Month: August 2009

A significant issue in agency law is the extent of the agent’s implied authority.  Case-law has defined the implied powers possessed by particular types of agent, for example, partners, solicitors or architects.  In this way, transactions can proceed quickly, without the need for the principal to provide express, detailed instructions. 

The cases which establish the principles of implied authority, most of them dating from the late 19th century, contain some useful statements, not about the agent’s specific implied powers, but rather the overall discretion an agent may have in the conduct of his business.  For example, Begg, in his Treatise on the Law of Scotland relating to Law Agents (2nd edn, 1883 at p.88) states of the solicitor:

“When a law agent has been duly appointed, he does not require to get fresh authority from his client at every stage of his proceedings, a certain amount of authority depends in each case on the nature of work which he has been employed to perform; and the legal presumptions on the fact vary according as the question is raised between agent and client, or between client and a third party.”

This led Begg to conclude that, in general, solicitors enjoy a “reasonable latitude” (p.88-89) in performing their mandate.  It is only when taking an “extraordinary step” in the conduct of litigation that express instructions are required (p.90).

In addition to the implied authority which attaches to a particular post, an agent’s authority may be implied by the object of the agency.  The agent may require particular powers to achieve a certain end, for example, the recovery of a debt or the transfer of heritage. 

Begg cites a number of cases to support his proposition that a general agent such as a solicitor possesses a wide implied authority.  One of those cases is Burnett v Clark (1771) M 8491.  The Burnett in question is James Burnett of Monboddo, a Senator of the College of Justice.  He had instructed a farrier, the unfortunate Clark, to attend his diseased horse, giving him “a positive injunction that he should give the horse no medicine of any kind but nitre.”  Clark gave the horse nitre, but in order to “take the sharp taste of the medicine away, and to make him swallow it more readily”, he mixed it up in a draught with a small quantity of treacle.  The horse died.  Lord Monboddo raised this action against Clark. 

The Court held that the addition of treacle was not a deviation, but was actually necessary.  This is a nice example of the rule that implied authority should be assessed by reference to the object pursued by the agent.  The object here was the treatment of the horse – it would not be possible to specify all the necessary steps.  There was, rather, authority by implication in order to achieve the desired end. 

The case report also contains an interesting statement touching on the discretion enjoyed by a professional agent: just as the solicitor enjoys a “reasonable latitude” in the performance of his mandate, Clark in this case as someone occupying a profession of skill could, the court suggested, take measures which were outside his mandate ("extra fines mandati"), provided that those measures were “innocent and proper.” 

The court overturned the decision of the sheriff and assoilzied Clark.  Lord Monboddo was found liable in the expenses of the action.  It cannot have been a pleasant experience for him, finding that he had misjudged the law, and being found liable in expenses by one of his colleagues, Lord Coulston.  Perhaps he thought his chances of success were high, having employed a certain J Boswell to act on his behalf.  It would have been an experience listening to Mr Boswell debating the merits of a decision to give the poor horse treacle.   

And the horse?….it had been “moribundus” when the draught had been given, so there was no presumption that the treacle had caused its death.     

Given the constitutional reforms of recent years all lawyers must have some familiarity with matters traditionally viewed as public law. The incorporation of the European Convention on Human Rights has touched a number of areas (in early cases in scotland primarily protecting the rights of corporations) The devolution settlement established by the Scotland Act 1998 has caused a degree of complexity for commercial lawyers. That complexity is inherent in the uncertain boundaries of commercial law.

Commercial law can be viewed in a variety of ways. In his magisterial work on commercial law Sir Roy Goode writes

"commercial law is that branch of law which is concerned with rights and duties arising from the supply of goods and services in the way of trade." (p 8, Commercial Law (3rd edn)

but acknowledges that not everyone would agree with this definition because

"Its scope is not clearly defined, and no tow textbooks adopt the same approach as to spheres of commercial activity that ought properly to be included in a work on the subject." (ibid)

On one level commercial law can be viewed as applied private law, involving the interaction of the law of obligations and the law of property. Nominate contracts may be considered (sale; hire; carriage; insurance &c) and the interface between property and obligations (apparent in rights in security and insolvency). However, others would interpret commercial law more broadly. For example, the Law Society of Scotland provides that the syallbus for the paper on Scots Commercial Law includes

1. Insurance
2. Diligence
3. Commercial paper
4. Real and personal rights in security
5. Sale of goods
6. Carriage
7. Agency
8. Partnership (including limited liability partnerships)
9. Companies
10. Personal and corporate insolvency

The lack of a unified approach, and the manner in which the general subject of commercial law touches upon a variety of other general areas of law (contract, property, civil procedure, the law of persons), means that in devolving legislative power to the Scottish Parliament there is a piecemeal approach to legislative competence in commercial matters.

