Wright, Johnston & Mackenzie Solicitors

Paying the Piper: Flushing Out Unwilling Debtors

You have served your statutory demand requesting the debtor company pays up and that if no payment forthcoming in 3 weeks then you’ll petition for them to be wound up. Your debtor who thus far hasn’t responded must do so within the time limit, will probably either pay up or tell you that he is disputing the payments that are due because you haven’t done X, Y or Z. You at least then know whether there is a genuine dispute or not.

The threat of a speedy and less formal winding-up petition is the ace card in the creditor’s hand to prompt an unwilling debtor to pay up but it is not without difficulty.

An unexplained failure to pay after a demand for payment is not enough to warrant a winding up petition being granted. Unfortunately the petitioning creditor must satisfy the Court that the debtor is unable to pay its debts as they fall due, which can be a challenging hurdle to overcome.

The creditor in order to satisfy the prima facie test must persuade the Court there is a good arguable case so if there is an apparent substantial defence then the petitioning creditor is unlikely to have a good arguable case.

In the recent case of Purewal Enterprises Ltd Petitioner in the Court of Session, Lord Glennie observed that a winding up petition is not the proper forum for the resolution of commercial disputes. In other words, if the debtor is disputing the debt on grounds that seem on the face of it to be genuine, then the petition should be dismissed.

However in PEC Barr (Holdings) Limited v Munro (Holdings) Limited, Sheriff Holligan decided that despite the alleged debt being in dispute there was insufficient evidence before him to refuse a first deliverance and to refuse the petition at this stage would be premature.

A similar stance has been taken in England in the case of Vertex Trading Sarl v Infinity Holdings Limited, where the Chancery Court was prepared to proceed with a winding up petition even though the debt was disputed as there was no prejudice to the debtor company in proceeding and it would be for the Court to decide at the petition hearing whether the debt was properly disputed or not.

Many creditors wish to have a provisional liquidator appointed which can be more difficult to obtain as in addition to a prima facie case, the petitioning creditor must satisfy the Court that there is a real and substantial risk of the assets of the company being dissipated. It should be borne in mind that all relevant facts for the appointment of the provisional liquidator must be fully and frankly disclosed. If there is material non-disclosure, the Court will dismiss the petition and recall the appointments of a provisional liquidator.

So it seems that creditors can use winding up petitions to flush out unwilling debtors but only in certain circumstances; if petitions are raised when the alleged debt clearly relates to a commercial dispute then that could be a costly decision.

WJM have experience and expertise in debt recovery, we know the best tactics to employ to recover your corporate debts. We are regularly instructed to recover debts in both the Sheriff Courts and the Court of Session.

For more information, contact Neil Morrison: .(JavaScript must be enabled to view this email address)

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How do I wind up a Scottish Company?

The first thing to do is to instruct your Solicitor to draft a Petition and lodge it with the Sheriff Court. The Petition must contain all the relevant information requested by the Sheriff Court Rules.  If the Petition is accepted and warranted it is then returned to the petitioning creditor. No hearing is normally necessary unless seeking a provisional liquidator (rather than interim liquidator sought in Petition, which is required by Court Rules) or the Sheriff wishes to be addressed on the Petition if it is suspected to be incompetent, for example. The next step is to serve the Petition on the debtor by Sheriff Officer.

However while the insolvency rules provide that service of the Petition should be made “forthwith”, it is worthwhile holding off serving in order to give the Interim Liquidator time to attend the debtor’s premises and investigate the circumstances of the company prior to formal appointment and advertisements, which usually flushes out the debtor who proceeds to make prompt payment of the debt.

If the Petition is served then it must be duly advertised in the Edinburgh Gazette and the Scottish newspaper of the specific Scottish region (in Edinburgh, it would be The Scotsman), the debtor then has eight days to lodge Answers, and a hearing will be fixed whereby the company may be wound up and the Interim Liquidator authorised to seize the company assets. Usually the expenses of the Liquidator are awarded against the company however the Court has complete discretion and may award expenses against the petitioning creditor.

The appointed Liquidator shall then advertise his appointment in one or more Scottish newspapers ensuring it comes to the notice of the creditors of the company.

For more information, contact Neil Morrison: .(JavaScript must be enabled to view this email address) 

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Adjudication: If at first you don't succeed, try, try again.....

If a dispute arises out of a construction contract then parties can refer the matter to an adjudicator to determine the dispute.  However once the adjudicator makes his decision, if the losing party then refers another dispute relating to the same contract to a second adjudicator, is the losing party allowed to have another bite at the cherry or does the second adjudicator have no jurisdiction to determine the dispute?

In the recent Commercial Sheriff Court case of Bell Building Projects Limited v Carfin Developments Limited, this was the question that Sheriff Scott had to answer. The case concerned a dispute between a contractor and employer over payment relating to a building contract to construct retail units.

