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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 147
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A580/06
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OPINION OF LORD HODGE
in the cause
3052775 NOVA SCOTIA
LIMITED
Pursuers;
against
MATTHEW PURDON HENDERSON
Defender:
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Pursuer:
Sandison; Boyds
Solicitors LLP
Defender: Ellis Q.C., Ms Higgins; Balfour & Manson for Levy & McRae,
Solicitors
19 September 2006
The motion
[1] This
is a motion seeking an interim order under section 47(2) of the Court of
Session Act 1988 to allow the pursuers to enter and possess heritable subjects
at Letham Grange, by Arbroath. Section 47(2) of the 1988 Act provides:
"In any cause in dependence
before the Court, the Court may, on the motion of any party to the cause, make
such order regarding the interim possession of any property to which the cause
relates, or regarding the subject matter of the cause, as the Court may think
fit."
In this action the pursuers seek declarator
that they are entitled to possession of the subjects at Letham
Grange unless and until the disposition in their favour is reduced by the
Court. In their second conclusion the
pursuers seek an order granting a warrant to Messengers-at-Arms to remove the
defender from the subjects and to facilitate the pursuers' possession. The pursuers also seek payment of a sum in
damages arising out of the defender's allegedly vitious
possession of the subjects since 2002.
[2] It is
clear therefore that the order sought is concerned with a property to which the
action relates. That is the first matter to be considered in relation to an
application under section 47(2). The
other matters that are relevant are (a) whether the pursuers have a prima facie case, and (b) the balance of
convenience having regard principally to (i) the
respective strengths of the parties' cases and (ii) the likelihood of either
party suffering harm as a result of the grant or refusal of the order. Although parties did not cite authority on
the correct approach, their submissions were consistent with this approach
which reflects the guidance set out by the Extra Division in Scottish Power Generation Ltd v British Energy Generation (UK) Ltd 2002 SC 517 and by Lord Drummond Young in V A
Tech Wabag UK Ltd v Morgan Est (Scotland) Ltd 2002 SLT 1290
and in Purac Ltd v Byzak Ltd 2005 SLT 37. As the enrolment of the motion triggered a
caveat lodged on behalf of the defender, I had the benefit of submissions on
behalf of both parties.
Background
[3] Letham Grange comprises a hotel and golf courses. The subjects are owned by the Letham Grange Development Company Limited ("LGDC") which
ran a business known as the Letham Grange Country
Club and Resort on the subjects. LGDC
encountered financial difficulties and by disposition dated 12 February 2001 disponed the subjects at Letham Grange to the pursuers. On delivery of the disposition of the
subjects, the pursuers immediately presented it for registration in the Land
Register for Scotland. The Keeper of the Registers has not
registered their title since then and the pursuers aver that they remain the uninfeft proprietors of the subjects.
[4] On 15 November 2002 the defender was appointed provisional liquidator of
LGDC by the Sheriff of Glasgow and Strathkelvin at Glasgow. Thereafter, on 3 December
2002
the defender was appointed interim liquidator of LGDC. The pursuers contest the defender's
appointment as liquidator of the company at a creditors' meeting held on 14 February 2003 as they dispute his decision to recognise certain
creditors as entitled to vote and his refusal to recognise others. The pursuers are making that challenge in an
action in Glasgow Sheriff Court and, in a separate Note in
the liquidation process, are seeking the removal of the defender as liquidator.
[5] The
defender raised proceedings in April 2003 against the pursuers under section
242 of the Insolvency Act 1986 ("the 1986 Act") seeking reduction of the
disposition on the ground that it was granted for inadequate consideration and
was thus a gratuitous alienation. That
action has had a remarkable history. On 9 December 2003 the Lord Ordinary granted
the defender summary decree but gave the pursuers leave to reclaim, and, after
the pursuers amended their pleadings in the Inner House and the case was
remitted back to him, he again granted summary decree on 21 April 2004. The pursuers
again reclaimed with the leave of the Lord Ordinary and the Extra Division
(2005 1 SC 325) refused the reclaiming motion and adhered to the Lord
Ordinary's interlocutor. The pursuers
appealed to the House of Lords, who on 10 May 2006 allowed the appeal and
remitted the case to the Inner House to proceed as accords (2006 SLT 489). The action has thus been in court for over
three years and is now at closed record stage at which the court at first
instance will have to consider the defence which the pursuers put forward and
which I discuss below.
