Judgments - Smith (Administrator of Cosslett (Contractors) Ltd (Appellant) v. Bridgend County Borough Council (Respondents)

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    38. These arguments were presented to the Court of Appeal and tentatively rejected by Laws LJ. He said that if he thought on other grounds that the company should have a remedy, he-

    "would have been prepared to hold that as between A, B and C, A converts B's goods when he (A) gives possession and purported title in the goods to C, notwithstanding that A's obligation to C to do so had been undertaken at a time when B had no right to immediate possession."

    39. I agree. The council consented to the removal of the plant by Burrows in violation of the company's right to possession. The fact that they gave such consent in advance, at a time when the company was not entitled to possession, can make no difference. The consent remained effective until the moment when Burrows took the plant. This was sufficient to amount to a conversion.

    40. My Lords, in my opinion Millett LJ was therefore right in saying that on the basis of the first Court of Appeal judgment, there could be no answer to the company's claim for damages for conversion. But, in addition to attempting to support the second Court of Appeal's grounds for differing from this view, Mr Moss also challenged the original decision that condition 63 created a floating charge. He said that it was not a charge and that if it was, it was fixed and not floating.

    41. On these points I can be brief because I agree with Millett LJ for the reasons which he gave. I do not see how a right to sell an asset belonging to a debtor and appropriate the proceeds to payment of the debt can be anything other than a charge. And because the property subject to condition 63 (constructional plant, temporary works, goods and materials on the site) was a fluctuating body of assets which could be consumed or (subject to the approval of the engineer) removed from the site in the ordinary course of the contractor's business, it was a floating charge: see Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454, 464.

    42. Mr Moss submitted that in the many years during which condition 63 had been in use, no one had imagined that it created a floating charge. A requirement of registration might ruin the credit of contractors when a search revealed the existence of such charges or cause them to be in breach of covenants with lenders which prohibited the granting of charges to third parties. The parties cannot therefore be supposed to have intended to create such a charge. But the intentions of the parties, as expressed in the ICE form of contract, are relevant only to establish their mutual rights and obligations. Whether such rights and obligations are characterised as a floating charge is a question of law (see Agnew's case, at p 457). The answer to this question may come as a surprise to the parties but that is no reason for adopting a different characterisation.

    43. I would also observe that the first Court of Appeal decision was reported more than four years ago and we were shown nothing to suggest that it has been the cause of any difficulties in the building or engineering industries.

    44. Mr Moss also submitted that while condition 63 might create a floating charge over materials and small items of plant which were more obviously likely to come and go during the course of a four year contract, it should be construed as a fixed charge over the washing plant, which was unlikely to be removed and received a separate mention in condition 53(1) as amended. As I said at the beginning of this speech, it is not easy to guess why the washing plant was treated separately in condition 53(1). But it receives no separate treatment in condition 63, where it falls within the charge simply as an item of constructional plant. It is in my opinion impossible to construe the latter condition as creating a charge over the washing plant different in nature from that which it created over the other plant and materials brought on site. Although the washing plant was very large, it was not inconceivable that during the contract, just as it was found necessary to acquire a second plant, it might be found advantageous to replace one or both by a more efficient machine. In that case the contractor would have been entitled to withdraw the old machine from the site and the charge.

    45. Finally, Mr Moss submitted that even if he was not entitled to raise an equitable set-off, any claim for conversion should be stayed pending the determination of its cross-claim. For my part, I can see no reason why there should be such a stay. It is agreed that the company is insolvent. But for the existence of these proceedings, it would no doubt have been wound up long ago. The council will be entitled to prove in the liquidation. But the claim for conversion is an asset which the administrator is entitled now to recover in due course of administration. In my opinion the judgment and interim order of Judge Toulmin QC should be restored.

LORD SCOTT OF FOSCOTE

My Lords,

    46. There are, in my opinion, four main issues to be decided on this appeal.

(1)  Did the terms of the ICE Conditions of Contract entered into between Cosslett and the council on 28 January 1991 entitle the council, in the events which happened, to a security interest in the two coal washing plants?

(2)  If so, did that security constitute a charge that was registrable pursuant to section 395 of the Companies Act 1985?

