[COURT OF APPEAL]

ROBERTS PETROLEUM LTD. v. BERNARD KENNY LTD.

[1979 R. No. 34]

Execution - Charging order nisi - Order absolute - Order nisi obtained by company's largest creditor - Statement of affairs showing company to be insolvent - Extraordinary resolutions passed that company be wound up - Charging order made absolute - Order discharged by judge on basis of company's apparent insolvency and probable liquidation - Whether proper exercise of discretion - Principles on which discretion to discharge or make order absolute to be exercised

The plaintiffs supplied petroleum products wholesale to the defendants who owned two filling stations. By October 1978 the defendants owed large sums of money to their various wholesalers, including the plaintiffs. On March 8, 1979, the plaintiffs issued a specially indorsed writ claiming from the defendants £74,001.02 for petrol sold and delivered between 1977 and 1979. The defendants did not enter an appearance. After a meeting of the defendants' directors on March 12, 1979, instructions were given for a statement of affairs to be prepared and notice was given of an informal meeting of all creditors to be held on March 26, 1979, and creditors were asked not to begin or continue any legal proceedings against the defendants. Nevertheless on March 23, 1979, the plaintiffs entered judgment against the defendants in default of appearance for the sum claimed and on the same day sought and obtained a charging order nisi under which the defendants' two filling stations were charged with the payment of the judgment debt and a receiver was appointed. April 4, 1979, was fixed as the date on which cause could be shown why the charging order should not be made absolute. At the meeting on March 26, the plaintiffs were represented and 12 other creditors having claims amounting in all to £95,000 were either present or represented. The statement of affairs showed that the defendants were insolvent with an overall deficit of £106,000. It was proposed that there should be a 56-day moratorium subject to the withdrawal of the plaintiffs' proceedings and subject to other safeguards but the plaintiffs would not agree with the plan. As a result an extraordinary

meeting of the defendants was held on April 2 at which extraordinary resolutions were passed that the defendants be wound up and a liquidator appointed. On April 4 the district registrar ordered that the charging order nisi should be made absolute but on October 13, 1980, Bristow J. allowed the defendants' appeal and discharged the order. He expressly found that once the resolutions of April 2, 1979, had been passed, although no further steps to wind up had been taken, there was no prospect of a finding of solvency and the defendants were on the road to liquidation.

On appeal by the plaintiffs:-

Held, allowing the appeal, (1) that the judge had misdirected himself in law in exercising his discretion to discharge the order since the authorities established that the insolvency of a company, followed or to be followed inevitably by liquidation, was not enough of itself to justify the court in exercising its discretion by refusing to make the charging order absolute; that there had to be some further factor in the situation, the most common being that a scheme of arrangement had been set on foot by the main body of creditors and had a reasonable prospect of succeeding (post, pp. 308B-D, 310A-B).

Burston Finance Ltd. v. Godfrey [1976] 1 W.L.R. 719, C.A. and Glass (Cardiff) Ltd. v. Jardean Properties Ltd. (1976) 120 S.J. 167, C.A. applied.

Rainbow v. Moorgate Properties Ltd. [1975] 1 W.L.R. 768, C.A. distinguished.

(2) That, accepting the judge's finding that the defendants were insolvent and irretrievably on the road to liquidation, on the evidence, there was not in existence at the material time a well-advanced scheme of arrangement set up by the main body of creditors which had a reasonable chance of success; that there was no more than a tentative plan, agreed to by creditors whose claims amounted in all to some 55 per cent. of the defendants' total trade debts, the balance of some 45 per cent. being owed to the plaintiffs and the evidence did not establish that that tentative plan had a reasonable chance of success; and that, accordingly, the court would exercise its discretion by making the charging order absolute (post, pp. 309C, F-H, 310A-B).

The following cases are referred to in the judgment of Lord Brandon of Oakbrook:

Burston Finance Ltd. v. Godfrey [1976] 1 W.L.R. 719; [1976] 2 All E.R. 976, C.A.

Glass (Cardiff) Ltd. v. Jardean Properties Ltd. (1976) 120 S.J. 167; Court of Appeal (Civil Division) Transcript No. 35 of 1976, C.A.

Hudson's Concrete Products Ltd. v. D. B. Evans (Bilston) Ltd. (1961) 105 S.J. 281; Court of Appeal (Civil Division) Transcript No. 110 of 1961, C.A.

