Summons for summary judgment under RSC, Order 14 — Claim by bank against directors of private company who had guaranteed company’s overdraft — Company’s assets sold by auction to meet debt, but auction unsuccessful and proceeds insufficient to discharge liability — Hence claim by bank under guarantee — Question as to whether guarantors should be given leave to defend — Master and judge at first instance refused leave under Order 14 procedure — Court of Appeal asked to reverse this decision on the ground that there were triable issues justifying unconditional leave to defend being granted — Affidavit in support of guarantors’ application for leave alleged that auction was held at wrong time of year, was insufficiently advertised, was held too quickly and without adequate notice to prospective customers, and that this was due to pressure from the receiver on instructions from the creditor bank — As a result, it was said, the company’s assets had been sold at a gross undervalue — Held by Court of Appeal that there were triable issues of fact and law on which leave to defend should be given without condition — Among the points mentioned were the duties of mortgagee and
This was an
appeal by Johnny Walker and his wife, Greta Gloria Walker, directors of a
private company, John Walker (Developments) Ltd, which had carried on business
at Vortex Works, Tetbury, Gloucestershire, in buying and selling metal presses
and moulding machines. Under the procedure for obtaining summary judgment set
out in RSC, Order 14, the Standard Chartered Bank Ltd applied for judgment
against Mr and Mrs Walker on their guarantee of the company’s indebtedness. The
Master and Bristow J refused the Walkers leave to defend.
M A F
Lyndon-Stanford QC and David G M Marks (instructed by William F Prior & Co)
appeared on behalf on the appellants; John Lindsay QC and John Higham
(instructed by Donald Bennett & Legat, of Bristol) represented the respondents.
Giving
judgment, LORD DENNING MR said: When a bank lends money to a private company,
it usually insists on the overdraft being guaranteed by the directors
personally. Especially when a husband and wife are the directors and
shareholders of the company. Then, when the company crashes and is unable to
meet its liabilities, the bank puts in a receiver. He realises the assets of
the company, but not enough to pay off the overdraft. The bank then comes down
on the directors on the guarantee. Have they any defence? The directors here say that the assets were
sold at a gross undervalue. How far does that give them any defence?
The directors
here are Johnny Walker and his wife Gloria. They have been concerned with
several private companies using the name ‘Johnny Walker’ but nothing to do with
whisky. We are here concerned with the latest one, John Walker (Developments)
Ltd. They carried on a very specialised business. They had a large workshop and
warehouse in Gloucestershire. It was called Vortex Works at Tetbury. They
bought huge metal presses and moulding machines secondhand and stored them
there. They resold them to buyers all over the world. They did it on money
borrowed from the Standard Chartered Bank. The bank insisted on a debenture. It
was dated October 25 1977. It gave the bank a floating charge on all the assets
of the company. It gave the bank power to appoint a receiver who was to have
power to take possession of the assets and to sell them. It contained an
express provision that:
Any receiver or
receivers so appointed shall be deemed to be the agent or agents of the Company
and the Company shall be solely responsible for his or their acts or defaults
and for his or their remuneration.
The bank also
insisted on a personal guarantee by Johnny Walker and his wife. It was dated
December 12 1978. It guaranteed the payment by the company of all its
indebtedness to the bank provided that the total amount recoverable from Johnny
Walker and his wife was not to exceed £75,000 together with interest thereon.
From 1978
onwards the business was badly hit by the slump in trade which was world-wide.
In order to meet wages, rent and other expenses, the company incurred a large
overdraft. At one time it was over £275,000. The bank pressed the company to
reduce it. They took stringent measures. They cut down the staff greatly and
reduced expenses on all sides. By April 1980 the overdraft had got down to
£65,751. The bank urged its further reduction to £50,000. Johnny Walker
constantly told them of his efforts. He told them of the sales he hoped to
make. But, despite his efforts, the overdraft went somewhat higher. The bank
thought of appointing a receiver. On September 1 1980 Johnny Walker wrote:
To put a
receiver in at the moment, when the company has done so well in streamlining
itself, ‘digging its heels in’ and preparing to combat the recession, would
mean, literally economic suicide . . . If commonsense prevails and we are
allowed to continue to trade, which I may add now is profitably so, it will not
be long before we can reduce down within the £50,000 but it is going to take a
little longer in time.
