NORDIC TRAVEL Ltd v SCOTPRINT Ltd
| Jurisdiction | Scotland |
| Judgment Date | 03 July 1979 |
| Date | 03 July 1979 |
| Docket Number | No. 1. |
| Court | Court of Session (Inner House - First Division) |
FIRST DIVISION.
Lord Maxwell.
Company—Winding up—Fraudulent preferences—Whether cash payments of trade debts made by one limited company to another closely associated limited company prior to debtor company's liquidation were fraudulent preferences at common law—Creditor company aware of debtor company's absolute insolvency and of the irretrievable nature of that insolvency—Whether payments were made in ordinary course of business—Collusion—Companies Act 1948 (cap. 38), sec. 320.1
Bankruptcy—Notour bankruptcy—Fraudulent preferences—Whether cash payments of trade debts made in ordinary course of business—Companies Act 1948 (cap. 38), sec. 320.1
A travel company, Nordic Travel Ltd., went into liquidation in October 1973. It had been absolutely insolvent since at least 31st December 1971. In autumn 1972 Nordic had instructed Scotprint Ltd. to print brochures for the 1973 season. The brochures were printed and Scotprint invoiced Nordic at 31st December 1972. During the latter part of 1972 and in 1973 Nordic incurred other trade debts. From January to September 1973, 11 payments totalling £21,723 were made by Nordic to Scotprint. At a shareholders' meeting on 28th September 1973 it was resolved that Nordic be wound up as it was unable to pay its debts. On 23rd October 1973 an official liquidator was appointed. It came to
the liquidator's attention that Nordic's indebtedness to Scotprint had been met more or less in full; that a Mr Watt was a director of both Nordic and Scotprint; that of the 11 payments made to Scotprint, three were by cheques signed by Mr Watt; that Scotprint was a shareholder in Nordic; that Scotprint had intimate knowledge of Nordic's financial circumstances; and that Scotprint had agreed to accept payment of the December 1972 debt as and when cash became available to Nordic. The liquidator sought to reduce all 11 payments to Scotprint as fraudulent preferences at common law in terms of sec. 320 of the Companies Act 1948. Scotprint maintained that all the payments save two were payments in cash of trading debts due and payable, made in the ordinary course of business, and were accordingly not reducible. After a proof before answer the Lord Ordinary (Maxwell) found inter alia that it was not proved that Scotprint's invoices had been met before prior trade creditors' invoices, nor that Nordic's decision to order brochures in autumn 1972 was other than a genuine one. The Lord Ordinary granted the liquidator decree for payment of £1,000 and quoad ultraassoilzied Scotprint. The liquidator reclaimed.Held (1) that an insolvent debtor who was in funds was entitled to pay, in cash and in the ordinary course of business, debts which were due and payable. The fact that both debtor and creditor were aware of the debtor's absolute insolvency, whether irretrievable or not, was not sufficient in itself to render the payments challengeable or to constitute fraud or collusion.
(2) That knowledge of the debtor's absolute insolvency and an agreement that the creditor should be paid a debt due and payable as and when funds became available did not necessarily take the payments outwith the ordinary course of business; and reclaiming motion refused.
Nordic Travel Limited and Frank Hutcheson Mycroft, Official Liquidator thereof, raised an action in the Court of Session against Scotprint Limited, concluding: "For declarator that the payments made by the first-named pursuers in favour of the defenders on 17th January, 4th April, 11th April, 19th April, 30th April, 10th May, 23rd May, 4th June, 13th June, 14th June, 19th September all in 1973 constituted to the extent of £21,723.52 illegal preferences at common law by the first-named pursuers to the prejudice of their creditors; for payment to the pursuers by the defenders of the sum of £21,723.52 with interest thereon at the rate of 11 per centum per annum from 19th September 1973 until payment; and for the expenses of the action."
The facts of the case appear from the opinion of the Lord President.
The pursuers pleaded:—"(1) The said payments to the defenders having been made by the first-named pursuers when insolvent fraudulently and illegally to the prejudice of lawful creditors, decree should be pronounced as concluded for. (2) The defences being irrelevantet separatim being essentially lacking in specification should be repelled and decree granted de plano."
The defenders pleaded:—"(1) The pursuers averments being irrelevant et separatim being lacking in specification, the action should be dismissed. (2) The pursuers' averments so far as material being unfounded in fact, the defenders should be assoilzied. (3) The said payments not being illegal preferences at common law, decree of absolvitor should be pronounced."