Rainbow v., Moorgate Properties Ltd. [1975] 1 W.L.R. 788; [1975] 2 All E.R. 821, C.A.

Wilson (D.) (Birmingham) Ltd. v. Metropolitan Property Developments Ltd. [1975] 2 All E.R. 814, C.A.

The following additional cases were cited in argument:

Ayerst v. C. & K. (Construction) Ltd. [1976] A.C. 167; [1975] 3 W.L.R. 16; [1975] 2 All E.R. 537, H.L.(E.).

Bowkett v. Fullers United Electric Works Ltd. [1923] 1 K.B. 160, C.A.

Caribbean Products (Yam Importers) Ltd., In re [1966] Ch. 331; [1996] 2 W.L.R. 153; [1966] 1 All E.R. 181, C.A.

Centrebind Ltd., In re [1967] 1 W.L.R. 377; [1966] 3 All E.R. 889.

Leitch (William C.) Brothers Ltd. (No. 2), In re [1933] Ch. 261.

Wicks v. Shanks (1892) 67 L.T. 609, C.A.

APPEAL from Bristow J.

By a specially indorsed writ dated March 8, 1979, the plaintiffs. Roberts Petroleum Ltd., claimed from the defendants, Bernard Kenny Ltd., the sum of £74,001.02 owing to them for petroleum spirit supplied and delivered to the defendants between October 1977 and January 1979. The defendants failed to enter an appearance and on March 23, 1979, the plaintiffs obtained judgment in default together with £54.55 costs. On the same date the plaintiffs applied to the Scunthorpe District Registry for a charging order nisi in respect of two filling stations which the defendants owned or had an interest in, namely, the Malton Road Filling Station. Pickering, North Yorkshire, and the Marklands Garage, Langthorpe, Boroughbridge, North Yorkshire. The registrar made the order and fixed April 4, 1979, as the date on which cause should be shown why the charging order should not be made absolute. A receiver was appointed to receive any moneys receivable in consequence of enforcing the charging order.

On April 4, 1979, the charging order was made absolute. The defendants appealed to the judge in chambers on the ground that the district registrar had been wrong in law and/or had wrongly exercised his discretion in making the charging order absolute. Bristow J. took the view that the registrar had come to a wrong conclusion and on October 13, 1980, he discharged the order.

The plaintiffs appealed to the Court of Appeal Oil the grounds that the judge had been wrong in law and/or had wrongly exercised his discretion in discharging the order absolute; that the judge, had misapplied and/or had come to a conclusion contrary to and/or inconsistent with the principles contained in the decisions of the Court of Appeal in Glass (Cardiff) Ltd. v. Jardean Properties Ltd. (1976) 123 S.J. 167; Court of Appeal (Civil Division) Transcript No. 35 of 1976 and Burston Finance Ltd. v. Godfrey [1976] 1 W.L.R. 719 and that the judge's order should be set aside.

The facts are stated in the judgment of Lord Brandon of Oakbrook.

Anthony Hidden Q.C. and Paul W. Miller for the plaintiffs.

Andrew Morritt Q.C. and Michael Crystal for the defendants.

December 21. The following judgment was read.

LORD BRANDON OF OAKBROOK. This appeal arises in an action in which Roberts Petroleum Ltd. ("Roberts") are plaintiffs and Bernard Kenny Ltd. ("Kenny"), now in liquidation, are defendants.

Roberts are and were at all material times wholesale suppliers of petroleum products. Kenny, at all material times before they went into liquidation, were retailers of such products, and as such were the owners of two filling stations in North Yorkshire. The first of these was known as the Malton Road Filling Station, Pickering ("Malton"). The second was known as the Marklands Garage, Langthorpe, Boroughbridge ("Marklands").

Kenny bought the petroleum products which they sold to the public

from a number of different wholesalers. These included Roberts, Cawoods Fuel Oils Ltd. ("Cawoods"), National Benzole Co, Ltd. ("National Benzole") and Nafta (G.B.) Ltd. ("Nafta").

By October or November 1978 Kenny had run into serious financial difficulties in that they owed large sums of money to their various wholesalers which they were unable to pay as and when payment became due. The creditors to whom Kenny owed the largest debt were Roberts.