(3)  If so, and having regard to the fact that the charge was never registered but that nevertheless the two plants were sold by the council to Burrows under the continuation contract entered into between them in January 1994, did the terms of the continuation contract constitute the tort of conversion? If so, can Cosslett's administrator sue on that tort in his own name? And on what basis should the damages for conversion be calculated?

(4)  On the footing that the council's security interest in the coal washing plants was void against Cosslett's administrator as a result of the failure to register it pursuant to section 395, can the council set-off against the conversion damages for which the council is liable to Cosslett the contractual damages for breach of the 28 January 1991 contract for which Cosslett is liable to the council?

    47. The essential background facts relating to these issues have been set out by my noble and learned friend Lord Hoffmann and I gratefully adopt them.

    48. It is, in my view, essential to keep in mind that at all material times Cosslett was the legal owner of the coal washing plants. It was so decided by Jonathan Parker J ([1997] Ch 23) and the Court of Appeal ([1998] Ch 495) in the first set of proceedings regarding the coal washing plants.

    49. It is also essential to bear in mind the nature of the ICE conditions of contract. The contract between the council and Cosslett was a commercial contract in a form used widely within the construction industry. Mr Moss QC, who appeared for the council before your Lordships, stressed the importance of keeping in mind the commercial character and purpose of the ICE Conditions of Contract when construing their terms and considering their effect. I agree with him about that importance.

(1)  Did the council have a security interest in the coal washing plants?

    50. In my opinion it plainly did. The coal washing plants were items falling within the definition in the ICE Conditions of "constructional plant". No one has argued the contrary. Clause 63(1) of the ICE Conditions gave rights and remedies to "the employer" ie in this case, the council, in a number of specified events, one of which was that the "contractor . . . (a) has abandoned the contract . . . " That is what happened in the present case. Cosslett abandoned the contract on 4 August 1993. The contractual rights and remedies given to the Employer are triggered by the service on the contractor of a 7 day notice. The council, presumably for belt-and-braces reasons, gave two such notices. No one has suggested a valid notice was not given. The rights and remedies that follow the service of a valid 7 day notice fall into three groups.

      (i) The employer may enter the site, expel the Contractor from it, and take possession of the "constructional plant" and materials on the site.

      (ii) The employer may itself complete the works, or may engage some substitute contractor to do so, and the Employer, or the substitute contractor, may use any items of "constructional plant" and any of the materials for that purpose.

      (iii) The employer may "at any time sell any of the constructional plant . . . and unused goods and materials and apply the proceeds of sale in or towards satisfaction of any sums due or which may become due to him from the Contractor under the Contract".

    51. As to (i), the right to enter and expel is a necessary preliminary both to the exercise of the right to use the Constructional Plant, and to the exercise of the right to sell it. As to (ii), the right to use the plant is not a security right. It was so decided by the Court of Appeal. Millett LJ said [1998] Ch 495, 508:

    "The right of the council in the present case . . . does not constitute any kind of security interest, since it is not given to the council by way of security. It does not secure the performance of the contract by the company, but merely enables the council to perform the contract in its place" (See also Evans LJ, at p 505).

    52. But, as to (iii), the Court of Appeal held that "by contrast the council's power to sell the plant and apply the proceeds in or towards discharge of whatever sums might be or become due from the company by reason of its failure to complete the works clearly is a security interest" (per Millett LJ at p 508).

    53. In the second hearing before the Court of Appeal, which culminated in the judgment now under appeal before your Lordships, the security character of the employer's clause 63(1) right to sell the plant and apply the proceeds in discharge of sums due to it from the contractor seems to have been accepted (see paragraphs 15 and 16 of Laws LJ's judgment). But before your Lordships Mr Moss challenged the proposition. He submitted that the purpose of the power of sale was to enable the council to clear the site by disposing of plant and materials when they were no longer needed for completion of the engineering works and that the council's right to apply the proceeds of sale in or towards satisfaction of any sum owing by Cosslett was simply a contractual right of set-off and not intended to constitute equitable security. I do not agree. The power to sell was not only for the purpose of enabling the council to clear the site of plant and materials no longer needed but was, plainly, also for the purpose of enabling the council to bring into existence a fund that it could appropriate towards any debt owing to it by Cosslett. In my opinion, a contractual right enabling a creditor to sell his debtor's goods and apply the proceeds in or towards satisfaction of the debt is a right of a security character. The conclusion does not depend on the parties' intention to create a security. Their intention, objectively ascertained, is relevant to the construction of their contract. But once contractual rights have, by the process of construction, been ascertained, the question whether they constitute security rights is a question of law that is not dependent on their intentions (see Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454, 465-466 per Lord Millett).

