McGowan v Chadwick and Another
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jonathan Parker,Mr Justice Pumfrey,Lord Justice Schiemann |
| Judgment Date | 05 December 2002 |
| Neutral Citation | [2002] EWCA Civ 1758 |
| Docket Number | Case No: A3/2002/2880 CHANI |
| Court | Court of Appeal (Civil Division) |
| Date | 05 December 2002 |
[2001] EWCA Civ 1758
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION (Mr Justice Burton)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Schiemann
Lord Justice Jonathan Parker and
Mr Justice Pumfrey
Case No: A3/2002/2880 CHANI
Mr Clive Freedman QC (instructed by amhurst brown colombotti) for the the Defendant/Respondent
Mr Christopher Pymont QC and Mr James Aldridge (instructed by Messrs Squire & Co) for Interested party/Appellant
INTRODUCTION
Before the court is an appeal by Mr Newton Grant OBE ("the Receiver") against an order made by Burton J on 10 December 2001 allowing in part the appeal of Mr Michael Chadwick, the defendant in a partnership action brought by his co-partner Mr John McGowan, against an order made by Deputy Master Lloyd on 2 August 2001. Limited permission to appeal to the Court of Appeal was granted by Arden LJ on the papers on 18 February 2002.
Also before the court is a cross-appeal by Mr Chadwick. Permission to cross-appeal was granted by Robert Walker LJ (as he then was) on the papers on 16 April 2002.
The appeal and cross-appeal arise in this way. On 22 April 1999, on Mr McGowan's application, the Receiver was appointed receiver and manager of the partnership business. In about July 2001 Mr Chadwick applied to the court for permission to commence proceedings against the Receiver for damages for alleged breaches of duty in discharging his functions as receiver. By his order dated 2 August 2001 Deputy Master Lloyd refused permission and dismissed his application. Mr Chadwick appealed to the High Court. By his order dated 10 December 2001, Burton J granted him permission to proceed with part of his claim, on terms to which I shall refer in due course.
BACKGROUND
The factual history
Mr Chadwick is a Chartered Accountant, practising as Chadwick & Co, in Ashton-under-Lyne. In late 1997 he entered into a partnership at will with Mr McGowan to acquire and carry on the business of a Chinese restaurant known as The Lee Garden, in Kensington High Street, London W8. Profits and losses were to be shared equally. They bought the business (including the leasehold premises in which it operated) for £250,000. The purchase price was funded as to £200,000 by a bank loan and as to the balance by Mr Chadwick. The bank loan was secured on other properties owned solely by Mr Chadwick.
It was envisaged that Mr McGowan would be in charge of the day-to-day running of the business, with Mr Chadwick providing all necessary accountancy services.
Trading began in about April 1998, but unfortunately the partners soon fell out (the reasons for this are not material for present purposes).
On 20 April 1999 Mr McGowan commenced a partnership action seeking the dissolution and winding up of the partnership, and he applied by way of interlocutory relief in that action for the appointment of a receiver and manager of the partnership business. In his evidence in support of his application, Mr McGowan put forward the Receiver as an appropriate person to be appointed as receiver and manager. The Receiver is a Chartered Accountant, and a partner in the firm of Pridie Brewster & Co. Mr Chadwick put forward an alternative candidate, but by an order dated 22 April 1999 Neuberger J appointed the Receiver to be receiver and manager of the business. The order gave the Receiver power to collect and get in the property of the partnership; power to sell the business; power to manage the business pending sale; and power to appoint agents.
Following his appointment, the Receiver appointed Mr McGowan as his agent in managing the business.
It is common ground on this appeal (as it was before the courts below) that Mr McGowan was at not any material time in a financial position to purchase the business.
In the early stages of the receivership, Mr Chadwick made a number of offers to purchase the business, none of which was accepted by the Receiver.