In this situation negotiations were entered into between two firms of solicitors acting for Roberts and Kenny respectively. The aim of these negotiations was that, in consideration of Kenny being given extended credit by Roberts, Kenny would give Roberts a first legal charge on Marklands to secure their indebtedness to the latter. The negotiations proceeded a long way and nearly reached fruition. In the end, however, Kenny failed to execute the instrument of charge which had been prepared, and on or about February 27, 1979, the negotiations came to an abrupt end.

Meanwhile, on January 24, 1979, Cawoods had issued a specially indorsed writ against Kenny, in which they claimed £22,500 for petrol sold and delivered. That writ had been served on Kenny on February 7, 1979, but no appearance had been entered by Kenny to it.

On March 8, 1979, following the breakdown of the negotiations between Roberts and Kenny through their respective solicitors to which I referred above, Roberts issued a specially indorsed writ against Kenny in which they claimed £74,001.02 for petrol sold and delivered. That writ was served on Kenny by post forthwith. Again, as in the case of Cawoods's writ, no appearance was entered by Kenny.

Shortly afterwards, on March 9 or 12, 1979, Cawoods entered judgment in default of appearance against Kenny for the amount of their claim (less certain small sums which it was agreed that Kenny were entitled to set off) and costs.

Before Cawoods obtained that judgment, correspondence took place between Cawoods's solicitors and the solicitors acting for Kenny in relation to Cawoods's claim, in which Cawoods's solicitors pressed Kenny's solicitors to get the directors of Kenny to guarantee personally the indebtedness of Kenny to Cawoods. This correspondence began on February 26, 1979, and continued until March 6, 1979, when Kenny's solicitors rejected the proposal. Cawoods's solicitors then put forward an alternative proposal for ensuring payment for any petrol sold by them to Kenny, which Kenny's solicitors by letter dated March 8, 1979, also rejected. Cawoods's solicitors then threatened, on behalf of their clients, to enforce the judgment which they had earlier obtained against Kenny unless Kenny agreed to make certain specified instalment payments. Kenny did not so agree, but in fact Cawoods's solicitors took no steps to enforce the judgment concerned.

On March 12, 1979, there was a meeting of Kenny's directors attended by Mr. Ward, a partner in the firm of solicitors acting for Kenny in relation to Cawoods's claim. Mr. Ward had originally supposed that Cawoods were Kenny's only creditors, but had later learnt from Kenny's auditors that there were other creditors also, and that these auditors had recommended to Kenny that they should sell their two filling stations. Malton and Marklands, as going concerns, in order to meet the claims of their creditors.

At the meeting on March 12, 1979, Mr. Ward advised Kenny's directors that the company ought not to delay any further in putting its

affairs before all its creditors. He further asked for, and obtained, instructions from the directors to engage an independent firm of insolvency accountants, Messrs. Poppleton and Appleby of Sheffield ("Poppletons"), to prepare a statement of affairs as a matter of urgency.

On March 16, 1979, Poppletons sent out letters, all in the same terms, to each of Kenny's creditors, including Roberts. In those letters Poppletons gave notice of a meeting (since described as an "informal meeting") of all Kenny's creditors to be held at the offices of Kenny's solicitors in Leeds on March 26, 1979. They invited all creditors to attend the meeting and asked them meanwhile not to begin or continue any legal proceedings against Kenny. They further requested the creditors to inform them of the amounts owing to them and of any securities in respect of such indebtedness held by them.

On March 23, 1979, Roberts entered judgment against Kenny in default of appearance for £74,001.02 and £54.55 costs. They then on the same day sought and obtained from the Scunthorpe District Registrar a charging order nisi under which Kenny's two filling stations, Malton and Marklands. were charged with payment of the judgment debt. The order further provided that Mr. Panter, an accountant employed by Roberts, should be appointed as receiver for the purposes of the charging order, and fixed April 4, 1979, as the date on which cause could be shown why the charging order nisi should not be made absolute.

