Re Herbert Berry Associates Ltd ((in Liquidation))

JurisdictionEngland & Wales
CourtChancery Division
Judgment Date01 Dec 1977




(1) In re Herbert Berry Associates Ltd. (in liquidation) Herbert Berry Associates Ltd. (in liquidation)
Commissioners of Inland Revenue

P.A.Y.E. (Employer's Liability) income tax and national insurance graduated contributions unpaid-Preferential debts in Company's winding-up- Distress by Collector of Taxes under Taxes Management Act 1970 (c 9), s 61- Within three months of distress, but before sale of distrained goods, Company went into creditors' voluntary liquidation - Whether Collector can retain benefit of distress as against liquidator-Companies Act 1948 (11 & 12 Geo 6, c 38), ss 307, 319(1), (5), (7).

On 29 January 1975 the Collector of Taxes distrained on the Company's goods at its premises pursuant to s 61, Taxes Management Act 1970, for unpaid P.A.Y.E. (Employer's Liability) tax and national insurance graduated contributions, which would be preferential debts in a company's winding-up under s 319, Companies Act 1948, and the Company entered into a "walking possession" agreement with the Collector. On 3 March the Company dispatched notices under s 293, Companies Act 1948, convening meetings of creditors with a view to a creditors' voluntary liquidation, and a resolution to wind up the Company was passed on 20 March. The distrained goods were sold by the liquidator on 27 March by prior agreement between him and the Collector, without prejudice to their strict legal rights.

The liquidator issued a summons under s 307 of the 1948 Act for an order that all further proceedings on the distress be stayed and that the proceeds of sale of the distrained goods were the property of the Company available for distribution amongst the creditors. The liquidator contended (i) that the Collector could not, by distraining, obtain priority over other preferential creditors because by s 319(5) all preferential debts were required to be treated pari passu; (ii) that s 319(7) should be construed to apply both to a compulsory and to a voluntary winding-up; (iii) that a distinction should be drawn between a distress by a landlord, which was a form of execution, and a distress by the Crown; and (iv) that the Collector had prejudiced his right of distress by accepting the "walking possession" agreement.

The Chancery Division, dismissing the summons, held (1) that the Collector in relying on his statutory rights of distress, was entitled to complete the distress by sale (and he had not abandoned or prejudiced his rights of distress by the "walking possession" agreement), notwithstanding the fact that by so doing he obtained for the Revenue priority over other preferential creditors; the Court would not interfere with the Collector's rights of distress in the absence of any special circumstances relating to the inequitable conduct on his part in seeking to complete the distress; (2) that the property of a company which is directed by s 302 of the 1948 Act to be applied for the benefit of the creditors subject to preferential payments is the property subject to such rights as were exercised prior to the date of winding up; and that in the present case the distrained goods were already in the possession of the Collector on that date and he had power to sell them to discharge unpaid taxes, and thus the Company's property at that date comprised its right to any surplus realised on that sale; (3) that s 319(7) was limited in its application to a compulsory winding-up. The liquidator appealed.

In the Court of Appeal the liquidator further contended that s 319(7) did not apply to the Crown, or, alternatively, if it did apply, the Crown could only get any benefit under its distress after the rights of the preferential creditors, including the Crown, had been satisfied, but did not pursue the "walking possession" point.

The Court of Appeal, unanimously dismissing the appeal and affirming the decision of the High Court, held (1) that s 319(7), which was limited to a compulsory winding-up, applied to the Crown by virtue of the words "or other person"; (2) that the Collector was entitled to retain the proceeds of the distress levied before the winding-up commenced as the Crown was not restricted to the preferential rights contained in s 319(1), nor was it confined to participation in the Company's winding-up under s 319(5) pari passu with the other preferential creditors; Food Controller v. Cork [1932] AC 647 distinguished; (3) that where distress had been levied but not completed before the commencement of a voluntary winding-up, the Court's discretion to deprive the distrainor of the fruits of that distress would only be exercised if the liquidator could show special circumstances rendering it inequitable to allow the distraint to continue; there was nothing in the Revenue's conduct to suggest that it should not receive the benefit of the distraint to the extent of the tax debt; In re Roundwood Colliery Co. [1897] 1 Ch 373 applied; (4) that the Court's decision under s 307 could not be exercised to modify the Crown's rights in relation to the distress in this case to accord with the position if the Company were compulsorily wound up. The liquidator appealed.

