OBG Ltd and another v Allan and Others

JurisdictionEngland & Wales
JudgeLord Justice Peter Gibson,Lord Justice Mance,Lord Justice Carnwath
Judgment Date09 February 2005
Neutral Citation[2005] EWCA Civ 106
Docket NumberCase No: A2/2004/0691
CourtCourt of Appeal (Civil Division)
Date09 February 2005
Between
OBG Ltd.
OBG (Plant & Transport Hire) Ltd.
Claimants and Respondents
and
Iain John Allan
First Defendant and First Appellant
Michael Francis Stevenson
Second Defendant and Second Appellant
Raymond International Ltd. (Formerly Raymond Centriline Ltd.)
Third Defendant
Penningtons
Fourth Defendants and Third Appellants

[2005] EWCA Civ 106

Before

Lord Justice Peter Gibson

Lord Justice Mance and

Lord Justice Carnwath

Case No: A2/2004/0691

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION MANCHESTER DISTRICT REGISTRY

His Honour Judge Maddocks

CH1995ONOS.0486AND04

Royal Courts of Justice

Strand, London, WC2A 2LL

Mr. Alan Steinfeld Q.C. and Mr. Alistair Wyvill (instructed by Messrs Hammonds of Manchester) for the Respondents

Mr. Gregory Mitchell Q.C. and Mr. Paul Greenwood (instructed by Messrs Reynolds Porter Chamberlain of London WC1V 7HA) for the Appellants

Lord Justice Peter Gibson
1

On 8 June 1992 the Third Defendant, Raymond Centriline Ltd. ("Centriline"), purported to appoint the First Defendant, Mr. Allan, and the Second Defendant, Mr. Stevenson, (together "the Receivers") as joint administrative receivers of the First Claimant, OBG Ltd. ("OBG"), and of the Second Claimant, its associated company, OBG (Plant and Transport Hire) Ltd. ("Plant"). On 31 January 2001 His Honour Judge Maddocks, sitting as a judge of the High Court, declared such appointments to be invalid. The principal issue in this case is as to the consequences in law of those appointments. Issues are raised as to the nature of the cause or causes of action to which that invalidity gives rise. We are told that there is no English authority which directly covers those issues. There is also an issue as to the extent to which the remuneration and expenses of the liquidators of OBG and Plant can be claimed as damages.

2

They arise in an appeal by the Receivers and by the Fourth Defendants, the solicitors Penningtons, who advised Centriline on the appointment of the Receivers, from the order made on 24 February 2004 by the Judge giving judgment to OBG and Plant in the sum of £1,854,000 (excluding damages for the costs and expenses of the liquidators of OBG and Plant) plus interest. The Judge also directed an inquiry into, and an assessment of, the liquidators' costs and expenses which OBG had suffered by reason of the Receivers' wrongdoing.

3

The Judge refused the Receivers and Penningtons permission to appeal, but Neuberger L.J. granted such permission on limited grounds and also granted the Claimants permission to cross-appeal, such permission being limited to a single ground.

The facts

4

OBG carried on business in a substantial way as civil engineering contractors specialising in underground pipe work and utilities. Plant supplied plant and transport for OBG's business. By far the main customer of OBG, accounting for 75% to 90% of its turnover, was North West Water Ltd. ("NWW"). But among other contracts not with NWW was a valuable sub-contract which it obtained in September 1991 from Trafalgar House Construction Management Ltd. for services to Strangeways Prison ("the Strangeways Contract").

5

OBG's contracts with its customers were of two types: fixed contracts for identified work and period contracts for work in a particular area over a particular period as and when identified and ordered by its customer. Among the relevant categories of contracts were annual mainlaying contracts and rehabilitation contracts (renovating underground pipes).

6

The procedure for payment under contracts with NWW required the weekly completion by OBG of track sheets, which were checked by the representative of the Engineer under the contract; the track sheets would then be submitted in a monthly statement to the Engineer, who, having checked it, would issue an interim certificate. The net amount certified for payment was due 28 days from receipt of the monthly statement.