    54. The classification of the council's rights under clause 63(1) as a security right is, in my opinion, supported by the decision of the Court of Appeal in In re Garrud, Ex p Newitt (1881) 16 Ch 522. That case arose out of a building agreement between a landowner and a builder. The agreement entitled the landowner, in the event of default by the builder, to re-enter the building site and expel the builder. It provided that:

    ". . . on such re-entry all such buildings, erections, constructions, materials, and things then in and about the said premises shall be forfeited to and become the property of the said lessor, as and for liquidated and settled damages; . ."

    55. The issue for decision was whether the agreement should have been registered as a bill of sale. The landowner argued that although the agreement did grant "a licence to take possession of personal chattels", the licence was not granted "as security for a debt" (see section 7, Bills of Exchange Act 1854 (17&18 Vict, c 36)). The court agreed. James LJ said at p 530:

    "It was no doubt 'an authority or licence to take possession of personal chattels' but not as security for a debt".

and Brett LJ explained, at p 532:

    "the chattels were taken, not as security for, but in discharge of the debt".

    56. Clause 63(1), however, has the features that the Garrud argument lacked. First, despite the Index and the side-heading, which refer to "forfeiture", the sub-clause is not a forfeiture provision. The employer does not take the proceeds of sale in satisfaction for sums due by the contractor, but on account of sums due. If there were a deficiency, the contractor would still owe the amount of the deficiency. If there were a surplus, the employer would have to account for it to the contractor.

    57. Moreover, an employer exercising a clause 63(1) power of sale would, in my opinion, have to take reasonable care to obtain a proper price (c/f Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 and would not be entitled to sell to himself (c/f Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349). These obligations are not expressed in clause 63(1) but, in my opinion, have to be implied in order to provide proper protection for the contractor's interest in the items being sold and are all indicia of a security interest.

    58. Accordingly, in my opinion, the council's rights under clause 63(1) included security rights over the plant and materials that were on the site when the council entered into possession after the expiry of the 7 day notice and over the proceeds of sale of any items of plant or materials that were sold.

(2)  Did the council's security rights under clause 63(1) constitute a charge registrable under section 395?

    59. Section 396(1) of the Companies Act 1985 specifies the types of charge that are registrable under section 395. Sub-paragraph (f) specifies "a floating charge on the company's undertaking or property". Sub-paragraph (c) specifies "a charge created or evidenced by an instrument which, if executed by an individual, would require registration as a bill of sale". The argument before your Lordships concentrated on the question whether the council's security constituted a floating, as opposed to a fixed, charge. After argument had concluded the parties were given leave to make supplemental written submissions on the bills of sale point.

    60. In the first Court of Appeal hearing the court held that the security constituted a floating charge. The reasons were given by Millett LJ (see [1998] Ch 495, 510). He described the essential difference between a floating charge and a fixed charge in the following passage:

    "The essence of a floating charge is that it is a charge, not on any particular asset, but on a fluctuating body of assets which remain under the management and control of the chargor, and which the chargor has the right to withdraw from the security despite the existence of the charge. The essence of a fixed charge is that the charge is on a particular asset or class of assets which the chargor cannot deal with free from the charge without the consent of the chargee. The question is not whether the chargor has complete freedom to carry on his business as he chooses, but whether the chargee is in control of the charged assets."

He then held that the provisions of clause 53 of the ICE Conditions enabled Cosslett to remove items of plant or materials from the site provided the removal would not prejudice or delay the completion of the works. This ability, he concluded, justified categorising the council's security as a floating charge. This conclusion does not seem to have been challenged in the second Court of Appeal hearing. Laws LJ described the categorisation of the council's security as a floating charge as "uncontentious" (see para 16 of the transcript). The conclusion has, however, been firmly challenged before your Lordships by Mr Moss. He submitted that if he was wrong in contending that the ICE Conditions did not create a charge at all, as I in common with all of your Lordships think that he was, the charge did not come into existence until a valid 7 day notice had been given under clause 63(1) and then came into existence as a fixed charge over all the plant and materials then on the site.

