[COURT OF APPEAL]

RAINBOW AND ANOTHER v. MOORGATE PROPERTIES LTD.

SAME v. SAME

[1973 R No. 1089]

[1973 R No. 1199]

Court of Appeal - Jurisdiction - Charging order by district registrar Registrar's discretion to make charging order - Whether appeal lies to Court of Appeal or to judge in chambers - R.S.C., Ord. 58,rr. 1,2¹

Practice - Charging order - Insolvent debtor - Petition for winding up of judgment debtor - Application for charging order to be made absolute - Exercise of discretion to make charging order - Whether appeal to Court of Appeal

In 1973 the plaintiffs succeeded in two actions against the defendant to restrain nuisances and were granted the appropriate relief and costs of both actions. The costs were taxed in September 1974 on a total amount of £1,188. The defendant was a subsidiary company in a large group of companies which were in financial difficulties. On June 7, 1974, the parent company went into voluntary liquidation. On July 19, 1974, at a meeting which had been convened by a circular sent to creditors of the companies in the group, it was unanimously resolved that there should be a moratorium for six months on the enforcement of debts in order to enable a scheme to be prepared under section 206 of the Companies Act 1948. The plaintiffs, who had not received the circular and were not a party to the resolution, wrote to the defendant on November 1, 1974, demanding payment of the costs and, on November 11, applied ex parte and obtained charging orders nisi against leasehold property of the defendant for the amount of the costs. On December 4 the plaintiffs applied to the registrar for the orders nisi to be made absolute. The defendant, which had in the meantime presented its own petition for winding up, opposed the application but the registrar exercising his discretion in favour of the plaintiffs made the orders absolute on the grounds that the effect of those orders would merely give the plaintiffs additional security for their debt without thereby conferring priority on them over the other creditors and that cases concerning garnishees were not analogous to a claim for additional security.

On appeal by the defendant: -

Held, allowing the appeal, (1) that the considerations relevant to the exercise of the court's discretion to make garnishee

1 R.S.C., Ord. 58, r. 1: "(1) Except as provided by rule 2, an appeal shall lie to a judge in chambers from any judgment, order or decision of a master of the Queen's Bench Division, the Admiralty Registrar or a registrar of the Family Division."

Ord. 58, r. 2: "(1) An appeal shall lie to the Court of Appeal from any judgment, order or decision of a master of the Queen's Bench Division (other than an interlocutory judgment, order or decision) given or made - (a) on the hearing or determination of any cause, matter, question or issue tried before or referred to him; or (b) on an assessment of damages under Order 37 or otherwise; or (c) on the hearing or determination of any interpleader or garnishee proceedings; or (d) on the hearing or determination of an application under Order 84, rule 3."

orders applied equally to the making of charging orders and, accordingly, since the charging orders gave the plaintiffs priority over unsecured creditors of the defendant, who was probably insolvent, the court should not exercise its discretion so as to place the plaintiffs at an advantage over the other creditors (post, pp.. 793D - E, H - 794A, 796F, H - 797A). (2) That the making of a charging order came within the words "any judgment, order or decision" in R.S.C., Ord. 58 r. 2 (1) (a) and, not being an interlocutory matter, an appeal from such an order made by a master or a district registrar was direct to the Court of Appeal and, therefore, the court had jurisdiction to hear and determine the defendant's appeal (post, pp. 795C-D, F-G, 796D-E).

Per Ormrod L.J. There is considerable difficulty in deciding how R.S.C., Ord. 58, r. 2 ought to be construed, and in its present form it plainly requires the attention of the Rules Committee because it is almost impossible to give it any satisfactory construction (post, p. 795G-H).

The following cases are referred to in the judgments:

Hudson's Concrete Products Ltd. v. D. B. Evans (Bilston) Ltd. (1961) 105 S.J. 281, C.A.

Lee (George) & Sons (Builders) Ltd. v. Olink [1972] 1 W.L.R. 214; [1972] 1 All E.R. 359, C..A.

Prichard v. Westminster Bank Ltd. [1969] 1 W.L.R. 547; [1969] 1 All E.R. 999, C.A.