[6] The
pursuers accept that LGDC were insolvent at the date of the disposition and
that they were associates of LGDC. Their
defence is put forward under section 242(4)(b) of
the 1986 Act, namely that the alienation was made for adequate consideration. As the merits of that action are relevant to the balance of
convenience and therefore of some importance to the determination of the
motion, it may be useful if I summarise the parties' positions. The liquidator avers that the board of LGDC,
which was controlled by Mr Dong Guang Liu ("Mr Liu"),
resolved to sell the subjects to the pursuers for г248,100, that LGDC signed a
disposition which bore to be granted in consideration of that sum and that the
pursuers paid stamp duty on the basis that that sum was the consideration for
the conveyance on sale. In their defence
of that action the pursuers aver that they had assumed liability for debts
amounting to г1,850,000 that LGDC owed to members of the Liu family. The
liquidator challenges this account, averring that no records exist of the
transaction in the accounts and books of LGDC or in the files of the solicitors
who acted for both parties in the sale of the subjects. The liquidator also avers that the pursuers'
assertion is inconsistent with claims made by members of the Liu family in the
liquidation. The pursuers on the other
hand refer to contemporaneous advice from their solicitors of the danger of a
transfer at an undervalue, to a resolution of the pursuers dated 7 February
2001 and signed by Mr Liu under the pseudonym of "J Michael Colby" whereby the
pursuers resolved to assume г1,850,000 of debt owed by LGDC to the Liu family,
and to a letter from Mr Liu (writing as "J Michael Colby") on behalf of the
pursuers to himself (in his real name) on behalf of LGDC setting up a lease
between the pursuers and LGDC.
[7] Following
his appointment as provisional liquidator, the defender in the present action
took possession of the subjects and has maintained them as a going concern
since then. The hotel ceased to operate
as a hotel in about October 2004 but part of the building is used as a
clubhouse and the whole building is kept wind and watertight. The golf courses are maintained in operation
by the continued employment of ground staff. The defender as liquidator has no
assets of any significant value beyond the subjects themselves. In order to preserve the business and fund
the litigation against the pursuers, the defender entered into an arrangement
with a company or other legal entity called Viol, whereby Viol operate the golf
club on the defender's behalf and provide him with funds. In return Viol receive
the takings from the operation of the golf club and have an option to purchase
the subjects at an undisclosed price if the defender succeeds in reducing the
disposition in favour of the pursuers.
As a consequence of the lack of other assets and this arrangement with
Viol, if the pursuers were to succeed in their defence of the challenge under
section 242 of the 1986 Act the defender would not have any funds with which to
pay them any damages for his occupation of the subjects since late 2002.
[8] It was
not made clear to me what was the legal basis on which the defender had
obtained and (except for the long periods during which he had a summary decree
in his favour) retained possession of the subjects. It may have been initially on the strength of
the lease between the pursuers and LGDC, although the pursuers asserted that
that had been brought to an end and that, before the commencement of the
winding up, another company associated with the Liu family, Zucarro
Limited, were to take over the operation of the subjects. Alternatively, it may have been on the basis
of LGDC's continued ownership of the subjects and the
fact that, apparently with the pursuers' tacit approval, they remained licensees
of the premises, employed the staff and ordered goods and services. Mr Ellis emphasised that Mr Liu and his
family had had control of the pursuers, LGDC and Zucarro,
the precise arrangements between them were not clear and they were certainly
not at arm's length.
The motion
[9] Mr Sandison contrasted the position of the pursuers in
relation to the subjects with that of the liquidator. He submitted that the pursuers held the
personal fee in the subjects and that they had a "quasi real right" in
them. He referred me to Burnett's Trustee v Grainger 2004 SC (HL) 19 and in particular to the speech of Lord
Rodger at paragraphs 95 to 102 where he discussed the position of the uninfeft proprietor and quoted from the decision of the
Whole Court in Earl of Fife v Duff (1862) 24D 936. He also referred me to the speech of Lord
Hope in Burnett's Trustee at
paragraphs 17 and 18. It was clear that
in a question with the disponer, a disponee had the right to possess the subjects of the
conveyance pending registration of the disponee's
title. By contrast, no right in the
subjects vested in the defender as liquidator by virtue of the winding up of
LGDC. This was in stark contrast to the
position of a trustee in a sequestration in whom the bankrupt's estate vested
by force of section 31 of the Bankruptcy (Scotland) Act 1985 and who was in a
position to run a race to the register.
