Director of company in administration refused interdict against creditor executing payment charge

About this case:

• Citation:
  [2024] CSOH 78
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Sandison

Pursuer Flemming Hansen claimed he was not liable to pay the sum sought to Close Invoice Finance Ltd due to the terms of an indemnity he granted in 2022. The defender counter-claimed maintaining that the sum was due. An identical action against the defender was commenced by Mr Hansen’s co-director, Raymond Denyer, and the action proceeded on the basis that any decision made in Mr Hansen’s case would have equal force in Mr Denyer’s.

The case was heard by Lord Sandison, with Upton, advocate, appearing for the pursuer and Thomson KC for the defender.

Whole debit balance

Mr Hansen and Mr Denyer were the directors of Bonar Yarns Ltd, which entered into a Debt Purchase Agreement with the defender in August 2022. Clause 7.6 of the DPA obliged the pursuer to sign a deed of indemnity in respect of obligations to the defender. As part of the arrangement, a current account was set up by the defender in the company’s name, to which it debited all payments made by it to the company and credited all payments received by it in respect of debts it had purchased from the company.

It was maintained by the defender that, in the circumstances that came to pass, the indemnity required the pursuers to pay the whole debit balance of the current account, with credit given against that balance for sums otherwise recovered by the defender in connection with the company’s affairs. The amount claimed to be due after allowing for other recoveries was £435,450.34.

Senior counsel for the defender submitted that the company was in fundamental breach of the DPA as it had issued false invoices with a face value of £356,942.32, purchased by the defender, which related to debts not properly due at the point of issue. However, the pursuer claimed that the scope of the indemnity he granted was limited to any losses recoverable at common law and denied that the balance due under the DPA fell within that scope.

Counsel for the pursuer went on to submit that the defender had not relevantly stated a case that it had indeed validly triggered any obligation on the part of the company to repay the debit balance. The DPA required the pursuer to sign the indemnity “in respect of obligations” to the defender, without further specification. It did not say that an indemnity would be required in relation to all of the company’s obligations to the defender.

Difficult to understand

In his decision, Lord Sandison noted that parties had accepted that a termination event occurred, saying: “A substantial problem for the defender’s favoured construction of the indemnity is that it is very difficult to understand how the whole debit balance of the Current Account may properly be understood to have come to represent a detriment suffered or incurred by the defender by reason of a breach of any of the obligations of the Company selected for inclusion in the indemnity.”

He explained further: “While the DPA was operating as contemplated, that balance was a sum brought out on a running account operated in consequence of the arrangements set out therein. It could only become a detriment to the defender if it were to become immediately due and payable to it and the Company was unable to pay it.”

Addressing the defender’s principal argument, Lord Sandison said: “It is possible to regard the Company’s obligation immediately to repay the Current Account balance as having arisen by reason of its breach of an obligation selected and set out in the indemnity. What is much more difficult to follow is how the Company’s inability to pay the whole of the Current Account balance may be said to arise ‘by reason of’ any such breach.”

He added: “The defender’s principal argument in support of its favoured construction of the indemnity is built on the specific inclusion, ‘for the avoidance of doubt’ of Discount Charge and Administration Charge within the concept of ‘Losses’. The argument suggests that the inclusion of those charges (which undoubtedly form part of the Current Account balance) as ‘Losses’ demonstrates that the Current Account balance as a whole is included within that concept, and the ‘avoidance of doubt’ phraseology indicates that those elements of that balance are not to be excluded from that whole. However, it is again difficult to see why any doubt would arise.”

Lord Sandison concluded: “I do not consider it appropriate to grant interdict against the defender in terms of the principal action, on the basis that there can be no reasonable apprehension on the part of the pursuer that the defender will unlawfully do diligence against him now that the proper import of the indemnity has been judicially clarified.”

Accordingly, both the principal action and the defender’s counterclaim were dismissed.