Wilson (D.) (Birmingham) Ltd. v. Metropolitan Property Developments Ltd., November 29, 1974; Bar Library Transcript No. 383A of 1974, C. A

No additional cases were cited in argument.

APPEAL from Mr. District Registrar Broughton.

During 1973 the plaintiffs, David Rainbow and his wife Zena Rachelle Rainbow, successfully brought two actions to restrain nuisances committed by the defendant, Moorgate Properties Ltd., and were granted the appropriate reliefs and their costs in the two actions. In September 1974 the plaintiffs obtained allocations for costs totalling £1,188. On November 11, 1974, the plaintiffs applied to the Bournemouth District Registry for and were granted charging orders nisi against the defendant's leasehold land and premises known as Dorchester Mansions, Bournemouth, for that amount. On December 4,1974, the plaintiffs applied to make the charging orders absolute. The defendant, which had already presented its own petition for winding up, opposed the application. Mr. District Registrar Broughton held that as the plaintiffs already had an immediate right to payment by virtue of their judgment, a charging order would not have the effect of giving them priority over the other unsecured creditors and they were entitled to charging orders absolute and costs.

The defendant appealed on the grounds, inter alia, that the registrar erred in holding that the making of a charging order would not prejudice the other unsecured creditors of the defendant or give the plaintiffs a preference; and that the district registrar in exercising his discretion under section 35 of the Administration of Justice Act 1956 failed to take into account the fact that the effect of making the charging orders was, the defendant being insolvent, to prefer one unsecured creditor to the others.

The facts are stated in the judgment of Buckley L.J.

D. Nicholls Q.C. and E. W. Hamilton for the defendant.

The plaintiff Mr. Rainbow, on behalf of himself and his wife, in person.

BUCKLEY L.J. This is an appeal from two orders of the district registrar at Bournemouth by which he made absolute two charging orders nisi which had been granted to the plaintiffs on November 11, 1974.

The defendant company, Moorgate Properties Ltd., is a subsidiary - indeed I think it is a sub-sub-subsidiary - of another company which is itself a member of a group of companies, subsidiaries of Willstar Securities Ltd., all forming part of a complex of companies which are commonly known as the Stern Group of companies engaged in property development. As a consequence of the prevailing economic situation the group as a whole has become involved in acute financial difficulties and, as a result of that, Willstar Securities Ltd. went into creditors' voluntary liquidation on June 7, 1974. The estimated liabilities of the group are very large but, of course, the liabilities of the individual companies in the group vary and, as is always likely to be the case when one gets a group of companies of this kind, there are numerous inter-company debts and liabilities, guarantees, and so forth. I can well believe that the financial position of the group as a whole is an extremely complicated affair.

A meeting of unsecured creditors of the companies in the group was convened on July 19, 1974, which was attended by a large number of creditors, certainly upwards of 500 - although I think elsewhere in evidence a figure of 700 was mentioned, but let me say upwards of 500 unsecured creditors of companies in this group. That had been convened by means of a circular letter which was sent out urging the desirability for a moratorium to enable the assets of these companies - which mainly consist of land and buildings - to be realised in an orderly way so that as large a sum as possible could be realised for the benefit of the creditors of the group. The evidence discloses that the holdings of the companies in this group are of such a magnitude that if they were all to be released on to the market in an unregulated way and at much about the same time it would completely upset the property market and result in the amounts realised being considerably less than what it is hoped will be realised if the assets can be sold in accordance with some controlled programme.

At that meeting on July 19 those creditors who were present unanimously voted in favour of a scheme which contemplated a moratorium for a period of six months, and contemplated that the subsidiary companies would not any of them be liquidated in the meanwhile, but that there should be a moratorium on the enforcement of all debts by creditors against any of the companies to enable sufficient time to pass for a scheme of arrangement to be prepared which it was proposed to submit to the court for approval under section 206 of the Companies Act 1948. In such a case the court directs meetings of the creditors and, having regard to the voting which takes place at those meetings, does or does not confirm the scheme. If it is confirmed the scheme becomes binding on all creditors. Such a scheme is in fact in course of preparation, but although the six months' moratorium is about to reach its terminal date, Mr. Nicholls tells us that the complications of the scheme are such that although the draft has been in existence for a considerable time and, no doubt, subject to discussion and amendments and alterations and improvements from time to time, the date has not arrived at which it can be

said that the application to the court is imminent. However, that process is Ill course.

