Secretary Of State For Employment v Stone [1994] UKEAT 239_93_1502

EAT

Secretary Of State For Employment v Stone

[1994] UKEAT 239_93_1502 · 1994-02-15

MR JUSTICE WATERHOUSE : This is an Appeal from a decision made by an Industrial Tribunal held at Cardiff on two dates, 20 October 1992 and 18 January 1993. The Originating Application before the Tribunal was brought pursuant to the provisions of Sections 122 and 124 of the Employment Protection (Consolidation) Act 1978 and the unanimous decision of the Tribunal was that the Applicant employee, who is the Respondent to the Appeal, should be paid a total of £1,163.97 in respect of arrears of wages.

The history of the proceedings is that there had been a previous hearing of an Originating Application brought by the Respondent against a company called Lane & Sons (Scaffolding) Ltd as his employer. That Originating Application was heard by a differently constituted Tribunal sitting at Cardiff on 9 June 1992 and the amount of the award was the same on that occasion: it was on the basis that the employer had made a series of unauthorized deductions from the Respondent's pay.

It became apparent later that the first proceedings had been wrongly constituted. There was evidence that the employer, or at least, a joint employer of the Respondent had been another associated company called Lane & Sons (Cardiff) Ltd, which was in the hands of joint receivers. In the circumstances, therefore, the second application was made by the Respondent against the Secretary of State for Employment on the basis that Lane & Sons (Cardiff) Ltd was insolvent at the time when the Respondent's employment had ceased.

The evidence before both Tribunals was that the Respondent's employment as a scaffolder had ended on 17 September 1991, when he was told to go home because the company "had gone bust". The issue now before this Appeal Tribunal could be put in layman's language as "Was that a correct statement?" because the case for the Appellant Secretary of State is that, on the true construction of the relevant statutory provisions, the company known as Lane & Sons (Cardiff) Ltd was not insolvent at the material time and that there was no evidence of insolvency in respect of Lane & Sons (Scaffolding) Ltd. Whether or not the Respondent was truly employed jointly matters not for the purposes of this Appeal. The conclusion of the first Industrial Tribunal appears to have been based upon the fact that the Respondent was interviewed and engaged by a director of Lane & Sons (Scaffolding) Ltd, although he worked essentially for Lane & Sons (Cardiff) Ltd, at least in the sense that he was paid by the latter company.

The evidence about Lane & Sons (Cardiff) Ltd was that the company had entered into a debenture with Barclays Bank Ltd on 29 August 1989 and that receivers had been appointed in relation to that debenture on 20 September 1991. The short point taken on behalf of the Secretary of State is that the two receivers appointed on the last-mentioned date were joint receivers with a limited appointment, restricted to the charge over both debts and other debts following part of the first fixed charge within the terms of the debenture, and that they were not appointed in respect of property which, according to the debenture, was the subject otherwise of the first fixed charge or of a floating charge. On that footing it is said that the company did not, either before or after 20 September 1991, fall within the definition of an insolvent company contained in Section 177(1) of the Act of 1978. It follows that, whatever remedy the Respondent might have against his employer or joint employers or against the receivers, there was no liability upon the Secretary of State within the statutory framework of Part VII of the Act of 1978.

In order to deal with the submissions made by Mr Jay on behalf of the Appellant, it is necessary to refer briefly to the relevant statutory provisions. For this purpose it is convenient to begin with Section 122 of the Act, which provides in Subsection (1)(1):

"If on an application made to him in writing by an employee the Secretary of State is satisfied - (a) that the employer of that employee has become insolvent; and that the employment of the employee has been terminated; and (b) that on the relevant date the employee was entitled to be paid the whole or part of any debt to which this section applies,

the Secretary of State shall, subject to the provisions of this section, pay the employee out of the [National Insurance Fund] the amount to which in the opinion of the Secretary of State the employee is entitled in respect of that debt."

The relevant date for these purposes is defined in subsection (2) of that Section but it is unnecessary to reproduce the subsection here because no issue in the Appeal turns upon it. The amount of the debt recoverable is limited by the provisions of subsection 3(a) and (b). Subparagraph (a) of subsection (3) restricts the award in respect of arrears of pay to eight weeks and subparagraph (c), in respect of any holiday pay, to a period not exceeding six weeks. By virtue of the interpretation section, Section 127, holiday pay in paragraph (3) means not only pay in respect of a holiday actually taken but also any accrued holiday pay which, under the employee's contract of employment, would, in the ordinary course have become payable to him in respect of the period of a holiday, if his employment with the employer had continued until he became entitled to the holiday. It should be mentioned in passing that a subsidiary part of this appeal is that the award made by the Tribunal below included a sum calculated on the basis of 25 weeks' accrued holiday pay rather than the maximum of 6 weeks so that, if the Appellant were to fail on the main argument in the appeal, it would be argued that the award should be reduced by the difference between 25 and 6 weeks' holiday pay.

