These are two appeals from two orders of the district registrar of Birmingham making absolute two garnishee orders nisi, the orders absolute being made on 1 November 1974.
The position is this. The judgment creditor is a firm of engineers which was employed as sub-contractor by the judgment debtor on work which the judgment debtor was under contract to carry out for the garnishee. The garnishee became indebted to the judgment debtor in a certain sum for work which was done for it and that work was carried out by the judgment creditor; and so it is said with justification, at any rate in one sense, the judgment creditor itself generated the debt due to the judgment debtor which the judgment creditor is seeking to attach.
The judgment debtor company is part of a complex of companies sometimes known as the Stern Group, which is a group of companies engaged in property development and which has run into severe financial difficulties owing to the present economic state of affairs, and it is common ground that the judgment debtor company is
at the present time wholly unable to meet its debts as they fall due. It is uncertain whether in the final result, if the assets of the various companies in this group, and in particular the assets of the judgment debtor company, can be realised in an orderly and controlled way and to the best advantage, the judgment debtor company will in the long run be able to pay its debts in full. There is at least a serious doubt whether that will be the position, but it remains a possibility which at the moment cannot be certainly denied.
The parent company of the Stern Group, a company called Wilstar Securities Ltd, went into creditors' voluntary liquidation on 6 June 1974 and, following that event, a meeting of creditors of companies in the group was held on 19 July 1974 which was attended by upwards of 700 creditors and representatives at which it was unanimously resolved by those present at the meeting: first, that there should be a moratorium for a period of six months on all debts of the companies in the group; secondly that a committee of unsecured creditors should be appointed to assist the liquidator of Wilstar Ltd; and, thirdly, that any petition to wind up any company in the Stern Group should be opposed by the secured and unsecured creditors of the company.
On 29 July the solicitors for the judgment debtor wrote to the solicitors for the judgment creditor a letter in which they informed them of the fact that this meeting had been held. Whether or not notice of the meeting had been sent to the judgment creditor is not clear but, at any rate, they were told what had then occurred; and they were told, moreover, that—
'it has been decided to proceed with the preparation of a scheme of arrangement under s. 206 of the Companies Act 1948 which will be submitted to the creditors for approval in due course and also for the approval of the court'.
The letter went on to express the hope that in those circumstances the judgment creditor would 'withhold from taking any further steps in the matter' of his judgment—
'pending the outcome of the scheme of arrangement and that in the meantime you will cooperate with the other secured and unsecured creditors in assisting the liquidator [of the parent company] in the realisation of the assets of the whole group for the ultimate benefit of all creditors.'
The judgment creditor had obtained judgment for amounts aggregating something like £61,000 against the judgment debtor and two of those judgments amounted together to £43,699. In respect of those two judgments the judgment creditor launched garnishee proceedings against the judgment debtor and the garnishee, which was indebted to the judgment debtor in the sum of £31,400 odd. On those applications garnishee orders nisi were made on 12 September 1974 and a firm date was fixed for the hearing of the application to make those orders absolute on 1 November.
On 22 October, pursuant to a special resolution of the judgment debtor company, that company presented its own petition for winding up. The judgment debtor company's solicitors wrote to the judgment creditor's solicitors on 22 October a letter in which they said, amongst other things:
'We would also inform you that [the judgment debtor company] are a subsidiary of Wilstar Securities Limited which went into creditors' voluntary liquidation on 6th June 1974, and that Counsel is actively engaged in the preparation of a scheme of arrangement under s 206 of the Companies Act, 1948, for the benefit of all the creditors',
and asking it whether it would accept the moratorium agreed to by all the creditors on 19 July and asking it to confirm that it was 'making arrangements with the court for the discharge of the garnishee orders nisi'. However, that was not a course which the judgment creditor was prepared to pursue.
On 28 October 1974 the chief clerk to the registrar, in answer to a letter from the judgment creditor, said the registrar was 'unwilling to discharge the garnishee order nisi without reference to the other side and is writing to enquire if they accept the position'. I should have said that on 22 October 1974 the judgment debtor wrote to the court a letter in which it drew the attention of the court to the provisions of s 325(1) of the Companies Act 1948 and said that 'having regard thereto' it 'would respectfully suggest that the court is not in position to make the garnishee orders nisi absolute', and in the final paragraph it said:
'In the circumstances, we do not propose to attend on the hearing on 1st November and shall be glad to know that you accept that this is not in any way being discourteous to the court. If, on the other hand, the court should be minded to make the garnishee orders nisi absolute we shall be glad to hear from you as to this so that we can arrange to be represented at the hearing.'
