SMITH v Bridgend County Borough Council

An administrator’s statutory power to recover company property does not confer a consequential claim for damages in conversion where the administrator’s only interest arises from an unregistered security. Section 234 of the Insolvency Act 1986 permits recovery of property in specie; it does not provide a statutory basis for damages. The ordinary requirement that a claimant in conversion have an immediate right to possession remains applicable. A contractual security may remain effective between the company and the contracting party even though it is void against the administrator under s.395 of the Companies Act 1985. The appeal was therefore allowed and the action struck out. The court also indicated that, if a conversion claim had existed, equitable set-off would have reflected the true account between the company and the council.

The administrator of Cosslett (Contractors) Ltd claimed damages from Bridgend County Borough Council for conversion of coal-washing plant. The council had used the plant under contractual provisions after the company abandoned reclamation works and later transferred it to another contractor, Burrows, under a continuation contract.

Earlier proceedings under s.234 of the Insolvency Act 1986 had established that the council retained a contractual right to use the plant, but that its power of sale constituted an unregistered floating charge void against the administrator under s.395 of the Companies Act 1985. The issue was whether the administrator could consequently claim damages in conversion after the plant had been transferred to Burrows, and whether the council could rely on equitable set-off.

1. Appeal allowed. The summary judgment was set aside, the action was struck out, and the council obtained its costs in both courts.
2. Section 234 of the Insolvency Act 1986 supplied a procedural route for recovery of property in specie if the plant remained in the council’s possession. It did not authorise a consequential claim for damages in conversion after the property had left the council’s possession.
3. The administrator’s powers under Schedule 1, read with ss.14 and 17, were not to be stretched to create ancillary rights unavailable under s.234. The administrator’s statutory status and the policy of administration did not justify extending either the statutory scheme or the common law of conversion.
4. The ordinary rule requiring an immediate right to possession for conversion applied. The administrator never had such a right while the council’s contractual right to use the plant continued, and the making of the continuation contract was not itself conversion. The court accepted Mukibi v Bhavsar [1967] EA 473 as good English law and regarded it as consistent with Leigh & Sillavan v Aliakmon [1986] AC 785.
5. Section 395 avoided the security against the administrator, not the underlying debt or cause of action as between the company and the council. The administrator’s potential right to recover the plant was therefore adventitious and did not alter the true account between the company and the council, including the council’s contractual damages claim.
6. The court rejected the suggestion that refusing the claim gave the council a special secured status. There was no evidence that the continuation contract had been devised deliberately to frustrate the administrator’s potential s.234 claim. If the conversion claim had nevertheless been available, equitable set-off would have been allowed.
7. As a narrow construction point, Schedule 1 paragraph 1 was not confined to proceedings brought in the company’s name by paragraph 5. That point did not affect the result.

• Court of Appeal (Civil Division): Appeal from the order of HHJ Toulmin CMG QC in the Queen’s Bench Division. The first-instance judge had entered summary judgment for the administrator, ordered damages to be assessed and required an interim payment of £389,000.
• Court of Appeal in earlier s.234 proceedings: The earlier claim for delivery up of the plant was dismissed, as recorded in [1998] Ch 495. The present appeal concerned the subsequent conversion claim.