On 2nd May 1978 and subsequent days a proof before answer was held. On 10th October 1978 the Lord Ordinary (Maxwell) of consent granted decree for payment of the sum of £1,000 with interest; and quoad ultra assoilzied the defenders.
The pursuers reclaimed, and on 31st May 1979 and subsequent days the case was heard before the First Division.
At advising on 3rd July 1979,—
LORD PRESIDENT (Emslie).—The pursuers and reclaimers are a company Nordic Travel Limited, now in liquidation, and the liquidator thereof. The company, which I shall call “Nordic” hereafter, was in the holiday travel business, specialising in arranging holidays in Scandinavia. The defenders are a company known as Scotprint Limited whose business is printing. For a number of years prior to the commencement of the winding-up of Nordic in October 1973 Scotprint undertook its printing services and, in particular, printed its brochures for each successive holiday season. For the printing of these brochures for each holiday season or year Nordic placed its order with Scotprint in the autumn of the preceding year.
As at 31 December 1971 and for a considerable period before that date Nordic was absolutely insolvent.
In the autumn of 1972 (the exact date is not known) Nordic, in accordance with the practice of previous years, placed its order with Scotprint for brochures for the 1973 season. These were delivered and invoiced to Nordic on or about 31 December 1972.
It is not in dispute that Nordic's decision to continue trading in 1973 was a genuine and reasonable one, in respect that there were grounds for believing that its trading and financial position would improve materially. It is not in dispute either that the pattern of Nordic's trading was that after distribution of its brochures at the beginning of the year, holidays were booked by customers from about January in each year until the summer. As a result cash, represented by deposits and advance payments for booked holidays, began to flow in to Nordic in the spring and early summer of each year, leaving Nordic with a substantial credit balance in June, July and August. From then onwards until the end of the year the cash inflow ceased, and as the result of cash outflow to meet the bills then presented by Scandinavian hotel-keepers who had provided accommodation for Nordic's customers, there was a debit balance on Nordic's bank account during the autumn, winter and early spring.
There was a close association between Nordic and Scotprint. They were, of course, associated in trade in respect that the latter did the printing required by Nordic for its operations. Apart from this, however, Scotprint were the holders of 8,972 "B" Ordinary Shares of Nordic, and their managing director, Mr Watt, was one of the two directors of Nordic from about the end of 1971 onwards. On the resignation of his co-director Mr Stewart on 28 June 1973, Mr Watt was left as Nordic's sole director. Because of this close association between the two companies it is not surprising that Scotprint was aware of the absolute insolvency of Nordic before, during and after the autumn of 1972. In particular, Scotprint was aware of Nordic's financial position when the order for printing the 1973 brochures was accepted in the autumn of 1972. At that time there was, it seems, an "understanding" between the companies that notwithstanding the delivery and invoicing of the brochures at the end of 1972, when Scotprint's account would become due and payable by Nordic, the price would be met by Nordic out of the cash which would begin to flow in, from and after the early spring of 1973. In the events which happened Nordic's trading debt to Scotprint for the printing of the 1973 brochures was paid off in cash in nine separate payments of various sums between 4 April and 14 June 1973. All of these payments were made within the period of six months prior to the commencing of the winding-up of Nordic, and, if they constituted fraudulent preferences at common law, the liquidator of Nordic would be entitled to recover them (see section 320 of the Companies Act 1948.)
In this action Nordic and its liquidator sought (first) declarator that these nine cash payments by Nordic to Scotprint, and two others, constituted fraudulent preferences at common law and (second) repetition of the sums so paid. The sole basis of the pursuers' case, according to their pleadings, may be seen in the following averments in article 5 of the Condescendence: "From at least 1st January 1973 the defenders knew that the first-named pursuers were and remained in a state of absolute insolvency, and, as a result, they, the defenders, were disabled from obtaining any valid repayment of their debt, whether in cash or otherwise, to the prejudice of other lawful creditors. Said preferences in favour of the defenders have materially prejudiced other lawful creditors of the first-named pursuers while the defenders have been paid in full. In these circumstances the second-named pursuer is entitled to require the defenders to make repayment to the pursuers of the said sum of £21,723.52 for distribution among all the lawful creditors of the first-named...
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