Supreme Court Liquidator’s Decision On Creditors Reversed

Press, Volume XCVIII, Issue 29075, 11 December 1959, Page 8

Supreme Court Liquidator’s Decision On Creditors Reversed

An order that a draft order be submitted for his approval, reversing a decision of the official liquidator of the Walker Construction Company, Ltd. (in liquidation) refusing to give preference, by payment in full and in priority, to unsecured nonpref erentia I creditors for debts incurred by the company subsequent to April 7, 1955, was made in a judgment issued yesterday in the Supreme Court by Mr Justice Adams. The hearing of a motion by current creditors was heard by Mr Justice Adams in June and July of 1958. He said yesterday that judgment had been delayed far too long but circumstances over which he had been unable to exercise control had made it impossible for him to give the case earlier consideration. The official liquidator’s estimate of the current debts was £9231 and of the deferred debts £48.169; and his estimate of the fund available for payment of debts was about £26,000. The amount directly at issue in the case was £5234, based on the probable dividend, if both classes of debts ranked equally, of 8s 8d in the £. The company was incorporated on November 26, 1954, as a private company with a paid-up capital of £20.000, of which £lO.OOO represented the goodwill of a business acquired from G. W. Walker, the balance being the difference between the values placed on the assets of the business and its liabilities (about £lOO.OOO and £20.000 respectively). Walker held nine-tenths of the shares. The company was very soon in financial difficulties and an order for wlnding-up was made in August, 1956. Business Ethics The not uncommon practice in the commercial world of according priority to current creditors almost necessarily raised a problem if 'the company and its creditors desired to negotiate while the company’s business was being carried on, and when the preservation of the business was almost invariably a major consideration. said his Honour. “Generally speaking, it is impossible to carry on a business of any magnitude without incurring fresh debts de die in diem: and. when the creditors at any particular date, knowing the company to have become insolvent, enter into and continue negotiations with the company, good faith certainly requires, both on their part and on that of the company, an assumption that persons concerned in the daily activities of the company shall not be entrapped into giving credit without warning. “That seems to me to be a matter of elementary business ethics, and to proceed on any other assumption may well be characterised as fraudulent trading.” Rule of Payment

As to the question whether the circumstances of this case, for equitable or other reasons, called for a departure from the rule of pari passu payment to creditors, Mr Justice Adams said he had no doubt whatever that any court possessing equitable jurisdiction and untrammelled by statute would insist that, in distributing the funds available for creditors, effect had to be given, so far as the circumstances permitted, to the arrangement or understanding that current debts should have priority. It would be unconscionable in the extreme to permit any deferred creditor who assented to the arrangement, and whose assent was acted upon, to prove in competition with the current creditors.

The evidence, he said, satisfied him that, apart from some possible exceptions, the deferred crditors, as a body, assented to the arrangement, with the intention that their assent should be acted on, both by traders who might give credit to the' company and by the company itself in inducing or permitting traders to give credit.

“I emphasise the concluding words of that last sentence,” said his Honour. “In my opinion, if there be here an equity such as will bind deferred creditors in favour of current creditors who know of and relied upon the arrangement, there must also be an equity in favour of all other current creditors, for the reason that the company itself was a party to the arrangement and was induced to act upon it in carry-

ing on its trade in a way that would have been tantamount to a fraud on current creditors had there been no such arrangement." Moral Responsibility

It seemed indeed that, as counsel for the official liquidator had suggested, such a course of dealing on the part of the company would in all probability have amounted, on the part of the directors and any other persons who were knowingly parties to it, to a criminal offence under section 320 of the Companies Act, involving them in both the civil and the criminal liabilities created by that section in respect of the carrying on of a business with intent to defraud creditors.

Such intent might properly be inferred where a company continued to carry on business and to incur debts when there was, to the knowledge of the directors, no reasonable prospect of the creditors ever receiving payment of those debts.

“But the only thing that saves this company and its directors from the imputation of such moral blame is the express arrangement, on which they undoubtedly relied, for the giving of priority to current creditors. They acted in this respect honestly and reasonably, whether misguidedly or not, and, if the Court cannot give effect to the arrangement which alone saves the company and its directors from the imputation of fraudulent trading, then the Court will be in the unfortunate position of finding itself compelled to impose on the current creditors those very consequences which it would have attributed to fraudulent trading on the part of the company and its directors had they deliberately brought them about.”

In his Honour’s opinion, the circumstances raised an equity on which current creditors were entitled to rely, even if they were ignorant of what was going on. “Honest Dealing”

“Is the Court free to follow the only course that is consistent with justice and honest dealing?” he asked, turning to the question whether the statutory requirement of pari passu payment was so inflexible that the Court might not depart from it, even where the circumstances called for departure so strongly as they did in this case.

On the supposition that all the deferred credtiors assented, he concluded that it was within the power of the Court to give effect to the equity or estoppel, or whatever it might be, arising from such assent.

Because researches had not brought to light any case directly in point, he was compelled to rely on principle, said his Honour. On one ground or another, he was satisfied that the arrangement made was binding on the deferred creditors in such a way as to justify and require the intervention of the Court in order to effectuate the arrangement. “It would. I think, be a lamentable state of affairs if the Court were unable to do justice in such circumstances,” said his Honour. What was important was not the mental state of the deferred creditors, but what was done by them or on their inducement vis-a-vis the current creditors. Non-assenting deferred creditors would get what they would have got had there been no arrangement, neither less nor more, he said. They could not be classed with the current creditors, as that would give them an unjust priority over other deferred creditors.

The proper course would be to reserve leave for deferred creditors to move for inclusion in the class of non-assenting deferred creditors, and each case would be considered on its merits. The arrangement would not interfere with distribution to current creditors.

The dividing line between the current and other creditor, the judgment said, was clear and distinct, depending solely on whether the debts were incurred after April 7, 1955—a simple question of fact. At the hearing, Mr P. H. T. Alpers appeared for current creditors in support of the motion, Mr P. T. Mahon, with him ’Mr F. F. Feenstra, for the official liquidator, and Mr G. H. Gould for deferred creditors. An order was made by his Honour that costs of all parties be taxed by the registrar as between solicitor and client and paid out of the company’s assets.