Despite Johnny
Walker’s hopes, things got no better. They got rather worse. The overdraft came
to over £80,000. So much so that on November 6 1980 the bank appointed a
receiver. He was Mr Heaford of the well-known firm of chartered accountants,
Touche Ross & Co of Bristol. Johnny Walker saw Mr Heaford and asked if he
could continue to trade through another of his companies. The receiver said:
As from now,
Mr Walker, you are out of business. My instructions are to be out of here as
quickly as possible. I intend to hold an auction sale as quickly as possible.
The receiver
instructed well-known auctioneers Edward Rushton & Co. They examined the
stock and estimated that at an auction sale they might sell the whole of the
stock for £90,000. They proposed to hold the auction on January 21 1981. Johnny
Walker afterwards thought this was too soon and asked for it to be postponed.
It was then fixed for Wednesday, February 4 1981 at the works at Tetbury.
The
auctioneers got to work preparing for the auction. They numbered all the lots.
They made up a catalogue containing a description of all the machines. They did
some advertising.
On Wednesday
February 4 1981 the auction was held. It was a disaster. Only about 70 persons
attended — nearly all from places round about. Only one buyer from overseas —
although the market for these machines was world-wide. It was a bitterly cold
day. They had a few heating stoves, but these made such a noise that the
auctioneer could not make himself heard. So they were turned off: and many
prospective buyers left. The result in outline was this.
The stock
realised only £42,864. The expenses of realisation came to £42,718. That left
hardly anything for the preferential creditors, who came to £37,139. And
nothing at all for the bank, whose debt was £88,432. So the result was a
disaster for everyone. The receiver had got enough to pay the expenses of the
sale and so forth: but nothing for the preferential creditors: and nothing for
the bank.
Soon
afterwards, on April 8 1981, the bank issued a writ against Johnny Walker and
his wife as guarantors claiming the whole sum of £75,000 and interest at £30 a
day. They issued a summons for judgment under Order 14. The registrar and the
judge gave judgment in favour of the bank. Johnny Walker and his wife appeal to
this court.
It is
interesting to see that the only affidavit put in by the bank throughout was
the formal affidavit under Order 14, which just said that in their belief the
defendants were justly indebted in those sums. There were affidavits in answer.
I will not go into all of them. Mr Johnny Walker set out his defence. The bank
never replied to his affidavits. I will read a passage from one of his affidavits.
He said:
It is
apparent from the affidavits referred to that the prices achieved at auction
were much lower than could reasonably have been expected and, indeed, were less
than half of the conservative valuation made by the Auctioneer. There were many
reasons for this. The main reasons are, in my opinion, that the auction was
held at the wrong time of the year, that it was insufficiently advertised, that
no notice was given to the prospective customers on my Company’s mailing list
by direct mailing, that the viewing arrangements were inadequate and the
attendance poor . . . . It will be apparent that the decision by the receiver
to hold an auction quickly and without adequate publicity was taken by him as a
result of an instruction received from the plaintiff
that is, the
bank.
Messrs Touche
Ross & Co of Bristol made a report to the plaintiff on the financial affairs
of
the company
on October 20
1980. At about that time, I had a telephone conversation with Roger Bailey who
was then the manager of the branch of the plaintiff in Bristol. Mr Bailey told
me during the conversation that the Bank had already made provision to write
off the entire . . . overdraft as a bad debt, that the plaintiff had decided to
appoint a receiver under its debenture and that the receiver would be
instructed to sell off the stock of
the company
as quickly as
possible so that the plaintiff could recover quickly some of the loss incurred
from writing off the overdraft of
the company.
As I read that
defence, it contains an allegation that the assets of the company were sold at
a gross undervalue: and, if reasonable care had been taken all the way through,
they could have been realised at a much higher value: probably double, if not
more: maybe up to £130,000. In which case, the company’s debt would have been
very much reduced. In consequence the guaranteed figure of £75,000 would have
been reduced greatly. Such are the facts of the case.