The first such offer ("the May 1999 offer") was made in a letter dated 4 May 1999 from Mr Chadwick to the Receiver. In that letter Mr Chadwick confirmed his willingness to take over all the assets and liabilities of the partnership in exchange for a payment of £10,000 to Mr McGowan and the writing off of a debt of £12,000 owed to the partnership by Mr McGowan, plus a sum of £5,000 in respect of the costs of receivership. In that letter, Mr Chadwick said that he was not convinced that the business was trading profitably, or that it was solvent. He quantified the outstanding liability of the partnership to the bank as at that date at £194,000. That offer not having been accepted, on 7 June 1999 he made a further offer to purchase the business for £250,000, the price to be satisfied by his assuming sole liability for the entirety of the bank loan (which then stood at £194,000) with the balance of £54,000 being paid in cash. On 20 August 1999 he made a further offer of £250,000 (the liability to the bank stood at some £183,574 at that date). In September 1999 he made a further offer of £250,000 of which £150,000 was to be in cash, and the balance was to be represented by his assuming sole liability for £100,000 of the bank loan. The Receiver applied to the court for directions. At the hearing of the application, Lightman J (by his order dated 17 September 1999) directed that unless an unconditional offer in the total sum of £270,000 were to be received by 15 October 1999 the Receiver should be at liberty to sell the business to Mr Chadwick for £250,000. Lightman J further ordered that all parties (including the Receiver) should bear their own costs of the application.
Mr Chadwick made further offers along the same lines in October 1999. As I have said, none of the offers was accepted by the Receiver.
In due course Mr Chadwick applied to the court. By this application he sought an order that he purchase the business for £250,000, to be satisfied by his assuming sole liability for £175,000 of the bank loan and paying the balance of £75,000 in cash. Mr Chadwick states that this offer was made notwithstanding that the business was running at a substantial loss and had declined substantially in value since the commencement of the receivership, and that he made the offer in order to bring the receivership to an end, and thereby to avoid still further losses.
The application was heard by Mr Michel Kallipetis QC, sitting as a deputy High Court Judge, on 7 March 2000. In the course of the hearing, in response to comments from the deputy judge, Mr Chadwick varied the terms of the offer by increasing the cash payment to £90,000 (so as to enable the Receiver to discharge outstanding liabilities incurred during the receivership), and by reducing the amount of the bank loan for which he was to assume sole liability by a corresponding amount. By his order of 7 March 2000 Mr Kallipetis QC directed that the sale proceed on those varied terms.
Pursuant to that order, by an Agreement dated 18 April 2000 and made between the Receiver as vendor and Mr Chadwick as purchaser, Mr Chadwick agreed to purchase the assets of the business, including goodwill, for £250,000. The price was apportioned as to £160,000 to the leasehold property, as to £88,000 to loose plant, as to £1 for goodwill, as to a further £1 to third party rights and the books and records, and as to the balance of £1998 to stock. The sale was completed on 29 June 2000.
Thereafter, as indicated earlier, Mr Chadwick sought permission to commence proceedings against the Receiver for damages for breaches of duty allegedly committed by him during the course of the receivership. Essentially, Mr Chadwick's complaints are (a) that the Receiver was in breach of duty in failing to accept the May 1999 offer; and (b) that, by his agent Mr McGowan, he mismanaged the business.
THE HEARING BEFORE DEPUTY MASTER LLOYD
The application for permission was heard at first instance by Deputy Master Lloyd. In support of his application, Mr Chadwick (represented then, as he has been throughout, by Mr Clive Freedman QC) presented to the court a draft pleading, setting out his case against the Receiver. I will refer to this pleading as "the first pleading".
The first pleading named the Receiver, Mr McGowan, and Messrs Pridie Brewster & Co (the Receiver's firm) as defendants, but made it clear that no substantive relief was sought against Mr McGowan.
Paragraph 5 of the first pleading alleged that the Receiver owed duties in equity to the partners, and that those duties included: a duty "having regard to the losses which the business was making during the receivership …. to bring to an end the management of the business at the earliest opportunity"; a duty to take all reasonable steps to procure that the partnership business be sold at the earliest opportunity "having regard to the damage to the business by the continuation of the receivership"; and a duty to prevent waste. Paragraph 5(e) pleaded a further duty in the following terms:
"Having regard to the fact that the only realistic possibility would be the sale of the business by way of the purchase by one of the partners of the interest of the other, not to damage the business in the meantime to the disadvantage of the partner upon such purchase."
The first pleading went on to plead the various offers made by Mr Chadwick, to which I have already referred.
Paragraph 31 of the first pleading pleaded that the business was carried on by...
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