It was in answer to that that the registrar wrote the letter I have referred to already. Then on 30 October the judgment debtor's solicitors wrote to the court again saying:
'We, of course, appreciate your unwillingness to discharge the garnishee orders nisi without reference to the other side, but as we pointed out to the chief clerk, we would be grateful if, in the event you are so minded to make the said orders nisi absolute, as we have hitherto asked you would grant a short adjournment to enable our clients to be represented before you.'
They seem to have got no answer to that letter. It was only written two days before the hearing before the learned registrar. The matter came before the registrar and the judgment debtor was not represented. The registrar did not see fit to grant an adjournment and made both orders absolute. It is, I think, most regrettable that the matter was allowed to follow that course. The argument which was put forward founded on s 325(1) was not, I think, a sound argument, or at least it was an argument which was only expressed in a very eliptical way, for what the section says is, not that the court shall not make an attachment, but that if the debt is attached the judgment creditor shall not be entitled to retain the benefit of the attachment. That section does not in any way deprive the court in terms of the power to make a garnishee order absolute. So the argument put forward in the correspondence was not very satisfactorily stated. Then the matter was, in a sense, allowed to go by default because the judgment debtor's solicitors merely wrote asking for an adjournment; they did not attend before the registrar to press for an adjournment, their client was not represented before the registrar and, further, the submissions which have been put before us in this court were never presented. But the result was that the orders were made absolute on 1 November. On 7 November 1974 this court granted a stay pending the hearing of this present appeal, and the matter now comes before this court on a notice of appeal which states as its ground that the learned registrar was wrong in law in making the order having regard to the presentation on 22 October 1974 of a petition to wind up the judgment debtor company.
Counsel for the judgment debtor has put the argument on rather wider grounds than that, but no objection has been taken to that by the other side. There is also a respondent's notice in each case asking that the decision of the registrar should be affirmed on the ground that this is a proper case for the court to exercise, in favour of the judgment creditor, the discretion conferred by s 325(1)(c) of the 1948 Act.
If I may dispose of that point immediately, that is not a good point for this reason, that the discretion under s 325(1)(c) is a discretion which is conferred on the court concerned with the winding-up of companies and is not a discretion which would have been at the disposal of the registrar when the garnishee proceedings were before him or at our disposal in these proceedings in this court.
It has been submitted on behalf of the judgment debtor that this is not a case in
which the court ought to attach the debt due from the garnishee because the judgment debtor here is insolvent, at any rate in the sense that it is wholly unable for the time being to pay its debts as they fall due, and that there is on foot the proposal for a scheme of arrangement, the object of which is to ensure that the assets of the company shall be realised for the best and equal advantage of all the creditors, and that to allow attachment at this stage to satisfy the judgment creditor's judgment would be to give the judgment creditor a preference which, in the circumstances, would be contrary to the policy of the 1948 Act and contrary to the equity of the matter generally.
Counsel for the judgment debtor draws attention to the fact that under the terms of RSC Ord 49 the making of a garnishee order is a discretionary matter, and that it is not disputed by the judgment creditor. He has further submitted that the court will not, consequently, make such an order if so to do would be inequitable, and that also is not disputed. Counsel for the judgment debtor went on to say that it would be inequitable to make an order in such a case as the present because its effect would be to confer a preference on the creditor and that, a fortiori, the court ought not to make such an order which would have such an effect where a winding-up petition has already been presented for winding-up the company. Nor, he says, ought an order to be made after presentation of a petition for winding-up an insolvent company where the only real alternative to making the winding up order is the approval by the court of a scheme under s 206.
We have been referred to some authorities. First I should mention Pritchard v Westminster Bank Ltd where this court was concerned with a case in which an estate was being wound up as an insolvent estate. Where an estate is wound up as an insolvent estate under the Administration of Estates Act 1925 the effect is that the bankruptcy rules apply and they apply on the footing that the date of the death of the deceased is deemed to be the date at which a receiving order was made of bankruptcy, and the Act certainly provides that all debts due shall be paid pari passu. In a case of that nature where a garnishee order had been made this court held that it should not have been made because it would have the effect of conferring a preference on the judgment creditor and would conflict with the statutory provision that all debts proved should be satisfied pari passu. Lord Denning MR said ([1969] 1 All ER at 1001, [1969] 1 WLR at 549) that the court would 'not allow one creditor, however diligent he may be, to get an advantage over the others by getting in first with a garnishee order', and that the effect of attaching the debt of the judgment creditor would be to give a preference to him against all other creditors to which he was not entitled by the 1925 Act.