We have had
much discussion on the law. So far as mortgages are concerned the law is set
out in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949.
If a mortgagee enters into possession and
the best possible price which the circumstances of the case permit. He owes
this duty not only to himself — to clear off as much of the debt as he can —
but also to the mortgagor so as to reduce the balance owing as much as possible
— and also to the guarantor so that he is made liable for as little as possible
on the guarantee. This duty is only a particular application of the general
duty of care to your neighbour which was stated by Lord Atkin in Donoghue
v Stevenson [1932] AC 562 and applied in many cases since; see Dorset
Yacht Co Ltd v Home Office [1970] AC 1004 and Anns v Merton
London Borough Council [1978] AC 728. The mortgagor and the guarantor are
clearly in very close ‘proximity’ to those who conduct the sale. The duty of
care is owing to them — if not to the general body of creditors of the
mortgagor. There are several dicta to the effect that the mortgagee can choose
his own time for the sale, but I do not think this means that he can sell at
the worst possible time. It is at least arguable that, in choosing the time, he
must exercise a reasonable degree of care.
So far as the
receiver is concerned, the law is well stated by Rigby LJ in Gaskell v Gosling
[1896] 1 QB 669, a dissenting judgment which was approved by the House of Lords
in [1897] AC 575. The receiver is the agent of the company, not of the
debenture-holder, the bank. He owes a duty to use reasonable care to obtain the
best possible price which the circumstances of the case permit. He owes this
duty not only to the company — of which he is the agent — to clear off as much
of its indebtedness to the bank as possible — but he also owes a duty to the
guarantor — because the guarantor is liable only to the same extent as the company.
The more the overdraft is reduced, the better for the guarantor. It may be that
the receiver can choose the time of sale within a considerable margin, but he
should, I think, exercise a reasonable degree of care about it. The
debenture-holder, the bank, is not responsible for what the receiver does
except in so far as it gives him directions or interferes with his conduct of
the realisation. If it does so, then it, too, is under a duty to use reasonable
care towards the company and the guarantor.
If it should
appear that the mortgagee or the receiver have not used reasonable care to
realise the assets to the best advantage, then the mortgagor, the company, and
the guarantor are entitled in equity to an allowance. They should be given
credit for the amount which the sale should have realised if reasonable care
had been used. Their indebtedness is to be reduced accordingly.
The only doubt
on those propositions is cast by two cases at first instance. The first is Barclays
Bank Ltd v Thienel June 13 1978. It is reported in ESTATES GAZETTE
(1978) 247 EG 385 and we have been provided with a transcript of the judgment.
That was a case of a mortgagee. The amount realised was only £6,500 to meet a
debt of £11,000. The allegation on the part of the guarantor was that the sale
was at a gross undervalue: and that there had been a want of care in the
realisation. Thesiger J said that the guarantor could not rely on that want of
care because of a very wide clause in the form of guarantee. But it seems to me
that, if a clause in a guarantee makes the guarantor liable for a larger sum
than the mortgagor, that clause is unenforceable. The guarantor is only under a
secondary obligation to guarantee the debt of the principal debtor. If the
principal debtor’s debt is reduced for good reason, equally the guarantor’s
obligation is reduced. If there is a term in the contract to the contrary, it
should be rejected as being repugnant or unreasonable, see Gillespie Bros
& Co Ltd v Roy Bowles Transport Ltd [1973] QB 400 and the cases
cited therein at pp 415 and 416. But nowadays we do not have to look at those
cases. The Unfair Contract Terms Act 1977 applies to this contract. The terms
of a contract are good only in so far as they are fair and reasonable. So I
would reject Thesiger J’s reliance on the contract., [1978] 2 EGLR 116
The second
case is Latchford v Beirne [1981] 3 All ER 705. That was a case
of a receiver. A debenture-holder had put in a receiver. The receiver sold the
property. Again the guarantor sought to say that there had been want of
reasonable care in the disposal of the assets, Milmo J went so far as to say
that there was no duty of care towards the guarantor. He said that there was no
duty of care towards the creditor. He treated the guarantor as though he was simply
a creditor. I cannot agree with that either. Clearly the guarantor’s liability
is dependent upon the company’s. He is in a very special position. The amount
of his liability depends entirely on the amount that the stock realises when
sold with proper care. To my mind he is well within the test of ‘proximity’.