For example, much of commercial law (in the sense used by the Law Society) is reserved under s 30 and Sch 5 to the Scotland Act, but some is not. The rationale for the reservations and exceptions to the reservations is not always clear.

Generally private law (as defined in s 126 (4) of the 1998 Act generally in accordance with the traditional civilian division of persons, obligations, property, and actions) is devolved. But matters relating to trade and industry are reserved (SCh 5, Head C) including the law relating to business associations (companies and partnerships); competition law; intellectual property law; consumer protection (including the regulation of the law of sale and supply of goods to consumers, and hire purchase; as well as the subject matter of the Commercial Agents (Council Directive) Regulations); the law of insolvency (including winding up of companies (but not sequestration of individuals). The reservation for winding up companies details a number of elements:

“(a) the modes of, and grounds for and the general legal effect of winding up, and the persons who may initiate winding up, (b) liability to contribute to assets on winding up, (c) powers of courts in relation to proceedings for winding up, other than the power to sist proceedings, (d) arrangements with creditors and (e) procedures giving protection from creditors”

but excluded from this general reservation is

"(a) the process of winding up, including the person having responsibility for the conduct of a winding up or any part of it, and his conduct of it or of that part; (b) the effect of winding up on diligence, and (c) avoidance and adjustment of prior transactions on winding up"

as well as the law of floating charges and receivers. For reasons best known to the Westminster government no amendment of these provisions was made to respond to the extensive reforms to the law of corporate insolvency processes made by the Enterprise Act 2002 (which transformed the law of receivership and the law of administration).

The Scottish Parliament has legislated on some of these devolved topics. The Bankruptcy and Diligence etc (Scotland) Act 2007 will (when in force) completely replace the rules on ranking and creation of floating charges currently found in the Companies Act 1985. However, even this project demonstrated the difficulties of the current devolution settlement because while Holyrood was passing this legislation – providing among other things that a floating charge is created on the date of registration in a new Register of Floating Charges – Westminster was passing the Companies Act 2006 which repeals and replaces the law on registration of company charges and provides that a floating charge in Scotland is created on the date of execution. Dual competence potentially leads to confusion and incoherence (albeit in this case likely to be resolved by a statutory instrument under s 893 of the Companies Act 2006).

Examining the reservation and exception for corporate insolvency under the Scotland Act 1998 one sees the potential for difficulty.

Some aspects are clearly appropriately devolved. It would be an odd system that prejudiced an unsecured creditor attempting to protect his or her position with different rules on the efficacy of their actions dependent on whether the debtor is a company or not. How civil procedure operates for liquidation, given an independent Scottish system of procedure (most of the time, but not always respected by Westminster) also seems appropriately to be devolved. Further insolvency law involves the interface between other subjects. It is the acid test for the efficacy of property rights, and determining the validity of obligations. Given the very different approaches to property law in Scotland in comparison with a system based on equitable property rights in England and Wales a difference in approach in various respects does not seem unreasonable. For example, Scots law has a numerus clausus of security rights with strict rules on creation that require publicity of property rights. English law is much more (secured) creditor-friendly being influenced by freedom of contract and while publicity is applicable for some security rights this does not apply generally (see, for example M Bridge, "The English law of security: creditor-friendly but unreformed" in E Kieninger (ed), Security rights in movable property in European private law (2004)). Other areas may seem less appropriate for devolved treatment. For example, the grounds for winding up are reserved (and consistent between Scotland and England).

But, as happened when the law of administration was substantially amended, it is essential that where there is joint competence, or competence for different aspects of the one area, that reform is carried out in a coherent manner. The risk of devolution and areas of complex competence is that neither legislature adequately addresses the issue – and Scots law finds itself ossifying.