The informal meeting of creditors arranged by Poppletons took place as planned on March 26, 1979. Roberts were represented by Mr. Armitage, an accountant, and 12 other creditors of Kenny, having claims amounting to about £95,000 in all, were either present or represented. It was estimated that the claims of Roberts and the other 12 creditors present or represented constituted about 95 per cent. of the total trade claims against Kenny. Mr. Ward informed the meeting of the charging order nisi obtained by Roberts, and made available to the creditors the statement of affairs prepared by Poppletons. The latters' report of the meeting showed that the principal creditors were National Benzole for £37,922, Cawoods for £22,141, Nafta for £24,520 and Roberts for £74,055. The statement of affairs showed that Kenny were insolvent, with an overall deficit of the order of £106,000.

The conclusion reached by the meeting was expressed by Poppletons in the penultimate paragraph of their report as follows:

"In conclusion, therefore, the creditors present unanimously agreed to the aforesaid recommendation of a 56 day moratorium subject to the withdrawal of proceedings by Roberts and subject to the company being able to trade for cash, which it has done for practical purposes for the whole of March, without suffering any substantial loss in trading. It was also therefore agreed that Messrs. Poppleton and Appleby set up a weekly cash account system so that the largest creditors could have a weekly receipts and payments account and in the meantime the company to incur no further credit and pay no further payments to creditors."

According to Mr. Ward, when the meeting closed, it was left that Roberts would inform him of their decision within 48 hours. In fact, again according to Mr. Ward, it proved impossible to obtain from Roberts, who did not agree with the plan, any decision either way on the matter. As a result an extraordinary meeting of Kenny was held at Mr. Ward's offices at 12.00 noon on April 2, 1979, at which extraordinary resolutions were

passed that Kenny be wound up and that Mr. Priestley of Poppletons should be appointed liquidator.

Two days later, on April 4, 1979, there took place before the district registrar the hearing of the question whether or not good cause had been shown why the charging order nisi obtained by Roberts on March 23, 1979, should not be made absolute. The district registrar, being aware from the affidavits put in on either side of the history of the matter as I have described it, came to the conclusion that the charging order nisi should be made absolute, and made an order to that effect.

Kenny desired to appeal from that decision and the view of the solicitors on both sides was than an appeal from a district registrar against an order making absolute a charging order nisi lay directly to this court. Later, after a great deal of unnecessary effort and money had been expended for the purpose of an appeal to this court, it became apparent that, under the Rules of the Supreme Court then in force, such an appeal lay to a judge in chambers and not directly to this court.

As a result of these misapprehensions about the proper procedure for appealing from the district registrar, a great deal of time was also lost, so much so that the appeal did not come before a judge in chambers, Bristow J., until October 13, 1980. That appeal was clearly a long way out of time, but, since there had been a common mistake by the solicitors on either side, no point was taken about that.

By order dated October 13, 1980, Bristow J. allowed Kenny's appeal and set aside the order of the district registrar dated April 4, 1979. We had placed before us what was described as an agreed note of the reasons given for his decision by Bristow J. It appears, however, that the agreed note was never submitted to the judge for his approval as it ought to have been. We must, however, do the best we, can on the material before us.

The judge expressly found that, once the resolutions of April 2, 1979, were passed, although no further steps towards winding up had been taken, there was no prospect of a finding of solvency, and Kenny were on the road towards liquidation from which there was no turning back for them.

He went on to deal with the principles of law applicable in deciding whether or not, in circumstances of the kind before him, a charging order nisi should be made absolute. In this connection he said:

"It is certain that if the creditor who has secured the advantage of the charging order nisi has done so by means of doing something amounting to a 'dirty trick' - for instance has given the appearance of going along with a scheme of arrangement and then gone behind the other creditors and taken advantage of special knowledge; or anything which a fair-minded person would stigmatise as not being fair play - the court will stigmatise that as inequitable and will not confirm the order. But as I read the cases that is not the only situation in which it would be inequitable to let him keep his advantage. If, at the time when the court has to decide whether or not to make the order absolute, the company is irretrievably on the road to dissolution, then the consideration of obtaining equal treatment for all the unsecured creditors in order to do equity becomes paramount, and the creditor who, even without any degree of foul play or trickery, has obtained an advantage (which is still provisional) is not to be allowed to keep that advantage. That seems to me to follow from the cases. Accordingly the district registrar was wrong and ought to have discharged the order."