In this case the defender had mounted a challenge under section 242 of
the 1986 Act. If there was a basis for
the challenge, that would make the pursuers' title voidable,
not void, and that until the disposition in the pursuers' favour was reduced,
it was to receive effect. The pursuers
were entitled to insist on possession of the subjects in a question with LGDC
and thus in a question with the defender.
[10] Mr
Ellis for the defender did not challenge the proposition that, as a general
rule, in a question with the disponer, the disponee is entitled to possession of the subjects covered
by a delivered disposition. He pointed
out that the disposition on which the pursuers relied had not been properly
stamped: if the pursuers were correct in their assertion, there had been stamp
duty evasion. He referred me to section
14(4) of the Stamp Act 1891.
Furthermore, the personal right which the pursuers had to possession of
the subjects was subject to the statutory right of the defender as liquidator
to defeat that right by challenging the gratuitous alienation. Section 242 of the 1986 Act placed the onus
on the pursuers to establish that the alienation had been for adequate
consideration. If the defender
ultimately obtained reduction of the disposition, it would have been a nullity
and there would have been no basis on which the pursuers were entitled to
occupy the subjects. The pursuers'
action addressed only the interim position pending the outcome of the challenge
under section 242 of the 1986 Act. Where
there was a challenge to a title to property the court often had to make
interim decisions and was not tied to giving effect to rights of parties at
that moment but could take account of the possible outcomes of the challenge in
considering the balance of convenience.
He cited the example of the court interdicting a buyer from alienating
moveable property where it was asserted that the transaction was voidable. There was
a real issue to be determined between the pursuers and the defender in relation
to the validity of the transaction and it was not appropriate to determine the
right to possession on a summary basis.
Decision:
(i)
The nature of the pursuers' right in the subjects
[11] In a
question with the disponer, a disponee
is entitled to possession of the disponed subjects as
a right under the law of obligations.
The disponer, who remains the owner of the
subjects, is obliged not to derogate from his grant and has undertaken to do
nothing to prevent the disponee acquiring a real
right of ownership in the disponed subjects by using
the delivered disposition to obtain a registered title. It is clear from Lord Rodger's speech in Burnett's Trustee at paragraph 105 and
from that of Lord Hope at paragraphs 16 to 19 that the disponee
who has not registered his title enjoys no real right in the subjects. Scots law does not recognise a right that
lies between a real right and a personal right: see the decision of the Whole Court in Young v Leith (1847) 9 D 932. Lord Hope discussed this in some detail in
his seminal opinion in the Inner House in Sharp
v Thomson 1995 SC 455. It is noteworthy that when that case reached
the House of Lords, no challenge was made to the analysis of property law by
the judges of the First Division (see Lord Clyde's speech at 1997 SC (HL)
66, 80B). Thus, in my opinion, Lord
Hope's exposition of the law of property in Sharp
v Thomson is the leading modern
statement on the subject and is supported by the decision of the House of Lords
in Burnett's Trustee. There is no such thing as a "quasi real
right".
[12] But
that mischaracterisation does not matter in this case. There is no competing interest such as an adjudger or a bona
fide purchaser in competition with the pursuers in a race to obtain a real
right in the subjects. The defender
could invoke section 145 of the 1986 Act to have the property vested in his
name, but there may be no point in his doing so as the pursuers presented their
application for registration to the Land Register long ago. If their disposition is valid, they are
already at the winning line in any race to the register. Thus it does not matter that the pursuers'
right rests on obligation. In a question
with LGDC and its liquidator, the pursuers have had a right to possess the
subjects since the delivery of the disposition which is now the subject of the
section 242 challenge. The voidable disposition is valid and can receive effect until
it is reduced: Smyth v Muir (1891) 19 R 81, Lord Kinnear at p.89. As a result, if the court were required
under section 47(2) of the Court of Session Act 1988 to have regard only to the
rights of the parties as they existed at the moment when it determined interim
possession, the pursuers would have an unanswerable claim to possession.