In its review of the Scottish devolution settlement, the Commission on Scottish devolution (better known as the Calman Commission) received various reprsentations on the settlement, and while media attention on the Commission's final report focused on issues of taxation there is some attention in the final report on commercial law matters. Corporate insolvency is considered at paras 5.267ff.

The Commission notes that despite work by the Accountant in bankruptcy to reform Scots law to produce standalone insolvency rules

"Notwithstanding moves by the Accountant in Bankruptcy to bring the law relating to insolvency procedure in line with that of England and Wales, the Commission has heard from insolvency practitioners who question the necessity of duplicating work in Scotland and the potential this allows for divergence in policy and practice. The Institute of Chartered Accountants of Scotland (ICAS), for example, argues that this is unhelpful in a field in which businesses operate across the UK, supported by lenders who also operate common policies across different jurisdictions." (para 5.272)

And goes on to note, despite the different systems of property law and the different treatment of secured and unsecured creditors, :

"The Commission is, however, persuaded that devolution has produced an unsatisfactory
state of affairs relating to corporate insolvency in that:

• there is an absence of clarity as to where responsibility lies for drawing up the rules
to be followed by insolvency practitioners dealing with corporate insolvencies;
• there are unnecessary and confusing divergences between the insolvency rules
applying in England and Scotland; and
• there have been unnecessary and damaging delays in introducing new rules in
Scotland.

Many corporate insolvencies involve companies operating on both sides of the border.
Clarity, consistency and speed are essential, particularly in the present economic and
financial climate. Whether or not, as some submissions have suggested, the necessary
expertise is lacking in Scotland (which the Commission is not in a position to judge), that
does not alter the importance of clarity, consistency and speed." (paras 5.275 – 6)

To that end the Calman Commission has not recommended repatriation of the law of corporate insolvency to Westminster but instead recommends,

"In the opinion of the Commission, the serious issues raised in connection with corporate
insolvency might be resolved without altering the reserved/devolved boundary in
Schedule 5 in relation to primary legislative competence. The essential point appears to
be that the UK Insolvency Service, with appropriate input from the relevant department(s)
of the Scottish Government, should be made responsible for laying down the rules
to be applied by insolvency practitioners on both sides of the Border. This could be
achieved by UK legislation to which the Scottish Parliament would consent by legislative
consent motion under the Sewel Convention." (para 5.277)

with a threat that if this is not done Westminster should look to repatriate, and a recommendation that reform in this area be carried out as soon as possible.

The suggested solution has attractions – in that if one body is responsible for the reform process in relation to the actions of insolvency practitioners – this should ensure consistency and avoid the lag that has blighted Scottish law in this area since the prioritisation of company rescue in the insolvency system. What must be secured though in any such reform is respect for Scottish civil procedure (and the actions in relation to tribunals and judical review highlighted by Jonathan Mitchell QC must be avoided) and appreciation of the differences in the Scottish law of rights in security, diligence, and the law of property must be central to any reforms. It is here that I feel cautious. The track record of the old DTI in responding in a manner sensitive to the Scottish legal system was not great; and when even (English) judges in the House of Lords in Scottish cases do not know what diligence is, can we rely on a system based south of the border to understand the differences in the Scottish system – specifically the Scottish law of procedure, property, and diligence – and to legislate appropriately?

Wishart v Castlecroft Securities Ltd. [2009] CSIH 65 is the first case in the United Kingdom where an appeal court has had the opportunity to consider and apply the statutory derivative proceedings under Part 11 of the Companies Act 2006 ("the Act"). Wishart was decided by the Inner House of the Court of Session on 21st July 2009 and Lord Reed delivered the judgment. Part 11 of the Act provides for a procedure which enables a shareholder of a company to take action against a director of the company or other third parties. The shareholder's claim is to the effect that a director has engaged in an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust. If successful, the company obtains the remedy, rather than the individual shareholder. Of particular note is the fact that the Inner House granted the shareholder's application for leave to raise derivative proceedings in Wishart v Castlecroft Securities Ltd.