7

The NWW forms of contract largely incorporated, or were on the terms of, the Institution of Civil Engineers Conditions of Contract (5 th edition). Those terms included in cl. 63(1) a term allowing NWW, if OBG went into liquidation or had an execution levied on its goods or if the Engineer certified that OBG had abandoned the contract, to give 7 days' notice in writing to OBG to enter on the site and the works and expel OBG and to employ any other contractor to complete the works. They also included in cl. 63(4) the following:

"If the Employer shall enter and expel the Contractor under this Clause he shall not be liable to pay to the Contractor any money on account of the Contract until the expiration of the period of Maintenance and thereafter until the costs of completion and maintenance damages for delay in completion (if any) and all other expenses incurred by the Employer have been ascertained and the amount thereof certified by the Engineer. The Contractor shall then be entitled to receive only such sum or sums (if any) as the Engineer may certify would have been due to him upon due completion by him after deducting the said amount. But if such amount shall exceed the sum which would have been payable to the Contractor on due completion by him then the Contractor shall upon demand pay to the Employer the amount of such excess and it shall be deemed a debt due by the Contractor to the Employer and shall be recoverable accordingly."

The result of that unusual clause is that if NWW as the Employer, having entered and expelled OBG as the Contractor, employed another contractor to do the work more cheaply than OBG, the savings thereby made by NWW became due to OBG. If the other contractor cost more, then OBG had to pay the excess to NWW.

8

OBG was undercapitalised and underfunded and heavily dependent on receiving payments from NWW under its contracts with NWW. In March 1992 NWW took the view that it had been overcharged by OBG. There was even a suspicion, never proved, that there had been corruption in the obtaining of contracts by OBG. NWW suspended OBG from its list of approved contractors and this, once known, damaged OBG's reputation with other employers. NWW withheld payment for work done under continuing contracts, thereby creating an immediate cash-flow crisis for OBG. Following investigation of work done by OBG for NWW on five annual mainlaying contracts, the Engineer under those contracts "de-certified" amounts previously certified for payment, thereby causing sums to become due to be repaid to NWW, and such sums would be set off against further sums later certified as due to OBG under other contracts. NWW held back orders for work under rehabilitation contracts. NWW instructed the accountants, Arthur Andersen, to provide an assessment of the overpayment claim if applied to work done under other OBG contracts and to report on the financial viability of OBG.

9

OBG sought and held meetings with NWW on 25 and 26 March 1992, at which it protested to NWW that if NWW did not pay what it was withholding, OBG would go out of business. It selected new solicitors to adopt a more aggressive approach towards NWW and on 1 May 1992 a winding up petition was issued against NWW. On its solicitors' advice it consulted an insolvency practitioner, Mr. Shierson of the accountants Grant Thornton, to advise on its financial position. At a meeting with him on 24 April 1992 consideration was given to the alternatives of administration and receivership, but neither was pursued. OBG compiled cross-claims against NWW under the annual mainlaying contracts in a total sum of nearly £6.5 million and they were submitted on 29 April 1992. Such claims were never substantiated. An approach was also made to another insolvency practitioner, Mr. Robinson (later to become the liquidator of OBG) of the accountants Begbies Traynor, and, without being formally instructed, he indicated that his advice would be similar to that which Mr. Shierson had given, viz. that there was a need to reach agreement with NWW and to obtain further capital.

10

At about this time OBG owed a substantial sum to its specialist sub-contractor, Centriline, which on 27 April 1992 presented a petition for the winding up of OBG. OBG's bank, the Royal Bank of Scotland ("RBS"), was a secured creditor of OBG and Plant but was unwilling to assist OBG, and other sources of funding were reluctant to assist because of the continuing dispute with NWW. Centriline, however, was a prospective source of finance. It wanted to take an assignment of RBS's securities and to take shares in OBG. OBG needed funding of £1.1. million. A facility of that amount was negotiated and a facility letter accepted by OBG on 22 May 1992. Centriline went ahead with a proposal to take the assignment from RBS.

11

OBG had in the meantime been conducting negotiations with NWW to resolve their dispute. On 15 May 1992 Mr. O'Brien, the managing director of OBG, and Mr. Golden, the procurement director of NWW, had a meeting. From what Mr. O'Brien told him, Mr. Golden saw OBG as "in or near a terminal position". In the meantime and to meet the threat of the winding up petition NWW had instructed the Engineer to proceed with de-certification. As at 19 May £427,000 had been de-certified. This would have resulted in no payments being made in respect of certified sums becoming due in the next two to three weeks. Mr. Golden refused to make payments in advance. On 19 May Mr. Golden indicated to Mr. O'Brien that he would need to be given "extreme confidence" or "extreme comfort" to exclude the de-certified sums. Mr. O'Brien told Mr. Golden that if the £427,000 de-certification was imposed, as he acknowledged was provided for by the...

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