Now I come to the facts of this particular case. The plaintiffs are resident in a building which belongs to the defendant company called Dorchester Mansions, and they had occasion, in 1973 or thereabouts, to bring two actions against the defendant company to restrain nuisances, in one instance by noise and in the other instance I think by obstruction of access to the building, arising out of building operations being conducted by the defendant company upon the building, and they were successful in those actions. They obtained relief with which we are not now concerned and also in each action they obtained an order for costs. Those costs were in due course taxed in September 1974. In the earlier action - which was the one relating to nuisance by noise - the costs taxed out at £254 65 and in the later action they taxed out at £933 90, making a total sum of approximately £1,188, which I think includes the costs of taxation. At a later stage they heard rumours of a sale by the defendant company of Dorchester Mansions, and in order to secure themselves with regard to their debt for costs, which had not been paid, they in the first place wrote demanding payment in a letter of November 1, 1974, a letter in which their solicitors said that their information was that there was probably a moratorium in operation but that their clients were no party to such moratorium. By that letter they demanded payment of the costs and that was followed by an application made ex parte in accordance with the rules of the court on November 11, 1974, for charging orders in respect of the two sums of costs, and charging orders nisi were granted on that day. The further consideration of those matters was on December 4. Between those two dates this court decided, on November 29, 1974,D. Wilson (Birmingham) Ltd. v. Metropolitan Property Developments Ltd., Bar Library Transcript 383A of 1974, to which I shall have to refer in a moment, which was a case of a rather similar nature in respect of another company in the Stern Group.

When the matter came before the district registrar on December 4 the application was opposed - that is to say, the application to make the orders absolute was opposed - by the defendant company and that opposition was supported by an affidavit of Mr. Weiss, who is a partner in the firm of W. H. Cork Gully & Co. Mr. Cork, the senior partner in that firm, was the gentleman who was concerned in dealing with the affairs of the group as a whole and the arrangement which was being developed or devised pending the six months' moratorium. In that affidavit Mr. Weiss sets out the state of affairs which I have been describing and in paragraph 10 he refers to the up-to-date financial position of the defendant company, and he describes it in this way:

"Firstly, it is quite" - that is the defendant company - "unable to pay its debts as they fall due. Secondly, whether - if the assets are realised in an orderly fashion and to best advantage - they will eventually suffice to pay all the creditors in full is something which at present it is quite impossible to know. There is, to say the least, a very serious doubt as to whether this will be possible. Liabilities are continuing to increase, with high interest rates, etc., and at this stage the amount of any sum which will or may be due under the complex system of cross guarantees which companies in the group (including the defendant) entered into to finance borrowings from outside sources is a matter which nobody can ascertain."

He then goes on to say there is no chance of anybody mounting a rescue operation.

Mr. Rainbow, the first plaintiff - who has appeared in person on behalf of himself and his wife, the second plaintiff, and has, if I may say so, presented his argument most sensibly and clearly and helpfully - has said that down to the date of December 4, 1974, he had no knowledge whatever of the connection between the defendant company and the group of companies and that he had no knowledge of the state of affairs set out in the affidavit and had no reason to suppose that the defendant company was in financial difficulties. He points out that the defendant company is not in liquidation and that therefore, to a layman at least, it would appear that the defendant company must be a solvent company. He also draws attention to some of the material in evidence in support of the defendant company's case which shows that on a first view of the figures there is a possibility of there being a surplus, or an ultimate surplus, for the shareholders in the event of a winding up of the company's affairs. However, I do not myself think that we can, on those grounds, disbelieve the evidence of Mr. Weiss, the deponent to the affidavit which I have mentioned, and I think we must proceed upon the footing that the financial position of the defendant company is such as is stated in paragraph 10 of his affidavit, to which I have referred.

The district registrar was urged not to make the charging orders absolute because of the insolvent character of the defendant company's situation, but he was not persuaded by that argument. He said that for the plaintiffs "to have the additional security on the property won't make a scrap of difference to any other creditors" and he did not see that making the orders absolute would give the plaintiffs priority. He went on to say he did not think " that the cases quoted concerning garnishees are analogous to a claim for additional security."