Part 11 of the Act is divided into provisions which apply to England and Wales (ss. 260-264 of the Act) and provisions which apply to Scotland only (ss. 265-269 of the Act). In terms of the Scottish procedure, a shareholder must first make an application for leave to raise derivative proceedings by presenting a petition to the Outer House of the Court of Session. The application for leave procedure is split into an ex parte (section 266(2)) and an inter partes stage (section 266(4) and (5)). The former does not involve a hearing with the parties present, whereas the latter does.

At the ex parte stage, the Outer House judge must refuse the application if the application and the evidence produced by the applicant in support of it do not disclose a prima facie case for granting it. In the Outer House (2009 SLT 376), Lord Glennie decided that the effect of the combination of sections 266(3) and 265(3) of the Act was such that the court was specifically required to be satisfied about two matters: First, that there has been a relevant act or omission by one or more directors of the company in terms of section 265(3) of the Act; secondly, that the applicant has established wrongdoer control, i.e. that the wrongdoer director has majority control over the shareholders of the company (directly or indirectly) which is or would be exercised to prevent a proper action being brought against the wrongdoer. On the latter point, Lord Reed in the Inner House disagreed with Lord Glennie. It is submitted that Lord Reed was correct on this point and support for this view is supplied by the speech of the Solicitor-General, Mike O'Brien MP, on 17th October 2006 which is reported in Hansard. At column 832, O'Brien stated:

"We do not want the claimant to have to show "wrongdoer control" – that is, to show that the company is controlled by the directors whom the claimant believes to have acted in breach of their duties-as that might make it impossible for a derivative claim to be brought successfully by a member of a widely held company, including almost all major quoted companies."

This is fortified by the fact that in Franbar Holdings Ltd. v Patel (a case decided in the High Court in England [2008] B.C.C. 885), it was implicit in William Trower QC's judgment that the issue of wrongdoer control must be taken into account at the inter partes (rather than the ex parte) stage in evaluating whether the director's act or omission was capable of ratification in terms of section 263(3)(c) (section 268(2)(c) is the equivalent provision which applies to Scotland) of the Act.

In evaluating the criteria to be applied at the ex parte stage for the purposes of determining whether there is no prima facie case disclosed for granting the application for leave, Lord Reed took the position that the mandatory and discretionary criteria which are specified in section 268(1), (2) and (3) of the Act, ought to be taken into account, together with ‘any relevant circumstances', since the language of section 268(2) is ‘non-exhaustive' (paras. [33] and [36]). Having taken such criteria into account, if the court is of the view that the application for leave should not be refused, section 266(4) of the Act directs that the applicant is entitled to serve the application on the company (rather than the prospective defenders in future derivative proceedings) and the court may make an order requiring evidence to be produced by the company. It is submitted that the reasoning for this particular aspect of Lord Reed's judgment is correct, since it rests on the proper statutory construction of sections 266(3) and 268(1) and (2). Section 266(3) deals with the approach which the court should apply at the ex parte stage. Here, it is provided that ‘if it appears to the court that the application and the evidence produced by the applicant in support of it do not disclose a prima facie case for granting it, the Court… must refuse the application…' Further, the relevant parts of section 268(1) and (2) stipulate that ‘The court must refuse leave to raise derivative proceedings or an application under section 267 if satisfied…' and ‘In considering whether to grant leave to raise derivative proceedings or an application under section 267, the court must take into account, in particular…' On this basis, it appears that the criteria in section 268(1) and (2) must be applied at both the ex parte and inter partes stages by virtue of the words  in section 266(3) of the Act which have been marked in bold (by the blogger) – since the application for leave procedure is made up of two distinct stages, namely the ex parte and inter partes phases. If it was Parliament's intention that the mandatory and discretionary criteria were only to be taken into account by the court at the inter partes stage in terms of section 266(4) and (5), the wording of the statute could have easily reflected that fact. But it didn't and the wording doesn't.