The receiver owes a duty not only to the company — but to the guarantor — to
exercise reasonable care in the disposal of the assets. I say nothing about
creditors. We are not concerned with them today.
Neither
counsel before us sought to support the decisions in those two cases. In so far
as those decisions hold that the guarantor is liable for a larger amount than
the principal debtor they are erroneous and should not be followed. I am afraid
that those cases may have misled the bank in this case. That may be the reason
why those who first advised the bank thought they need rely only on their own
formal affidavit: and that they did not have to worry about all the affidavits
put in on behalf of Mr and Mrs Walker. Putting those two cases on one side, it
seems to me that on the facts of this case there are these triable issues.
There is a
triable issue as to whether or not the bank did interfere with the sale in such
a way as to take away some of the receiver’s discretion: not only by directing
him to sell as quickly as possible but also in regard to publicity and so
forth. On reading the affidavit of Mr Walker it seems to me that, until there
has been discovery, there is an arguable case for saying that the bank did
interfere, not only in the timing of the sale but also in other respects. So
the matter should be investigated to determine the liability of the bank.
I will not go
into whether or not the receiver would be liable for any negligence of the auctioneer:
but there is certainly a triable issue as to whether or not the sale was
conducted with the proper degree of care which is owed to all those interested
in the proceeds of it. It is clear that it was a disastrous sale which realised
far less than any of the experts had anticipated. There is a triable issue as
to whether that was due to any fault in the arrangements for the sale.
Those are
triable issues of fact which ought to go for trial. There should be
unconditional leave to defend. That being given, it is for the advisers of Mr
and Mrs Walker to consider whether they should put in a counterclaim and bring
in other parties to their counterclaim — the receiver and the auctioneers. They
should consider whether they should make an application to put in a
counterclaim. It is undesirable that there should be a subsequent action
brought by Mr and Mrs Walker against the receiver or the auctioneers
separately. All should be dealt with in one action.
All I would
say at the moment is that, in my opinion, the appeal should be allowed with
unconditional leave to defend: and the defendants should take such steps on the
pleadings and interlocutory matters as they are advised.
Agreeing that
the appeal should be allowed, WATKINS LJ said: The question before this court
is whether the defendants ought to have been granted leave firstly by the
learned deputy registrar and secondly by Bristow J to defend the plaintiffs’
claim which they sought successfully to bring to judgment under the Order 14
procedure.
The defendants’
application for leave to defend was amply supported by affidavits especially
when it was heard by the learned judge. The allegations contained in those
affidavits were not replied to in any shape or form by the plaintiffs, who have
contented themselves throughout by seeking to defeat the application almost
exclusively by legal arguments supported by such inferences arising out of the
uncontested facts as they contended favoured them. This was, I think, a
dangerous course for them to have adopted, seeing that the relevant law to be
applied to the issues arising here is to some extent unclear.
There are, in
my opinion, three triable issues involved in this litigation. Firstly, as to
the state of the law governing the liability, if any, of a bank in any circumstances
in the conduct of a receivership initiated by that bank. Secondly, in the
present case, as to whether the bank so interfered in the receivership which it
initiated as to be liable both in law and in fact to have been responsible for
the conduct of it. Thirdly, as to whether there was negligence shown by the
auctioneers and possibly by the receivers in the conduct of the auction itself
for which the bank, upon the basis of principal and agent, can be said to be
properly liable in damages provided that the defendants can show — and this,
too, of course is a question of fact — that they have sustained damage for
which they are entitled to be recompensed.
It would have
been a simple matter for the bank to have replied in very short form by
affidavit to the central contention made by the defendants in this case, that
contention being that the bank unwarrantably and inappropriately interfered in
the receivership
that much of the trouble, if not all of it, which eventually ensued is said to
have flowed.
For the
reasons provided by my Lord, the Master of the Rolls, I, too, would allow this
appeal with the consequences which he has stated.