Cases like the present one involve a conflict between two well-established principles of law. The first principle is that a judgment creditor is in general entitled to enforce a money judgment which he has lawfully obtained against a judgment debtor by all or any of the means of execution prescribed by the relevant rules of court. Such rules provide, among other things, for the enforcement of a judgment debt by means of a executing order on the judgment debtor's lands or interests in land and the appointment of a receiver. The second principle is that, when a judgment debtor, whether he be a natural person or a corporate body, has become insolvent, all the unsecured creditors should be treated equally, each receiving the same proportionate share of the inadequate fund available as all the others.

Various authorities were cited to us, as they were before Bristow J., in which this court decided, on the particular facts of the particular case, whether a garnishee or charging order nisi should be made absolute or not. Those authorities included: Hudson's Concrete Products Ltd. v. D. B. Evans (Bilston) Ltd. (1961) 105 S.J. 281; Court of Appeal (Civil Division) Transcript No. 110 of 196l; D. Wilson' (Birmingham) Ltd. v. Metropolitan Property Developments Ltd. [1975] 2 All E.R. 814; Rainbow v. Moorgate Properties Ltd. [1975] 1 W.L.R. 788; Glass (Cardiff) Ltd. v. Jardean Properties Ltd. (1976) 120 S.J. 167; Court of Appeal (Civil Division) Transcript No. 35 of 1976 and Burston Finance Ltd. v. Godfrey [1976] 1 W.L.R. 719.

I do not propose to examine individually these various authorities cited to us, the outcome of which necessarily depended in the end on the particular facts of each particular case. I shall rather try to distil from those authorities the principles of law which they appear to me collectively to establish. In cases where a charging order being made absolute is not precluded by a winding up order, those principles can, in my view, be summarised as follows.

(1) The question whether a charging order nisi should be made absolute is one for the discretion of the court.

(2) The burden of showing cause why a charging order nisi should not be made absolute is on the judgment debtor.

(3) For the purpose of the exercise of the court's discretion there is, in general at any rate, no material difference between the making absolute of a charging order nisi on the one hand and a garnishee order nisi on the other.

(4) In exercising its discretion the court has both the right and the duty to take into account all the circumstances of any particular case, whether such circumstances arose before or after the making of the order nisi.

(5) The court should so exercise its discretion as to do equity, so far as possible, to all the various parties involved, that is to say, the judgment creditor, the judgment debtor, and all other unsecured creditors.

(6) The following combination of circumstances, if proved to the satisfaction of the court, will generally justify the court in exercising its discretion by refusing to make the order absolute: (i) the fact that the judgment debtor is insolvent; and (ii) the fact that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding.

(7) In the absence of the combination of circumstances referred to in (6) above, the court will generally be justified in exercising its discretion by making the order absolute.

In summarising the relevant principles in this way, I have deliberately confined myself to cases like the present one, in which there is no allegation of conduct amounting to trickery on the part of the judgment creditor who has obtained an order nisi.

The judge, as appears from the passage from the agreed note of his judgment which I quoted earlier, treated the circumstance that Kenny were insolvent and irretrievably on the road to liquidation, as sufficient reason by itself for refusing to make absolute the charging order nisi. He further stated that that was the conclusion to which he was led by the authorities cited to him.

With great respect to the judge, I am of opinion that, in approaching the question which he had to decide in this way, he was misdirecting himself in law. The authorities do not, in my view, establish that the insolvency of a company, followed or to be followed inevitably later by a liquidation, is enough of itself to justify the court in exercising its discretion by refusing to make an order nisi absolute. There must, as I indicated earlier when trying to summarise the collective effect of the authorities, be some further factor in the situation, the most common such factor being that a scheme of arrangement has been set on foot by the main body of creditors and has a reasonable prospect of succeeding.

In this connection it is, I think, helpful to refer to the judgment of Scarman L.J. in Burston Finance Ltd. v. Godfrey [1976] 1 W.L.R. 719, bearing in mind that it was a case of a natural person going bankrupt between the date of a charging order nisi and the date of the further hearing for consideration of the question whether the order should be made absolute or not. Scarman L.J. said, at p. 734:

"I cannot conceive how the mere making of a decree for administration of the debtor's estate without further evidence as to the debtor's estate could be a sufficient cause for refusing to make the order absolute. ... Similarly, the mere fact of a receiving order, or even an adjudication of bankruptcy, subsequent to the order nisi, would not necessarily suffice: if, however, there were other circumstances, such as a scheme of arrangement, formal or informal, agreed or being negotiated amongst creditors, the court might well think it equitable to refuse to make the order absolute."