The effect of the charging orders was not, I think, such as can be accurately described as conferring "additional security"; in fact it converted the plaintiffs, as unsecured creditors, into secured creditors for the amount of the charge, and to the extent that a secured creditor is better off than an unsecured creditor if the debtor is insolvent or likely to be insolvent, the effect of the orders must be to confer an advantage upon the creditor to whom such an order is granted, and in that sense it does give a priority over other unsecured creditors.

The effect of the charging orders in this case has to be considered in the light of the fact that on December 3, 1974-the day before the orders were made absolute - the company presented its own petition for winding up. That step was taken for the purpose of invoking the provisions of section 325 of the Companies Act 1948, which is the section of the Act which imposes restrictions upon the rights of execution creditors in the case of companies being wound up. The effect of the petition having been presented on December 3 is that if eventually a winding up order is made, the plaintiffs will be unable to insist upon their charging orders, but if no winding up order is ever made, and if the charging orders remain in force, the plaintiffs will remain secured creditors of the company.

The burden of the case put forward on behalf of the defendant company is that if during the period of moratorium one creditor is allowed to obtain an advantage over other creditors who are holding their hands honouring the moratorium, the result must inevitably be to erode the confidence of all the creditors in the moratorium and this might mean that

the scheme which the group of companies as a whole is intending to put into operation for the benefit of all their creditors will be undermined and will come to grief, so that the interests of all creditors will be adversely affected by that. It is said that, in those circumstances, the court ought not, in the exercise of its discretion under section 35 of the Administration of Justice Act 1956, to grant such an order, to make charging orders in this particular case.

I mentioned earlier D. Wilson (Birmingham) Ltd. v. Metropolitan Property Developments Ltd., Bar Library Transcript No. 383A of 1974. That was not a case relating to charging orders but to garnishee proceedings. There a judgment creditor sought to garnish money due to a company in a group. The question was whether it was right that the garnishee orders in that case should be made absolute or not, and that matter came on appeal to this court and we had to consider that question. With respect to the district registrar, I myself think that there is a close analogy between garnishee proceedings and charging order proceedings. It is perfectly true that as a result of a garnishee order the judgment creditor gets immediate payment out of the debt which is garnished and so his debt is discharged whereas the effect of a charging order is merely to put a charge on some property of the debtor and the creditor must take some further step before he can recover the amount of his debt. But both proceedings are in the nature of execution of a judgment and both are steps which depend upon an exercise of discretion by the court, and I for myself can see no difference between those considerations which are relevant to the question whether the discretion should or should not be exercised to make absolute a garnishee order and those considerations which are relevant to the question whether the court should or should not make absolute a charging order.

In that case the court was referred to certain authorities, Prichard v. Westminster Bank Ltd. [1969] 1 W.L.R. 547; George Lee & Sons (Builders) Ltd. v. Olink [1972] 1 W.L.R. 214 and Hudson's Concrete Products Ltd. v. D. B. Evans (Bilston) Ltd. (1961)105 S.J. 281, and for the reasons which are set out in the judgment in the last mentioned case, the court came to the conclusion that it was not a case in which garnishee orders should be made absolute. In the course of my judgment in the D. Wilson (Birmingham) Ltd. case I said:

"The position is, I think, that a court in considering whether or not to exercise its discretion to make absolute a garnishee order in circumstances such as this must bear in mind, not only the position of the judgment creditor, the judgment debtor and the garnishee, but the position of the other creditors of the judgment debtor and must have regard to the fact that proceedings are on foot, and were on foot at the time the garnishee proceedings were launched, for ensuring the distribution of the available assets of the judgment debtor company among the creditors pari passu."

In that case the court followed the reasoning in the Hudson's Concrete Products Ltd. case, 105 S.J. 281 and, as I say, the decision was that it would be wrong to make absolute the garnishee order.