The employer withheld retention monies due to the contractor’s alleged failures to complete the unit to the agreed standard. The first adjudicator decided that the employer was entitled to retain the retention monies, as the work carried out by the contractor was held to be defective.

One year later, with the defects liability period having expired in the meantime, a further dispute arose and the contractor referred the matter to a second adjudicator who then decided that the retention monies should be released because the employer had failed to issue valid withholding notices. 

The employer argued that the second adjudicator had no jurisdiction to determine the dispute as the terms of the parties’ contract stated that an adjudicator must resign if the dispute is the same or substantially the same as the previous dispute referred to adjudication and the adjudicator made his decision.

However Sheriff Scott agreed with the contractor who argued that the first adjudicator had only dealt with the factual circumstances of the dispute, for example, whether the dimensions of car parking spaces were in accordance with the contract. Whereas the second adjudicator was not being asked to investigate alleged defects but instead had been asked to determine the contractual basis upon which the monies sought by the contractor could still be withheld.

The Sheriff dismissed the employer’s argument that the second adjudicator had relied upon the practical completion certificate in making his decision, and that it had not been issued under the terms of the parties’ contract amounting to little more than a “compromise agreement”. The Sheriff disagreed, holding that it was patently clear that the certificate was under the contract as the certificate explicitly stated so and it would be illegitimate for the Court to “look behind” the terms of the certificate.

The Sheriff said the second adjudicator’s decision was fundamentally different from the first adjudicator’s decision and the only thing in common was the contractor’s desire in each case to release the retention monies.

The decision is a reminder to a losing party in an initial adjudication that they may be allowed another bite at the cherry to unlock the door to payment of retention monies so long as the subsequent adjudication is distinct from the first one.

WJM have a wealth of experience in adjudications and can provide you with clear, commercial advice to help you resolve the dispute and to ensure the best outcome is achieved in the particular circumstances.

For further information: contact Neil Morrison, .(JavaScript must be enabled to view this email address)

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Arbitration (Scotland) Act 2010: The force is strong with this one.

On 7 June 2010 the new Arbitration (Scotland) Act 2010 with its integrated Scottish Arbitration Rules (“SAR”) came into force and therefore applies to all contractual arbitration provisions. The Act has not yet come into force for statutory arbitrations based on law rather than agreement but this will happen at a later date.

All arbitration proceedings started before 7 June 2010 are not covered by the new Act. However all arbitration clauses entered into before 7 June 2010 are governed by the new Act so long as parties have not specifically agreed in their arbitration clause or agreement that new Act shall not apply.

The authorised arbitral appointment referees list has recently been issued. This is a list showing the bodies that are entitled to appoint arbitrators. The list includes the Law Society of Scotland, Royal Institution of Chartered Surveyors, Institution of Civil Engineers and the Dean of the Faculty of Advocates, amongst others.

Arbitration awards can be appealed to the Outer House of the Court of Session so new procedural rules also came into force on 7 June 2010 regulating appeal applications, and the enforcement of arbitration awards.

For further information: contact Neil Morrison, .(JavaScript must be enabled to view this email address)

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Ask WJM!

QUESTION

Dear WJM,

I purchased a vehicle from my neighbour and have since discovered that there is outstanding finance on the vehicle from my neighbour’s hire purchase contract with a car dealership. Do I have good title to the vehicle?

WJM ANSWER

Dear Madam,

If you bought the car in good faith without notice of the finance company’s interest in the vehicle, then you may obtain good title to the vehicle. The finance company is under an obligation to give you good title under the Hire Purchase Act 1964.

Ask WJM

If you have a question for WJM, we may publish the answer to your question in our “Ask WJM” section of our Lawsuit! E-zine; you can email your questions to .(JavaScript must be enabled to view this email address)

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Capital Gains Tax Bonanza for UK Expats!

The Spanish nation is no doubt raucously celebrating winning the World Cup but thousands of non-Spaniards are also celebrating for very different reasons. People who were not fiscal residents in Spain and sold Spanish property were obliged to pay capital gains tax on the property just as Spaniards must. However although Spanish nationals paid just 15%, non-resident foreign nationals in Spain such as sellers from the UK were charged 35% on any gains made on Spanish properties by the Spanish Government.

The European Commission challenged those rules on the grounds they were discriminatory and since 2007, both Spanish and overseas property owners have paid the same tax rate of 15%. The High Court of Valencia has ruled in favour of UK nationals Mr and Mrs Roy. The judge told the Spanish tax authorities to repay them the difference in the capital gains tax they paid compared to what Spanish nationals paid. 

As a result of the ruling, UK expats who were not fiscal residents and sold their Spanish property between July 2004 and 31 December 2006 are eligible to claim a rebate from the Spanish tax authorities on capital gains tax paid. A claim is only valid if the capital gains tax bill was paid within the last 4 years.