The application thus proceeds to the second stage which entails a hearing inter partes the member and the company. At this point, the court must again consider the mandatory and discretionary criteria which are specified in section 268(1), (2) and (3) of the Act and grant, refuse or adjourn the application for leave to raise separate derivative proceedings. Lord Reed's judgment was clear to the effect that the defenders (i.e. the director(s) and any third party against whom the substantive derivative proceedings will be directed) are disentitled from being involved in the inter partes hearing (paras. [18]-[26]), i.e. to lodge answers or to be heard. A number of reasons for this approach were advanced, not least of which was the contention that the application for leave proceedings is not concerned with the determination of their rights and obligations or any liability which might attach to them. Moreover, the Inner House was concerned to avoid engagement with the full merits of the claim at the inter partes phase, since this would entail a ‘dress rehearsal', leading to wasteful duplication of evidence and costs since the same points must necessarily be revisited at the full hearing in the substantive derivative proceedings (paras. [27]-[28] and [39]). Thus, it formed the view that affidavits and productions should be lodged and considered by the court.

With regard to the discretionary criteria which the court must take into account at both the ex parte and inter partes stages, Lord Reed made two interesting observations. First, section 268(2)(a) of the Act, which is the initial discretionary criteria which the court ought to consider, directs that the court should assess whether the petitioning member is in good faith in seeking to raise substantive derivative proceedings. Whilst Lord Glennie's judgment in the Outer House that the member was in good faith had not been challenged at the appeal, that conclusion had been reached without recourse to an evaluation of that member's subjective viewpoint or motivations. On this particular issue, Lord Reed had the following to say at para. [36]: –

"We observe however that it is possible that, at least in certain circumstances, that provision might require the court to give consideration to the view which the petitioner might reasonably hold of the merits of the proposed proceedings. In that regard, we note the approach which has been adopted by the courts of other jurisdictions (notably in Canada and Australia) where similar provisions exist."

That is to say that subjective considerations will be relevant for the purposes of the court's determination of the member's good faith. Bearing in mind that the inter partes stage is to be conducted by reference to affidavits and productions only, it is opined that this subjective assessment may prove to be slightly difficult for a court to discharge in practice.

Secondly, section 268(2)(f) of the Act provides that the court must have regard to whether the cause of action is one which the member could pursue in his own right rather than on behalf of the company, i.e. whether the claim could be best progressed as a personal action or a section 994 unfair prejudice petition. Interestingly, unlike the English case of Franbar Holdings Ltd. v Patel [2008] B.C.C. 885, where William Trower QC ruled that the availability of section 994 proceedings disentitled the shareholder claimant from being given permission to continue the derivative proceedings, Lord Reed was prepared to hold that Wishart should be given leave to raise substantive derivative proceedings in the following terms (para. [46]:

"In the circumstances of the present case, we accept that the allegations made by the petitioner against [the director] might form the basis of a petition under section 994. Such proceedings would however constitute, at best, an indirect means of achieving what could be achieved directly by derivative proceedings; and they could not provide any remedy against [the third party]. The petitioner's complaint is that [the director] has acted unlawfully, with [the third party]'s knowing assistance; not that the Company's affairs have been mismanaged. The relief the petitioner seeks is to have the Company restored to the position in which it ought to be, by an order for restitution or damages; not that he should be bought out. In that regard, we note that an order requiring him to be bought out at the present time, when the commercial property market is depressed, would not be an attractive remedy. The order sought in the proposed derivative proceedings, that the properties in question be declared to be held by [the third party] upon a constructive trust for the Company, would in reality be a more valuable remedy, since the petitioner could then benefit from any rise in the value of his shareholding over the longer term, consequent upon a recovery in the market. Furthermore, any inquiry into whether there had been mismanagement, or into the price at which the petitioner should be bought out, would require the court to establish the truth or otherwise of the petitioner's allegations, and the value of any property held by [the third party] which had been acquired through [the director]'s breach of his duties to the Company: the same issues as would be raised more directly, and with the possibility of [the third party]'s participating in the action and being ordered to make restitution or to pay damages, if derivative proceedings were permitted. We also note that the Company does not appear to be deadlocked, and that it continues to trade. In these circumstances, the availability of an alternative remedy under section 994 does not appear to us to be a compelling consideration."

The above section from the judgment of Lord Reed is extremely significant, since it underlines the types of circumstances in which the availability of a section 994 petition will nevertheless be insufficient to disempower a petitioner from proceeding with substantive derivative proceedings. To that extent, it acts as useful guidance to shareholders and their advisers in future cases.