So also in the present case, it seems to me, it would be wrong, in the circumstances as they at present exist, that the plaintiffs should have the benefit of these charging orders. While I have much sympathy for the plaintiffs and quite understand that they are anxious that payment should be made, I think it is wrong, when the court is aware of the fact that the

debtor is, or is likely to turn out to be, insolvent, that one creditor should be given an advantage over other creditors by an exercise of the discretion of the court under section 35 of the Act. It is not that the moratorium is binding upon the plaintiffs and that they are doing, or have done, anything wrong in seeking to obtain the charging orders; the moratorium clearly is not binding upon them because they were no party to the resolution setting it up. But the court has to be satisfied that it is proper for the court, in the exercise of its discretion, to place them at an advantage over other creditors. If there were no countervailing reasons the court would make charging orders in the present case but, in my judgment, there are countervailing reasons connected with the moratorium and the proposed scheme of arrangement which I have mentioned which in this case do make it improper to give the plaintiffs an advantage over other creditors. It is a misfortune for the plaintiffs, but there it is. For these reasons I would differ from the district registrar in the view at which he arrived.

Before parting with the matter finally I ought to say that the point has been raised before us as to whether we have jurisdiction to entertain this appeal at all. That turns upon whether the appeal should have been made to a judge in chambers or to this court, and it turns upon the proper interpretation to be placed upon R.S.C., Ord. 58. rr. I and 2. Ord. 58, r. 1 provides:

"Except as provided by rule 2, an appeal shall lie to a judge in chambers from any judgment order or decision of a master of the Queen's Bench Division, ... or a registrar of the Family Division."

For the present purpose the district registrar is in the same position as a master of the Queen's Bench Division. Then one goes to rule 2 to see what is the exception, and one finds that rule 2 (1) provides:

"An appeal shall lie to the Court of Appeal from any judgment, order or decision of a master of the Queen's Bench Division (other than interlocutory judgment, order or decision) given or made - (a) on the hearing or determination of any cause, matter, question or issue tried before or referred to him; or (b) on an assessment of damages under Order 37 or otherwise; or (c) on the hearing or determination of any interpleader or garnishee proceedings; or (d) on any hearing or determination of an application under Order 84, rule 3."

The question, I think, is whether this case comes within the words:

"any judgment, order or decision of a master ... (other than interlocutory judgment, order or decision) given or made ... on the hearing or determination of any cause, matter, question or issue tried before ... him; ..."

Mr. Nicholls has pointed out that the words "cause, matter, question or issue" in sub-paragraph (a) are very wide words. He says they should be construed widely and that here we are concerned with a question upon which the district registrar has given a decision, which was not an interlocutory decision. I do not think it can have been an interlocutory decision. The question is how widely the words in sub-paragraph (a) should be interpreted. If they are read as widely as Mr. Nicholls suggests it seems to me somewhat unnecessary to go on to include in the rule subparagraphs (b), (c) and (d).

This rule derives from the former Ord. 54, r. 22A, which was in somewhat different language. That rule read that there should be a right of appeal:

"... from any finding decision order or judgment arrived at made given directed or entered by any master of the Queen's Bench Division on the hearing or determination by him of (a) any trial or reference of any action cause issue or matter (including trials directed under Order 14, rule 7) (but excluding any application under section 17 of the Married Women's Property Act 1882), or any assessment of damages and whether by consent or otherwise, or (b) any interpleader or garnishee matter or issue whether by way of summary decision or adjournment of the interpleader or garnishee summons or order nisi or on an issue directed or otherwise and by consent or otherwise."

It then goes on to say that the appeal must be to the Divisional Court.

It seems to me that it would be an extraordinary thing if garnishee proceedings were matters on which there was a direct appeal to this court but proceedings for an application for a charging order should not be matters on which there was a direct appeal to this court, for, as I say, I think the two forms of procedure are closely analogous. I think that, on the true interpretation of Ord. 58, r. 2 the present matter must be regarded as a decision of the district registrar, not on an interlocutory matter, made on the hearing of a question tried before him. Otherwise the result would be that in the present case there would be an appeal to the judge in chambers with a consequent right of appeal to this court from a judge in chambers, whereas in the case of garnishee proceedings there would be a direct appeal to this court, and I cannot see any sense in there being any such distinction.