    61. Up to a point I agree with Mr Moss' analysis, but I am not sure that it makes any difference. A charge expressed to be granted over all the assets of a company but with liberty for the company until the occurrence of some specified future event to deal with the assets in the ordinary course of its business would be a classic floating charge (see Lord McNaghten in Governments Stock and Other Securities Investment Co v Manila Railway Co Ltd [1897] AC 81, 86). The grant would vest in the grantee an equitable security interest in the assets of the company for the time being; but the interest, although existing, would remain dormant until the requisite event happened. Contrast a charge expressed to come into existence on a specified future event and then to attach to assets then owned by the company. Such a grant would not, in my opinion, vest in the grantee any immediate equitable interest in the company's assets for the time being. Mr Moss would categorise such a grant as a grant creating a future fixed charge over the assets in question, rather than as a floating charge over the company's assets for the time being. I agree with Mr Moss that a grant of the sort described would not create a traditional floating charge. And if parties want to create future charges over assets that cannot be identified until the future event happens, I do not see why, unless there be some public policy objection, they should not be free to do so.

    62. However, there has never been any statutory definition of "floating charge". The definitions are all judicial ones and, in most cases, expressed in order to distinguish floating charges from fixed charges. Buckley LJ in Evans v Rival Granite Quarries Ltd [1910] 2 KB 979 said, at p 999:

    "A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it."

    This language, I think, assists Mr Moss. It suggests that a future security lacks something of the character of a floating charge. In the present case, over the period between the date of the contract, 28 January 1991, and the date of one or other of the 7 day notices given in August 1993 was there a "present" security that "presently" affected the coal washing plants? To put the point another way, did the council have any equitable interest in the coal washing plants until the service of a 7 day notice? In my opinion, it did not. Its rights over constructional plant and materials during the pre-7 day notice period were contractual operational right, not property rights. Its security rights were dependent on the occurrence of one or other of the future events specified in clause 63(1).

    63. I do not think, however, that this analysis bars the clause 63(1) future security rights from constituting a floating charge for section 395 registration purposes. In my opinion, a charge expressed to come into existence on the occurrence of an uncertain future event and then to apply to a class of assets that cannot be identified until the event has happened would, if otherwise valid, qualify for registration as a floating charge. The future charge would have the essential characteristic of floating, remaining dormant, until the occurrence of the specified event. It would, I think, come within the mischief sought to be dealt with by the section 395 requirement of registration of floating charges. For the same reasons, it would also, in my view, constitute a floating charge for Insolvency Act 1986 purposes (see eg section 15(3) and section 245).

    64. The conclusion that the Council's security was registrable as a floating charge makes it unnecessary to decide whether it might also have been registrable as a bill of sale; as to which see sections 4 and 8 of the Bills of Sale Act 1878 (41&42 Vict, c 31)and sections 3,4 and 8 of the 1882 Act. (45&46 Vict, c 43).

(3)  In disposing of the coal washing plants to Burrows under the continuation contract of January 1994 did the council commit the tort of conversion?

    65. The failure to register the charge under section 395(1) made the charge "void against the liquidator or administrator and any creditor of the company". It has been suggested that this language leaves an unregistered charge valid against the grantor company, that the clause 63(1) charge was accordingly valid as against Cosslett notwithstanding that it was void against the administrator, and that consequently the disposition by the Council of the coal washing plants did not constitute the tort of conversion. In In re Monolithic Building Company [1915] 1 Ch 643, 667 Lord Cozens Hardy MR said this of an unregistered charge:

    "It is a perfectly good deed against the company so long as it is a going concern."

And Phillimore LJ said:

    "We have to construe section 93 of the statute. It makes void a security; not the debt, not the cause of action, but the security, and not as against everybody, not as against the company grantor, but against the liquidator, and against any creditor, and it leaves the security to stand as against the company while it is a going concern."