Also agreeing
that the appeal should be allowed, FOX LJ said: On the evidence which is before
us it seems that the auction sale on February 4 was a sad failure. The
auctioneers’ prior estimate of the value of the assets was about £90,000. The
sale fetched less than half that amount. Mr Walker would say that the position
is far worse than that, since he regards £90,000 as being much too low anyway.
Allowing for the fact that the two figures are possibly not truly comparing
like with like, nevertheless the defendants’ evidence suggests that far more could
have been realised.
That, however,
does not impose liability on the bank. The sale is by the receiver under the
debenture, and the debenture provided in terms that the receiver is the agent
of the company and not of the bank. The defendants were perfectly well aware of
the debenture when they gave the guarantee.
Two further
matters, however, emerge from the evidence as it stands. First, there is
evidence that the sale was incompetently organised. Thus Mr Fenton, for
example, says that in his opinion the sale was badly organised at short notice
and received the minimum of publicity. Secondly, Mr Walker deposes that he had
many conversations with the receiver’s manager, Mr Mallett, after the receiver
was appointed, and protested at the haste with which the receiver was acting.
He says that during one of their conversations Mr Mallett told him that the
receiver was acting throughout on the express instructions of the bank.
Apart from
intervention in the conduct of receivership, the bank can rely upon the provisions
of the debenture making the receiver the agent of the company. But, it is said,
if the bank gave directions to the receiver as to the conduct of the sale, the
receiver became the agent of the bank; and, it is said, in such an event, if
the receiver was negligent, the bank was liable. It is not disputed that a
mortgagee can choose his own time for sale, but, say the defendants, the sale
must be a proper sale and must be properly organised. The auction, it is
alleged, was nothing of the sort.
The bank has
put in no evidence at all apart from a largely formal affidavit in support of
the Order 14 summons. Mr Lindsay has told us of the circumstances in which the
case developed, and he says that having regard to the lateness in which the
defendants put in their evidence on the previous hearing the bank decided not
to answer it themselves but to proceed on the evidence as it stood. I follow
that, but nevertheless the fact remains that in the period between the decision
of the learned judge and the hearing in this court the bank had ample time and
the fullest opportunity to explain to the court exactly what instructions, if
any, it gave to the receiver.
The evidence
as it stands suggests that the receiver was acting on the directions of the
bank and that the bank at any rate directed the receiver to proceed with haste.
That is the first thing. There is also on the evidence, it seems to me, a clear
issue to be tried as to whether the sale was negligently conducted. But for
present purposes there is then a gap, and one is left with the question, was
the conduct of the auction the consequence of instructions from the bank? On the evidence, we do not know. The bank has
given us no information about it at all. That is evidence which is peculiarly
within the knowledge of the bank and not of the defendants. It seems to me, as
the evidence stands, that it is certainly a possibility that, if the auction
were negligently conducted, it was the direct consequence of instructions by
the bank to the receiver not merely to proceed with haste but as to the actual
conduct of the sale. I think there is a triable issue as to that and that it
would be wrong to prevent it from being fully investigated by the court on
trial. I bear in mind that despite express allegations of interference the bank
has filed no evidence.
That assumes
that a surety could have a cause of action at all in such circumstances. I
think that he could. I agree with the Master of the Rolls in his view that the
decisions in Barclays Bank v Thienel and in Latchford v Beirne,
in so far as they decide, in principle, the contrary, cannot be supported. I
should add that neither counsel before us in fact attempted to support them.
There is one
further matter to which I should refer. Mr Lindsay, in an attractive argument
based upon the arithmetic, suggested that even if the auction sale had produced
the full amount of £90,000 it would make no difference because there would
still be an indebtedness to the bank in excess of the guaranteed amount. I do
not think that this court can safely rely on the evidence which is before it
upon such a matter as this; we simply do not know with any assurance whether
£90,000 is a reliable figure at all.
In the
circumstances, my view of the matter is that there are triable issues of fact
and law upon the evidence as it was presented to us, and accordingly that leave
to defend should be given.
The appeal
was allowed and unconditional leave to defend given. The remainder of the order
covered details which embodied an agreement between the parties.
