Smith (Administrator of Cosslett (Contractors) Limited v. Bridgend County Borough Council

A contractual power permitting a creditor to sell assets belonging to its debtor and apply the proceeds towards the debt creates a charge. Where the assets form a fluctuating body which the debtor may consume or remove in the ordinary course of business, the charge is floating. Its legal character depends on the rights created, rather than the parties’ description or intention.

Under section 395 of the Companies Act 1985, an unregistered registrable charge is ineffective against a company in administration acting through its administrator. The administrator may therefore cause the company to recover damages for conversion. The creditor cannot reproduce the avoided security through equitable or insolvency set-off.

A council engaged Cosslett (Contractors) Ltd under standard engineering conditions. The contractor owned two coal-washing plants placed on site. The conditions permitted the council, following specified defaults, to use constructional plant to complete the works and to sell it and apply the proceeds towards sums owed by the contractor.

After the contractor abandoned the works and entered administration, the council arranged for a replacement contractor to use and ultimately acquire the plants. Jonathan Parker J dismissed the administrator’s delivery-up application, holding that the sale right created a fixed charge: [1997] Ch 23. The first Court of Appeal held that the right of use was not security, but that the power of sale was an unregistered floating charge: [1998] Ch 495.

In subsequent conversion proceedings, Judge Toulmin QC entered judgment for damages to be assessed and ordered an interim payment. A second Court of Appeal set that judgment aside, reasoning that the unregistered charge remained valid against the company although void against the administrator personally. The central issues were the effect of non-registration, the proper claimant, conversion, set-off and the classification of the contractual power of sale.

Appeal allowed unanimously. Lord Hoffmann delivered the leading speech. Lord Bingham of Cornhill, Lord Browne-Wilkinson and Lord Rodger of Earlsferry agreed with his reasons. Lord Scott of Foscote also agreed that the appeal should be allowed and delivered additional concurring reasons.

1. Per Lord Hoffmann, the contractual right to sell an asset owned by the debtor and appropriate the proceeds towards the debt was necessarily a charge. The relevant assets were a fluctuating body of constructional plant, goods and materials which could be consumed or, with the engineer’s operational approval, removed in the ordinary course of business. The charge was therefore floating. The separate reference to the coal-washing plant did not create a fixed charge over that equipment.

2. The parties’ intention determined their contractual rights and obligations, but the legal classification of those rights was a question of law. Commercial expectations or surprise at the consequence could not change that classification.

3. Section 395 of the Companies Act 1985 made the unregistered charge void against the company while it was in administration and acting through its administrator. The provision was intended to preserve charged property for the company in administration and, where relevant, its creditors. It was not confined to personal proceedings by the administrator under section 234 of the Insolvency Act 1986.

4. The company retained title to its assets and causes of action. An administrator asserting such a claim should ordinarily cause proceedings to be brought in the company’s name under section 14 and Schedule 1 of the Insolvency Act 1986. The inaccurate title of these proceedings caused no misunderstanding and required no amendment.

5. The council committed conversion by authorising the replacement contractor to take the plants and by purporting to confer title. Although that authority had been granted before the company regained an immediate right to possession, it remained effective when the plants were removed. The company was accordingly entitled to damages.

6. Neither rule 4.90 of the Insolvency Rules nor equitable set-off permitted the council to deduct its contractual cross-claim. Conversion was not a mutual dealing. Equity could not recreate the very security which section 395 invalidated.

7. Lord Scott added that a future charge arising upon an uncertain event over an as-yet unidentified class of assets could qualify as a floating charge for registration purposes, although it was not a traditional present floating security. He also considered that conversion damages should reflect the value of the plants at the date of the purported disposal, adjusted for the council’s valid contractual rights of use. Those additional conclusions did not form part of Lord Hoffmann’s majority reasoning.

The judgment and interim payment order made by Judge Toulmin QC were restored.

1. House of Lords: Allowed the administrator’s appeal unanimously and restored Judge Toulmin QC’s judgment for damages to be assessed and interim payment order: [2001] UKHL 58.
2. Court of Appeal, second proceedings: Lord Woolf MR, Ward LJ and Laws LJ allowed the council’s appeal, set aside the conversion judgment and struck out the action. The citation is not stated in the judgment.
3. Judge Toulmin QC: Entered judgment for conversion damages to be assessed and ordered an interim payment of £389,000.
4. Court of Appeal, first proceedings: Dismissed the appeal concerning the council’s continuing right to use the plant, but held that its power of sale was an unregistered floating charge and therefore void against the administrator: [1998] Ch 495.
5. High Court, Jonathan Parker J: Dismissed the administrator’s section 234 application. The judge held that the power of sale created a fixed charge which did not require registration: [1997] Ch 23.