Reverting to the main structure of the statutory provisions, Section 124(1) deals with a complaint to an Industrial Tribunal and provides that:

"A person who has applied for a payment under Section 122 may, within the period of three months beginning with the date on which the decision of the Secretary of State on that application was communicated to him or, if that is not reasonably practicable, within such further period as is reasonable, present a complaint to an industrial tribunal that - (a) the Secretary of State has failed to make any such payment; or (b) any such payment made by the Secretary of State is less than the amount which should have been paid."

In the instant case, the Respondent employee failed to make his complaint within the prescribed period of three months but the Tribunal decided that the delay came within the exception stated in Section 124(1) and accepted that it had not been reasonably practicable for the Respondent to make his complaint until the actual date of the complaint. There is no appeal against that finding by the Industrial Tribunal.

It will be apparent from what has been said that the Secretary of State's liability under the provision is dependent upon proof that an employer was insolvent at the relevant date. For this purpose it is accepted that it would be sufficient for the employee to establish that one of two joint employers was insolvent and it is necessary to look at the provisions of Section 127(1) of the Act of 1978, in which insolvency is defined in the following way:

"For the purposes of sections 12 to 126, an employer shall be taken to be insolvent if, but only if, in England and Wales, -

[(a) he has been adjudged bankrupt or has made a composition or arrangement with his creditors; (b) he has died and his estate falls to be administered in accordance with an order under section [421 of the Insolvency Act 1986]; or

and this is the material provision for the purpose of the appeal:

"(c) where the employer is a company, a winding up order [or an administration order] is made or a resolution for voluntary winding up is passed with respect to it, or a receiver or manager of its undertaking is duly appointed, or possession is taken, by or on behalf of the holders of any debentures, secured by a floating charge, of any property of the company comprised in or subject to the charge [or a [voluntary arrangement proposed for the purposes of Part I of the Insolvency Act 1986 is approved under that Part]].

The case for the Appellant here is that joint receivers were duly appointed by or on behalf of the holders of a debenture and that it is only the words in subparagraph (c) relevant to the appointment of receivers that are material for the purpose of deciding whether or not the company Lane & Sons (Cardiff) Ltd was insolvent at the relevant date. It is part of that submission that, although a receiver on appointment necessarily takes possession of certain property on behalf of the holders of the debenture, those provisions relating to possession in subparagraph (c) are not relevant for the purpose of determining whether or not the company is insolvent. It is said by Mr Jay that the words "relevant to possession" contemplate a different situation, that is, a different situation from the appointment of a receiver. Possession may be taken without an appointment by or on behalf of the holders of any debenture and, in those circumstances, it is necessary for a Court or a Tribunal within the terms of subparagraph (c) to look at the factual position and to make findings as to whether or not possession has been taken of property comprised in or subject to the floating charge. Here, it is said, the Tribunal should have confined their attention to the terms of the appointment of the joint receivers in order to determine the relevant position and to decide whether or not there was an insolvency of the company within the relevant words of Section 127(1)(c).

In order that this argument may be understood, it is necessary to set out the relevant terms of the debenture entered into between the Bank and Lane & Sons (Cardiff) Ltd on 29 September 1989. Paragraph 3 of the Debenture provided as follows:

"3. The Company as beneficial owner hereby charges with the payment or discharge of all moneys and liabilities hereby covenanted to be paid or discharged by the Company:- (a) by way of legal mortgage all the freehold and leasehold property of the Company ... and fixed plant and machinery from time to time thereon; (b) by way of legal mortgage all other freehold and leasehold property of the Company ... together with all buildings fixtures (including trade fixtures) and fixed plant and machinery from time to time thereon; (c) by way of first fixed charge all future freehold and leasehold property of the Company together with all buildings fixtures (including trade fixtures) and fixed plant and machinery from time to time thereon and all the goodwill and uncalled capital for the time being of the Company; (d) by way of first fixed charge all book debts and other debts now and from time to time due or owing to the Company;

Finally in paragraph 3, the Debenture provided:

"(e) by way of a first floating charge all other the undertaking and assets of the Company whatsoever and wheresoever both present and future ..."

subject to certain limitations.