    66. The words "or administrator" were inserted into section 395(1) by the Insolvency Act 1985 (see section 109(1) Sch 6 para 10). The previous language "void as against the liquidator and any creditor" may have been derived from the Bills of Sale Acts. Under section 8 of the 1878 Act the consequence of failure to register was that the bill of sale became void "as against all trustees or assignees of [the grantor of the bill of sale] and against [any creditor levying execution]"— I have endeavoured to summarise the rather turgid language of the section. Section 8 did not make the unregistered bill of sale void against the grantor. But, on a bankruptcy or assignment for the benefit of creditors, the grantor's title to his assets would have left the grantor and passed to his trustee or assignee. The references in the Monolithic Building Company case to the unregistered security remaining enforceable while the grantor company was a going concern produce the same effect for companies pre liquidation as section 8 of the 1878 Act produced for individuals pre bankruptcy. Until bankruptcy intervened the unregistered bill of sale was enforceable against the grantor. Thereafter it was not. Until a liquidation or administration intervenes, the unregistered charge is enforceable against the grantor company. Thereafter, or until the liquidation or administration comes to an end, it is not.

    67. I am, therefore, in full agreement with my noble and learned friend Lord Hoffmann that for as long as an unregistered charge is void under section 395(1) against a liquidator or administrator the charge is, for the reasons he gives, void against the grantor company in liquidation or in administration.

    68. It follows, in my opinion, that the council's security rights under clause 63(1), being unregistered, have been void against Cosslett since 8 September 1993 when the administration order was made.

    69. In Clerk & Lindsell on Torts, 18th ed, (2000), conversion is described as "a wide tort, covering the deliberate taking, receipt, purchase, sale, disposal or consumption of another's property" (para 14-03). Paragraph 14-08 says that "the essence of the wrong [is] the unauthorised dealing with the claimant's chattel so as to question or deny his title to it".

    70. Under the continuation contract between the council and Burrows the council purported to dispose of the coal washing plants to Burrows. But since Cosslett was the owner of the plants and the council's power of sale under clause 63(1) was void as against Cosslett in administration, the disposal was, in my opinion, a clear act of conversion.

    71. I would add that even if the clause 63(1) power of sale had been valid as against Cosslett, I do not think the disposal to Burrows would have been franked by the power. A sale is a disposition of property for a price. The obligation of a chargee with a power of sale is to obtain the best price reasonably obtainable. Under the continuation contract, only parts of which were available to your Lordships, it seems that the council disposed of the plants to Burrows on the footing that Burrows would be allowed a credit of £100,000 for each against its tender price for completion of the engineering works. But by a letter to the council dated 13 October 1993 Burrows estimated the residual value of the plants to be £500,000 and stated that "The £200,000 credit quoted in our tender is after making allowance for the cost of expected barren earthworks". On this evidence it seems to me impossible for the council to contend that it made a proper exercise of its clause 63(1) power of sale. If the clause 63(1) power had been valid as against Cosslett in administration, I think the position would be that the council had become a mortgagee in possession on entry on the site and, accordingly, accountable to Cosslett on the footing of wilful default for the proper value of the coal washing plants.

    72. Mr Moss contended that conversion was a wrongful interference with the right of possession, that the council was entitled to retain possession of the coal washing plants in order to complete the engineering works and that the purported disposal to Burrows at a time when the works had not been completed and Cosslett did not have a right to possession could not have constituted a conversion. He argued that the eventual removal of the plants by Burrows after the works had been completed, although done pursuant to the continuation contract, did not constitute a conversion by the council for it was not done by the council.

    73. I am unable to accept these submissions. The continuation contract, being a purported disposal of the plants by the council, was a wrongful interference with Cosslett's title to the plants. It was repudiatory in character and, had it been relied on in the first set of proceedings between the parties, might well have enabled Cosslett to succeed in its claim to immediate possession of the plants. The details of the continuation contract were not, however, then known and the right of the council to retain the plant pending completion of the works became res judicata as between the council and Cosslett.

    74. Both the coal washing plants were removed from the site in or about June 1997. By that time they were no longer needed for completion of the works and were removed by Burrows, acting in reliance on the continuation contract.

 
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