In the House of Lords the liquidator further contended that, if the distraint was not the exercise of a prerogative power, the statutory powers of distraint were incompatible with the priority rules in s 319, but did not contend either that s 319(7) applied other than in a compulsory winding-up or that th e Crown did not fall within the words "any other person" in that subsection.

Held, in the House of Lords, unanimously dismissing the appeal,

(1) that the distress was the exercise not of a prerogative but of a statutory right: Food Controller v. Cork [1932] AC 647 distinguished;

(2) that the terms of s 61, Taxes Management Act 1970, and s 319 of the 1948 Act could stand together, and further, if there was any such repugnancy as contended, the Taxes Management Act 1970 would prevail as a later Act;

(3) that the House would not exercise its discretion to deprive the Revenue of the benefits of the distress. It was not accepted that there was any lacuna revealed in s 319(7) as the 1948 Act frequently distinguished between compulsory and voluntary winding-up, and s 319(7) was only intended to apply to the former.

Quaere: Whether a distraint was a "proceeding" for the purposes of s 226(b), Companies Act 1948.

The case came before Templeman J. in the Chancery Division on 19 and 20 May 1976, when judgment was reserved. On 28 May 1976 judgment was given in favour of the Crown, with costs.

Templeman J.-By s 61 of the Taxes Management Act 1970, a Collector of Taxes is entitled to distrain on the goods of a taxpayer and to sell the goods in satisfaction of the unpaid taxes. By s 319(1) and (5) of the Companies Act 1948 certain debts, including unpaid taxes, are designated preferential debts, and on the liquidation of a company all those preferential debts must be paid in full and pari passubefore any payment is made to any other unsecured creditor. The question in the present case is whether the Collector, and thus the Revenue, can retain the benefit of a distress which was levied but not completed by sale before the date when the Company, Herbert Berry Associates Ltd., went into creditors' voluntary winding-up.

On 29 January 1975 the Collector distrained on the goods of the Company, at the Company's premises, for about £9,500 of unpaid taxes-P.A.Y.E. and national insurance graduated contributions. On the same day the Company entered into what is known as a "walking possession" agreement with the Collector whereby, for the personal convenience of the Company, and in consideration of the Collector not leaving a man in possession of the goods upon which he had distrained, the Company agreed, firstly, that by not leaving a man in possession the Collector had not abandoned the distraint and, secondly, that they would not, without the written authority of the Collector, remove or allow to be removed from the premises the goods which had been distrained. They also agreed, although I do not think it matters in the present case, that they would tell anybody else who visited the premises that the goods were already in the possession of the Collector and that they would warn the Collector of any such visit.

On 3 March 1975 the Company sent out notices under s 293 of the Companies Act 1948 convening meetings of creditors with a view to going into creditors' voluntary liquidation. The statement of affairs as at 18 March 1975 showed an overall deficiency of £91,000 and that there were preferential creditors of £31,000 and assets of £25,000, including the distrained goods, which have since been sold for £10,500. Accordingly, if the Collector is entitled to the proceeds of sale of the distrained goods, the unpaid taxes will be paid in full and the other preferential creditors will receive a dividend of only roughly 70p. in the pound. If the Collector cannot claim the proceeds of sale of the distrained goods so that they are thrown into the pool to provide for all the preferential debts, including the unpaid taxes pari passu, then all the preferential creditors, including the Collector in respect of the unpaid taxes, will receive a dividend of about 80p. in the pound.

Before the Company went into creditors' voluntary winding-up on 20 March 1975 the Collector had arranged for the distrained goods to be sold on 27 March 1975. The distrained goods were subsequently and sensibly sold by agreement between the liquidator and the Collector without prejudice to the legal rights of the parties. So this is a case where the remedy of distress was exercised on 29 January and, without any undue delay or other prejudicial omission or action by the Collector, the Company went into creditors' voluntary winding-up on 20 March, before the distrained goods had been sold and the distress completed.

In In re Roundwood Colliery Co. [1897] 1...

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