Turning now to the terms of the appointment, of the receivers, they were:

"to be Receiver(s) and Manager(s) of the book debts and other debts comprised in and charged by the said Debenture with power to enter upon any land or buildings in or on what the books and other records of Lane & Sons (Cardiff) Ltd. are for the time being held or deposited for the purpose of obtaining access to or copies of the said books and other records and such Receiver(s) shall have and be entitled to exercise all powers conferred on him/them by the said Debenture and by law in respect of the charge over book debts and other debts and where joint Receivers and Managers are appointed they shall have power to act severally."

Thus, it was clear from the terms of the appointment that the two receivers were appointed to be receivers and managers only of the property embraced within subparagraph 3(d) of the Debenture, namely, all book debts and other debts now and from time to time due or owing to the company. There was no reference to the legal mortgages or the other first fixed charge in respect of freehold and leasehold property of the company and no reference to the first floating charge specified in paragraph 3(e) of the Debenture. It is clear also from the findings of the Tribunal below that the joint receivers understood their appointment to be so limited and a document confirming that position and notifying the appointment was sent to Companies House on 20 September 1991.

In their statement of reasons, having set out the history already summarised in this Judgment, the Tribunal below referred to the fact that, by a letter dated 17 November 1992, the receivers had confirmed that they had been appointed over the following assets:

(1) all book debts present and future

(2) all other monetary debts and claims and

(3) all books records and information which relate to the book debts.

In paragraph 8 of the letter they stated:

"The register of their appointment makes it quite clear that the appointment under the debenture is only in respect of the fixed charge on book debts."

Nevertheless, the ultimate finding of the Industrial Tribunal was that the appointment, or alternatively the powers of possession, of the receivers in this case extended to the property that was the subject of the floating charge and that, accordingly, Lane & Sons (Cardiff) Ltd was insolvent. The findings on this issue were put in this way:

"17. The evidence was that among the assets over which the receivers had power of possession, according to their letter of 17 November were 'all books, records and information which relate to book debts'. It is inevitable that some of those books records and information also relate to the floating charge for example, the cash book.

18. It is inconceivable that book debt receivers would not take possession of all available books records and information in their search for book debts present and future. Some of those books records and information would relate to the floating charge as well as the fixed charge. They would be common to both. We find that such books records and information constitute ' any property comprised in or subject to' the floating charge as well as to the fixed charge and that the second statutory requirement for insolvency under this part of the section is satisfied."

Finally, in paragraph 19(v) they said:

"having regard to the strict wording of section 127 we hold it is immaterial that the appointment of receivers was in respect of a fixed charge only, and we find that Lane & Sons (Cardiff) Ltd are 'insolvent' for the purposes of sections 122 to 126 of the Act."

Those quotations from the reasons of the Tribunal below crystallise, in the submission of Mr Jay, the error of law and of approach made by the Tribunal. He says that, if the dichotomy between possession and appointment that has already been outlined is accepted as the correct approach to the interpretation of Section 127(1)(c), then it is clear, on the evidence before the Tribunal, that the appointment of the receivers was strictly limited to the part of the first fixed charge relating to book debts and that there was no appointment in relation to the floating charge. Thus, the decision of the Tribunal that the relevant company was insolvent was contrary to law.

Although Mr Jay has not been able to submit to the Appeal Tribunal any specific authority for the distinction that he draws between possession and appointment in the interpretation of Section 127(1)(c) of the Act of 1978, we are compelled to the view that it is a correct analysis on the construction of the subsection. We are further satisfied that, in reaching their own conclusion, the Tribunal below confused the two separate situations of appointment and possession. We accept that, where receivers or managers have been appointed, the duty of a Tribunal is to look at the terms of the appointment in order to decide what the factual position is and that the Tribunal is not concerned in those circumstances with the incidentals of possession in carrying out the terms of the receivers' appointment. It is only in the situation in which possession is taken other than in pursuance of an appointment that a Tribunal has to look at the factual position and to reach a conclusion as to whether(i) the possession was by or on behalf of the holders of a debenture secured by a floating charge and

(ii) the possession embraced property comprised in or subject to that floating charge.

The only matter that remains for consideration by this Appeal Tribunal, therefore, is whether or not on a proper construction of the charge defined in paragraph 3(d) of the debenture, it is to be regarded as a fixed charge (as it is described in the document) or whether it ought not to be regarded as a floating charge in view of its terms.

Issues of a parallel nature have been considered in the Chancery Division on a number of occasions in a rather different context and Mr Jay, on behalf of the Appellants, has very helpfully drawn our attention to the most recent relevant authorities, in which the earlier decisions have been fully considered. In particular, Mr Jay has drawn our attention to the decision of Mr Justice Slade (as he was) in Siebe Gorman & Co. Ltd v Barclays Bank Ltd [1979] Ll.LR 142. That was a complex case involving many issues, including the status of a bill of exchange, and it is unnecessary for the purpose of this judgment to recapitulate the facts. What is relevant is that Mr Justice Slade had to construe a debenture referring to a fixed charge in the same terms as those which fall to be considered in the present appeal.