The next case which was drawn to our attention was George Lee & Sons (Builders) Ltd v Olink which was another case concerning the administration of the estate of a deceased person. It was there doubtful whether the estate was or was not insolvent. The garnishee order was made absolute and this court allowed the appeal from that order and held that since there was a serious doubt whether the estate was insolvent, the appropriate order would be that the garnishee order absolute should be set aside and the garnishee should be ordered to pay into court the sum in question and that there should be an enquiry by the district registrar whether the estate was solvent or insolvent. If insolvent, the garnishee order should be set aside and the sum in court paid out to the garnishee, and, if solvent, the garnishee order should be made absolute and the sum paid out to the judgment creditor. That was a case which differed from Pritchard's case in this respect, that it was not known whether the estate was insolvent or not, but it was thought improper to allow the garnishee order absolute to stand because there was a real doubt whether or not the estate was insolvent. Russell LJ ([1972] 1 All ER at 361, [1972] 1 WLR at 216) referred to the Pritchard case and said: 'But it seems to me that where there is a
doubtful case such as the present that would be to run the grave risk of preferring one creditor over others, which would be wrong', and, accordingly, the court in that case took the course of ordering an enquiry.
In the present case at the moment there is nothing equivalent to a receiving order in bankruptcy; on the other hand there is no doubt that this company is one which is immediately insolvent in the commercial sense and is one which, it is very possible, will eventually turn out to be insolvent in the absolute sense. Therefore, neither of the cases to which I have referred really bears directly on the problem which we have to consider, in my view, but our attention was drawn to a third case which is really very close to the present case in fact. It is Hudson's Concrete Products Ltd v D B Evans (Bilston) Ltd. In that case the judgment creditors obtained a judgment on 14 December 1960. In November 1960 the judgment debtors, who were in financial difficulties, had convened a meeting of creditors, having sent out a circular to their creditors, and the proposals they then put forward appear to have received a favourable response from the creditors. The judgment creditor obtained a garnishee order on 20 December attaching all debts owing by the garnishee, who was a bank, to the judgment debtor. On 16 January 1961—that is about a month after the garnishee order nisi—the judgment debtors took out a summons under s 206 of the Companies Act 1948 for the sanctioning of a scheme of arrangement, and on the same day a creditor filed a petition for the winding-up of the company. On the following day, 17 January, the garnishee order was made absolute. So the order of events in that case was: November 1960, the circular to creditors; December 1960, garnishee order nisi; January 1961, the launching of the proceedings to sanction the approval of the court to the scheme of arrangement; and later in January 1961, garnishee order made absolute. In that case Willmer and Donovan LJJ (who constituted the Court of Appeal) held:
'It would be wrong to allow these creditors, even though they were judgment creditors, to gain an advantage over other creditors. The garnishee order might have the effect of wrecking the scheme of arrangement because it gave the judgment creditors priority over other creditors.'
And the case proceeded on the basis that the district registrar did not exercise his discretion judicially and they allowed the appeal.
Counsel for the judgment creditor in this case has presented a most ingenious argument to this effect, that since the debt which is here sought to be attached was a debt which resulted from the judgment creditor's own action as sub-contractors, in this case it would be just and equitable that the judgment creditor should be allowed to get an advantage over the other creditors of the company. But although that argument has a certain attraction about it, I do not think it is a basis on which we can decide this case. I think we have got to bear in mind that where insolvent estates are to be administered it is the policy of the law that creditors should, so far as possible, be treated with equality, and the fact that in the present case the debt which the judgment creditor seeks to attach would not have come into existence had the judgment creditor not performed a contractual obligation which he was bound to the judgment debtor to perform does not seem to me to be a reason for disregarding that general policy.
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 hear 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. So, notwithstanding the ingenuity of that argument of counsel for the judgment creditor, I
think this is a case in which the registrar ought not to have made absolute the garnishee orders nisi.
Counsel for the judgment creditor has also submitted that under the Companies Act 1948, s 226, the judgment debtor company should have applied for a stay of these garnishee proceedings. That section provides:
'At any time after the presentation of a winding-up petition, and before a winding-up order has been made, the company … may—(a) where any … proceeding against the company is pending in the High Court … apply to the court in which the action or proceeding is pending for a stay of proceedings therein',
and it is true that that is in fact a course which would have been open to the judgment debtor to pursue; but I do not think it follows from that that it is not open to the judgment debtor to come to this court saying that an order has been made which ought not to have been made and asking this court on appeal to discharge that order.
For these reasons, I think that this case is really not to be distinguished from Hudson's Concrete Products Ltd v D B Evans (Bilston) Ltd and I think we should follow the course that was taken by the court in that case: allow the appeal and discharge the orders absolute; and sin‘e I think that, when the matter was before the registrar, the right course would have been not only to refuse to make the orders absolute, but to discharge the orders nisi, I think that we should do the same.