Moreover it seems to me not at all improbable that the reason for the inclusion of paragraphs (b) and (c), which expressly refer to the hearing or determination of, inter alia, garnishee proceedings, may be that those are matters which were referred to in terms in the old Ord. 54, r. 22A (a) and (b) and that the framers of the new rule, when they reframed sub-paragraph (a) in the language in which they did, thought it desirable that they should still make express reference to these particular matters in order to show that they were not intending them to be excluded from the operation of the new language in sub-paragraph (a).

So I have come to the conclusion that this is a case in which we have got jurisdiction to entertain an appeal direct from the district registrar and, for the reasons which I gave earlier in my judgment, I would allow the appeal and would discharge both the charging orders absolute and the charging orders nisi.

ORMROD L.J. I agree and have only a few words which I wish to add. On the question of whether an appeal lies direct to this court from the decision of the district registrar I have considerable difficulty in deciding how Ord. 58, r. 2 ought to be construed, and I can only say that in its present form it plainly requires the attention of the Rules Committee because it is almost impossible to give it any satisfactory construction. The effect of the decision which we are about to give on this rule is, I think, clearly this: any appeal from any order which is not caught by the words in brackets in sub-rule (1) of the rule - namely "other than an interlocutory judgment, order or decision" - will come straight to this

court, so that all the rest of sub-rule (1) of that rule is superfluous, except possibly the reference to Cord. 84, r. 3 which does look, on the face of it, to be an interlocutory matter.

But however we construe this order we have some difficulty. Making the assumption that a charging order comes within (a) and is, therefore, a matter to be dealt with by this court on appeal and looking at sub-rule (3), we find that on an appeal from a garnishee order notice must be given as if it were an appeal from an interlocutory order, whereas the inevitable conclusion, it seems to me, is that on an appeal from a charging order absolute the appeal would be treated as a final appeal and the length of notice would be appropriate to a final appeal. That is not the only thing. If one looks at sub-rule (2), which deals with the Family Division, we arrive at this conclusion, that a master of the Queen's Bench Division, or a district registrar, can make a charging order and the appeal would lie direct to this court, whereas if a charging order was made by a registrar of the Family Division the appeal would lie to a judge in chambers, because sub-rule (2) is very much more restricted. This sub-rule is limited to judgments or orders or decisions of registrars on the hearing of an application under section 17 of the Married Women's Property Act 1882 or interpleader or garnishee proceedings, and no more. So that it is impossible, in my judgment, to arrive at any construction of this order in its present form which does not lead to one anomaly or another. In those circumstances, there is no justification that I can see for distinguishing between appeals in garnishee matters and appeals in charging order matters. The two things are so close together and so similar that they should be, so far as possible, dealt with together but, for the reasons I have given, in my judgment, the rule requires very extensive redrafting.

On the merits of the appeal I have only this to say out of deference to Mr. Rainbow's extremely lucid and calm presentation of his submissions and because no one who has heard his submissions could have anything but the greatest sympathy for him. However, it is clear, to my mind, that the principle to be applied to this appeal is the principle which was established in D. Wilson (Birmingham) Ltd. v. Metropolitan Property Developments Ltd., Bar Library Transcript No. 383A of 1974. I am quite unable to distinguish between garnishee proceedings and proceedings for a charging order and therefore we today, in my judgment, are bound by the decision as to the law in the case I have just mentioned unless this case can be in some way distinguished on the facts.

Now Wilson's case really applied where - and I am quoting from the transcript - "insolvent estates are to be administered" and at that point Buckley L.J. said " ... it is the policy of the law that creditors should, so far as possible, be treated with equality . . ." In other words, once it is clear that the court is dealing with an insolvent estate, or an estate which is probably insolvent, then that principle applies. However hard it is on Mr. Rainbow, and he seems to me to be fully entitled to say that the defendant company, as far as he was concerned and a great many other people were concerned, was apparently trading in a normal way in the building in which he had his flat, the fact is that it is clear from the evidence that it is, if not insolvent, then almost certainly insolvent, and once that fact is shown in relation to the particular company in question, then the principles of Wilson's case apply and it must follow from that that the district registrar erred in exercising his discretion in granting the

charging orders absolute. Accordingly, in my opinion this appeal must be allowed and that order discharged.

Solicitors: D. J. Freeman & Co

[Reported by EVERARD CORBALLY, ESQ., Barrister-at-Law]