(ii) The exercise of
discretion and the balance of convenience
[13] In my
opinion, however, in considering the balance of convenience the court is
entitled in the exercise of its discretion on an interim application under
section 47(2) of the Court of Session Act 1988 to have regard not only to the
immediate entitlements of the parties but also to the challenge mounted against
the transaction and the possibility of different outcomes of that
challenge. It is not appropriate to
speculate on the likelihood of a particular outcome of the section 242
challenge, but the existence of the challenge and the fact that the defender
has made a prima facie case of a
gratuitous alienation are relevant considerations. So too is the observation by the House of
Lords in their opinion at paragraph 8 that the effect of the transaction (if it
became completely effectual) would be that the pursuers would obtain title to
the only substantial asset of LGDC and that asset would be available to pay off
the Liu family creditors in preference to LGDC's
other creditors. While their Lordships
did not say more, it may be that they had in mind the possibility of a
challenge to an unfair preference either under section 243 of the 1986 Act or
at common law.
[14] In
their submissions on the balance of convenience parties raised a number of
issues to which I am not in a position to attach much weight as I have
insufficient information on those matters.
In particular Mr Sandison founded on what he
said was the defender's vitious occupation of the
subjects, his misguided pursuit of summary decree and the opaque arrangements
which he had entered into with Viol for the operation and, if his challenge
were to be successful, the eventual disposal of the subjects. He also referred me to the two actions in Glasgow Sheriff Court to remove the liquidator
and to challenge the composition of the liquidation committee. He suggested that it was difficult to
reconcile the liquidator's approach to the Liu family claims in the liquidation
with his stance that the pursuers had not taken over responsibility for those
debts. It was clear that there were real
issues between the parties on these matters but I was not in a position to
reach even a tentative view on the merits of the parties' cases on these
matters. Similarly, Mr Ellis referred me
to allegations that Mr Liu used several pseudonyms and had opaque business
dealings, that the auditors of LGDC had expressed concerns about the state of
the company's accounting records in January 2002, that HM Revenue and Customs had
claims against LGDC as a result of VAT irregularities from the period when Mr
Liu controlled the company and that the Department of Trade and Industry had a sisted application for disqualification of Mr Liu as a
director on the grounds of stamp duty evasion and failure to keep proper
accounts. Mr Sandison
explained that there were detailed explanations of these matters. Again, in the absence of much more detail, I
am not able to attach much weight to these matters.
[15] There
were other matters which were of significance and which were relevant to the
balance of convenience. In particular
the continued occupation of the subjects by the defender prevented the pursuers
from making use of the subjects. It was
not clear how long it would take finally to resolve the challenge. If the defender remained in occupation and
lost his challenge, there would be no funds to pay the pursuers damages for the
occupation of the subjects. On the other hand, the defender was an officer of
court acting on behalf of the unsecured creditors of LGDC which had no other
assets against which they recover any proportion of their claims. LGDC had not operated the business
successfully when under the control of Mr Liu and, as Mr Ellis submitted, all
that was at stake in the interim was any surplus from the continued operation
of the business as the pursuers would not be able to alienate the subjects
pending the determination of the challenge.
Mr Ellis was however not able to confirm whether a notice of litigiosity had been registered under section 159 of the
Titles to Land (Consolidation) (Scotland) Act 1868. The status quo since 2002 had been that the
defender had occupied the subjects and operated the business. Mr Ellis submitted that his continuing to do
so would be in the interest of whoever was eventually held to be entitled to
the subjects. The pursuers had no
definite plan for the use of the subjects.
It was not in the interests of anyone that the business should cease to
trade. Until the pursuers had developed
credible plans that they could trade profitably it could not be said that they
would suffer significant loss from being deprived of possession pending
resolution of the challenge.
[16] In my
opinion the matters which are particularly significant in the balance of convenience
are on the one hand (a) the strength of the pursuer's claim for immediate
possession, (b) the fact that there will be no funds in the liquidation to pay
damages to the pursuers if the defender's challenge fails, and on the other
hand (c) the defender's prima facie case
in his section 242 challenge, and (d) the fact that the defender is maintaining
the subjects in good repair and preserving the business as a going concern so
as to maintain its value for the benefit of the person ultimately found to be
entitled to the subjects. I also have
regard to the facts that the defender is an officer of court and is answerable
to the court for his intromissions and that for understandable reasons the
pursuers have not developed plans for the use of the subjects. I attach particular weight to the fact that
the defender has secured the preservation of the business as a going concern. I
am satisfied that the balance of convenience does not favour altering the
status quo pending the determination of the challenge.
[17] I
therefore refuse the pursuers' motion for an order giving them interim
possession of Letham Grange.