A currency broker has suggested that the average claim value is £14,100. Taxpayers are entitled to claim missing interest at a rate of 6% from the date the claim is presented. It has been estimated that around 10,000 UK expats may be eligible to reclaim their capital gains tax.

The reclaim process is not without difficulties though. Firstly, claimants will need to obtain a copy tax form called Modelo 212 or 210 to proceed. A claim must be lodged at a Spanish tax office and assuming it is rejected, an appeal must be made to an economic tribunal. If the appeal is unsuccessful then the claimant only has two months to start pursuing a claim through the Spanish Courts. 

The claim process takes 3 months and the deadline is 31 October 2010 so sellers only have until 31 July 2010 begin the claim process or kiss goodbye to their Spanish tax rebate forever. So anyone who believes they have been affected should take immediate steps now to make their claim before it’s too late.

For more information: contact Neil Morrison, .(JavaScript must be enabled to view this email address)

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Mutuality of Contract: I'm not doing my bit until you do your bit!

The principle that one party to a contract need not perform unless the other party was willing to perform or has performed was enshrined in Scots law as far back as 1492 when it was held that if a marriage didn’t go ahead then the other party was under no obligation to perform their part of the bargain.

The modern rules of this “mutuality” principle are that a party who is in breach of his obligations cannot enforce performance by the other party. The innocent party who is not in breach can withhold performance until the other party has performed, by for example refusing to pay for defective plumbing. The innocent party can also claim damages for the breach. However once the breach ends, so does the right to suspend performance.

An important rule of the mutuality principle is that the obligations of the parties must be the causes of one another, so for example an obligation to pay the price is the counterpart of an obligation to deliver a car. There a few other rules which are worthwhile remembering, namely that the operation of the principle can be affected by the express terms of the contract, and that not every breach will entitle a party to withhold performance of part of the contract.

A famous case where the mutuality principle was put under the spotlight was the 1997 House of Lords case of Bank of East Asia Ltd v Scottish Enterprise. The facts were that the Scottish Development Agency (“SDA”) entered into a contract with builders to construct factory units in Hamilton. The agreement stated that no instalment of the contract price would be paid until 15 May 1990. The builders required money up front to construct the units and so assigned the payments due to them from the SDA to the Bank of East Asia Ltd who gave them a loan on that basis.

On 15 May 1990, the sum payable to the Bank by the SDA was £416,964. However the SDA said that the builders had negligently carried out work, which had caused losses of £168,512. A few weeks later the builders became insolvent and as they were unable to complete the factory units, the SDA suffered further losses and became entitled to damages under the contract.

The question that the House of Lords had to answer was whether the SDA were entitled to withhold payment of the £416,964 pending quantification of their claim for damages arising out of the builders’ failures.

The court held that each and every obligation in a contract by one party was not the counterpart of each and every obligation of the other party. It was a matter of circumstances. If a contract is performed in stages then the counter obligation of a stage one payment would be the completion of the work for stage one in accordance with the contract. It follows that if a part of a contract has not been performed then payment of the whole contract cannot be retained, only payment relating to the part of the contract that has not been performed.

In summary, a party can only rely on the mutuality principle where corresponding obligations are payable but unfulfilled. Once the obligations have been duly performed the remedy is no longer available; for example, if potatoes were delivered for two months as per the contract but not in the third month then the person receiving the potatoes can only retain the payment relating to the third month.

The court further clarified the Scottish rule that retention could only be used for breaches of contract that existed when the payment fell due, so any losses flowing from breaches that occurred after the payment date could not be retained. 

What amounts to a counter obligation depends on the express and implied terms of the specific contract. There has been judicial criticism of the Bank of East Asia Ltd decision in a series of Scottish court decisions that muddy the waters somewhat, where it was held that there is a presumption that the obligations in a contract are reciprocal in the absence of any indication to the contrary.

WJM can examine your contractual obligations to determine their counter obligations and provide you with succinct advice on whether the remedy of retention applies in your circumstances or not.
 
For further information: contact Neil Morrison, .(JavaScript must be enabled to view this email address)

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You couldn't make it up....

CRIMINAL CAUGHT OUT BY SWEET TOOTH!

An Australian thief who’s favourite calling card was stealing treats from his victims’ fridges has been caught after police took samples of DNA left on a half-eaten Krispy Kreme doughnut and empty Coke bottles.

The samples were then tested at the police laboratory where DNA traces were matched with McKillop.

The Australian judge, Peter McClellan, rejected McKillop’s appeal against a 17-year jail term and commented during the hearing that the thief had become somewhat relaxed the robberies carried out in 2005 and 2006, because he committed so many without being caught.

Justice McClellan concluded: “Frankly, it is not surprising that Mr McKillop was not concerned about leaving his DNA at the scene. After all, he had committed 154 offences without apprehension.”

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