Further light on this aspect of the matter is thrown by the decision of this court in Glass (Cardiff) Ltd. v. Jardean Properties Ltd. (1976) 120 S.J. 167; Court of Appeal (Civil Division) Transcript No. 35 of 1976. Lord Denning M.R. distinguished the case then before him from Rainbow v. Moorgate Properties Ltd. [1975] 1 W.L.R. 788, in which this court refused to make absolute a charging order nisi against an insolvent company. He said, referring to the Rainbow case:

"The important fact there was, not only that the company was in voluntary liquidation, but furthermore there was a well advanced scheme of arrangement. Nearly all the creditors had agreed to it. It was about to come before the court for approval: and there was every prospect of it being approved. ... Mr. Nicholls, with his great experience, has told us that he has never known of a creditor being refused this remedy [i.e. that of having a charging order nisi made absolute], except where there has been a winding-up order or a well advanced scheme of arrangement with every prospect of going through. All that we have in this case is a letter from accountants which leaves

many things unsaid. It is quite insufficient to hold out any substantial prospect of a scheme of arrangement. I see no reason why the judgment creditors, who have been diligent in pursuing their legal rights, should be held up any longer. The registrar was quite right to make the charging order absolute. ... This case is quite outside the Rainbow case. I see no reason why the charging order should not be made absolute."

Lawton L.J. gave a concurring judgment and Bridge L.J. agreed with both the judgments given.

On the footing that the judge, in exercising his discretion in the present case, misdirected himself in law in the respect which I have indicated, it is both the right and the duty of this court to exercise its own discretion anew.

I accept the finding of the judge that Kenny were insolvent and irretrievably on the road to liquidation. But I then go on to ask myself whether there is any other significant factor in the case, and in particular whether there was a scheme of arrangement agreed to by other creditors which had a reasonable chance of success.

As to this, the evidence shows that most of the other creditors were in agreement on a scheme whereby Kenny would be given a moratorium of 56 days to enable them to dispose of their two filling stations, Malton and Marklands, as going concerns to the better advantage of the general body of creditors. This agreement was, however, subject to two conditions. The first condition was that Roberts should withdraw their charging order proceedings. The second condition was that Kenny would be able to trade for cash without suffering any substantial loss in trading. There was no satisfactory evidence as to what prices the filling stations, if offered for sale as going concerns, would be likely to fetch. There was further no certainty at all that Kenny would, pending sale of the filling stations, be able to trade for cash without suffering any substantial loss in such trading.

Finally, and I consider that this is a significant additional factor to bear in mind, the amount of money owed to Roberts, for which they already had a judgment, represented about 45 per cent. of the total amount of money owing to all the known trade creditors taken together. This fact makes it difficult to regard those other creditors as being the "main body" of Kenny's creditors.

On the evidence in this case, I do not think that it is possible to say that there was in existence at the material time a well-advanced scheme of arrangement set up by the main body of creditors which had a reasonable chance of success. There was no more than a tentative plan, agreed to by creditors all of whose claims added up together amounted to only about 55 per cent. of Kenny's total trade debts, the balance of about 45 per cent. being, as I said above, owed to Roberts. That tentative plan might or might not have had a reasonable chance of success. The evidence went nowhere near to establishing that it did have such a chance.

Having regard to these matters, it seems to me that the present case has more in common with the Glass (Cardiff) Ltd. case, 120 S.J. 167 in which this court exercised its discretion by making the charging order nisi absolute, than the Rainbow case [1975] 1 W.L.R. 788, in which the court exercised its discretion by refusing to do so.

After considering all the circumstances of the present case, I have reached the clear conclusion, for the reasons which I have given, that this court should exercise its discretion by making the charging order absolute.

It follows that I would allow the appeal, set aside the order of the judge and restore the order of the district registrar.

CUMMING-BRUCE L.J. I agree.

LORD BRANDON OF OAKBROOK. Dame Elizabeth Lane is unfortunately unable to be here today, but she has authorised me to say that she concurs with my judgment.

Solicitors: Collyer-Bristow for Sergeant & Collins, Scunthorpe; R. C. Moorhouse & Co., Leeds.

E. M. W.