After referring to a passage in the judgment of Lord Justice Romer In re Yorkshire Woolcombers Association Ltd [1903] 2 Chancery 284, 295. Mr Justice Slade said in Siebe Gorman at pages 158, 159 :

"The provisions of cl. 5(c) of the debenture obliged the debtor, even before the bank had taken any steps to enforce its security, to pay into the debtor's account with the bank all moneys which it might receive in respect of the relevant bills and not without the prior consent of the bank in writing to purport or charge or assign the same in favour of any other person. Notwithstanding these provisions, Mr Phillips, on behalf of Siebe Gorman, submitted that it was plain the context of the debenture that R. H. McDonald Ltd. was intended, until the bank took steps to enforce its security, to be free to continue trading and to use the proceeds of its future book debts, including the relevant bills for the purposes of such trading. He submitted that there were a number of forms of dealing with future book debts which are not precluded by the terms of cl. 5(c), for example dealings by way of barter, exchange or set-off, and that the sub-clause necessarily implied that the debtor had the right to deal with future book debts, save as thereby expressly precluded. He emphasised that, while according to the terms of cl. 5(c) all the proceeds of future book debts would in the first instance have to go into the debtor's account with the bank, it must have been contemplated that R. H. McDonald Ltd. would then be free immediately to draw out all those moneys for the ordinary purposes of its business, at least if such account was for the time being in credit.

In regard to the latter point, if I had accepted the premise that R. H. McDonald Ltd. would have had the unrestricted right to deal with the proceeds of any of the relevant books debts paid into its account, so long as that account remained in credit, I would have been inclined to accept the conclusion that the charge on such book debts could be no more than a floating charge. I refer to the respective definitions of a floating charge and a specific charge given by Lord Macnaghten in Illingworth v. Holdsworth , (1904) App.Cas.355, at p. 358.

A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.

If the debenture on its true construction had given the bank no right whatsoever, at a time when the account of R. H. McDonald Ltd. was in credit, to prevent the company from spending in the ordinary course of business all or any of the proceeds of book debts paid into its account, I would have been inclined to regard the charge, for all the wording of the debenture, as doing no more than 'hovering over and so to speak floating with' the book debts, within the words of Lord Macnaghten. Such, I would conceive, is the effect of a charge on future book debts in the form more usually employed. Commonly it is intended, by both creditor and debtor, that the debtor shall have the free disposal of the proceeds of future book debts which may come into his hands, so long as the creditor takes no steps to enforce his security, or the charge has not otherwise crystallised.

In my judgment, however, it is perfectly possible in law for a mortgagor, by way of continuing security for future advances, to grant to a mortgagee a charge on future book debts in a form which creates in equity a specific charge on the proceeds of such debts as soon as they are received and consequently prevents the mortgagor from disposing of an unencumbered title to the subject matter of such charge without the mortgagee's consent, even before the mortgagee has taken steps to enforce its security: (compare Evans Coleman and Evans Ltd. v. R. A. Nelson Construction Ltd., 16 D.L.R. 123). This in my judgment was the effect of the debenture in the present case."

Although that reasoning of the learned Judge is not binding upon this Appeal Tribunal, it is obviously of great persuasive importance. Moreover, his judgment was considered by Mr Justice Hoffmann in the case of In re Brightlife Ltd. , [1987] 2 W.L.R.197 and more recently by Mr Justice Knox in the (as yet) unreported case of New Bullas Trading Ltd but neither judge questioned the `ratio decedendi'. We have no doubt, therefore, that we should follow it.

In our judgment, therefore, the Tribunal below here did make an error in law in relation to a difficult aspect of Company Law. Their conclusion that the Respondent had established that Lane & Sons (Cardiff) Ltd was insolvent at the relevant date cannot be supported and the appeal must be allowed on the footing that there was no insolvency. Applying the provisions of Part VII of the Act of 1978, it follows that there was no liability upon the Secretary of State to make the payments prescribed in Section 122 of the Act and the award to the Respondent must be quashed. No need arises, therefore, to re-calculate the arrears of holiday pay that would otherwise be recoverable.

We have some sympathy with the Respondent who has been caught, so to speak, by the statutory provisions. Is there any possibility that an appropriate person in the Department of Employment could direct his attention to such remedies as he has? Presumably, they are only against the insolvent company, as it now appears to be, or against the other scaffolding company, the status of which we do not know.