cosslett (Contractors) Ltd (In administration) and Bridgend County Borough Council." But no one was misled about the nature of the proceedings because the statement of claim endorsed on the writ made it clear that the claim was for loss and damage suffered by the company on account of the conversion of its property. So I do not think that any amendment was necessary. On the other hand, the earlier proceedings under section 234 were at first headed "In the matter of Cosslett (Contractors) Limited and in the matter of the Insolvency Act 1986, between Cosslett (Contractors) Ltd, applicant, and Mid-Glamorgan County Council, respondent." Later the title was amended to substitute the name of the administrator for that of the company as applicant. In this case I think that second thoughts were correct.
33. Laws LJ described the effect of section 395 as being to confer upon the administrator "a purely adventitious potential claim in specie to recover or retain the plant" and the right to "take advantage" of the ineffectiveness of the floating charge as "nothing but statutory serendipity". I see no reason to impute such whimsical intentions to the legislature. The purpose of section 395 as originally enacted was to protect the interests of the general body of creditors. The purpose of section 395 as extended to administrators is to protect the interests of the company in administration and, if it should subsequently go into liquidation, the interests of creditors. If, on the other hand, the company emerges solvent from the administration, the secured creditor will by definition obtain payment of his debt without recourse to the avoided security.
34. In giving section 395 a narrow and arbitrary construction, Laws LJ appears to have been influenced by what he regarded as the merits of the case. He thought it was unfair that the council should lose its security over the plant when it had a cross-claim greatly exceeding the value of that security, part of which arose from the advances which had enabled the company to buy the plant in the first place. He said that if there had been no charge created by condition 63, any claim by the company for damages for conversion would "plainly" have been met by a set-off, either in equity or under rule 4.90 of the Insolvency Rules, raising the council's cross-claim. There would in his judgment have been "no answer" to such a set-off. Why should the council be in a worse position because it had taken an unregistered charge?
35. If there was indeed such a right of set-off, the argument would be a strong one. And, encouraged by the judge's remarks, Mr Moss QC, who appeared for the council, submitted that even if the charge was void not merely against the administrator personally but against the company in administration, he could still rely upon an equitable set-off. But in my opinion neither equitable set-off nor (if the company were to go into liquidation) set-off under Rule 4.90 would be available. The position under rule 4.90, which provides for a set-off arising out of "mutual credits, mutual debts or other mutual dealings between the company and any creditor", was expressly considered by Millett LJ in Manson v Smith (liquidator of Thomas Christy Ltd)  2 BCLC 161. There a director who had been held liable for misappropriating funds belonging to an insolvent company attempted to invoke rule 4.90 to set off his liability against what the company owed him on loan account. Millett LJ said "a misappropriation of assets is not a dealing". Nor is a conversion of the company's property.
36. Similarly, equitable set-off depends upon showing some equitable reason for protection against the plaintiff's demand: see Hanak v Green  2 QB 9. In my opinion a defendant could not, in the absence of a lien or other security, claim to retain an asset belonging to a plaintiff by way of set-off against a monetary cross-claim. If this were not the case, everyone would in effect have a lien over any property of his debtor which happened to be in his possession. It follows, in my opinion, that he cannot improve his security in equity by wrongfully converting the debtor's property. As Lord Uthwatt said in Winter Garden Theatre (London) Ltd v Millennium Productions Ltd  A C 173, 203: "In a court of equity, wrongful acts are no passport to favour." To allow an equitable set-off would be to allow the council to exercise the very right which it could have exercised if the charge had been registered but which section 395 was intended to avoid.
37. Mr Moss next submitted that the council had not done any act which could be regarded as a conversion of the plant. Conversion is a tort against a person entitled to possession and when the council entered into the continuation contract which gave Burrows the right to take away the plant on completion of the works, the company had no right to possession. The council was entitled, as the first Court of Appeal held, to retain possession for the purpose of completing the works. When the works were completed and the company became entitled to possession, the council did not do anything to interfere with that right. Burrows simply removed the plant. If anyone converted the plant, Burrows did.