Black Letter report: 2018 Carillion collapse

Insight | August 2019

Carillion
‘Le Chantier’ by Maximilien Luce

This is a twenty page report detailing the financial collapse of Carillion plc in 2018, and while this independent report explains much of the background leading up to their downfall, it also includes judicial insight into the rights of those left out of pocket when the hammer finally fell (simply click here to read it).

Barclays Bank Ltd v Quistclose Investments Ltd (1968)

English Equity & Trusts

Barclays Bank Ltd v Quistclose Investments Ltd
Image: ‘Bankers in Action’ by Remedios Varo

Conditional lending, while perhaps overlooked during commercial and personal loans, forms the bedrock of such delicate transactions, and so should the borrower find themselves unable to apply the funds as expected, the nature of the agreement remains lawfully intact in favour of the lender. In this matter, an insolvent debtor’s bank attempted to convert such monies into company assets at the expense of the lender, at which point the reassurance of equity intervened.

In 1964, the shareholders of a relatively successful enterprise took steps to issue dividends of around £210,000, however upon inspection, they discovered that without adequate liquidity, the payment would be impossible. With that in mind, the company owner secured a conditional loan from the respondents, on the express condition that the funds were to be used for dividend issue only.

Once received, the owner wrote to the company bank, giving instruction to open a standalone account for the retention of the funds, while stipulating that:

“We would like to confirm the agreement reached with you this morning that this amount will only be used to meet the dividend due on July 24, 1964.”

Unfortunately, on July 17 1964, the company entered into voluntary liquidation, whereupon the monies held remained unused, as per the instructions given at the point of receipt. Some time later, the respondents demanded repayment of the money loaned, after which the appellant bank argued that it had since become a corporate asset, and was therefore subject to the priorities of all associated creditors involved in the bankruptcy process.

At the point of litigation, the respondents held that the money loaned was subject to a resulting trust, and that the bank by virtue of their position, were now under a fiduciary liability as constructive trustees for the amount loaned. In the first hearing, the judge awarded in favour of the appellants, on grounds that equitable principles did not apply when arms-length dealings fail, whereupon the respondents appealed and the Court held that in matters involving third parties to a failed transaction, recovery under equity was a principle long enjoyed, and routinely evidenced through a number of judgments across hundreds of years.

Presented again to the House of Lords, the House examined the complexity of the transaction, and noted that in Toovey v Milne, Abbot CJ had ruled that failure to apply the money loaned in the way originally intended, allowed for recovery of the funds during insolvency, under the principle that:

“[T]his money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid.”

Here again, reference was made to the express conditions applied to the loan, as well as the statement made in the letter at the time the money was passed to the appellant bank. It was further noted that while in circumstances where the lender agrees to loan on non-specific terms, there is an implied assumption that such funds become part of the corporate estate (albeit not entirely free of equity), however on this occasion there was ample testimony that the respondents had bargained with the borrowers on clear conditions, therefore the House uniformly and unreservedly held that the Appeal Court decision was to remain untouched and the bank’s appeal dismissed.

Carlton Communications plc v The Football League (2002)

English Contract Law

Carlton Communications plc v The Football League
‘Football’ by Anthony Barrow

The phrase ‘subject to contract’ is pivotal to the preservation of legal rights, particularly when negotiating for multi-million pound contracts. On this occasion, the eagerness of a national sports fraternity overtook the urgency for a logical and constructive approach to long-term franchise agreements, resulting in an outcome none would have wished for.

In June 2000, the Football League entered into a contract for licensing rights with ITV Digital (or ONDigital as they were then known), who themselves were subsidiaries to both Carlton Communications Plc and Granda Media Plc. Having begun negotiations in April 2000, ONDigital were extended permissions to tender for contracts not exceeding £10m, whereupon this particular bid was now worth in excess of £240m, which therefore required the oversight of Granda and Carlton, but nothing more.

In a document titled ‘Initial Bid for Audio-Visual Rights Football League 2001/2 – 2003/4 ONDigital’ Executive Director Graeme Stanley expressed within the Financial Arrangements section, that:

“ONdigital and its shareholders will guarantee all funding to the FL outlined in this document.”

While noting that as with the remainder of the document, all statements therein were ‘subject to contract’ and therefore not binding upon any parties.

During the negotiation period, the value of the contracts increased to £315m, and at the point of their contracting, express notice was given in clause 18, which read:

“18. ONdigital and FL shall use their best endeavours to execute a long form agreement within 60 days which will be negotiated with reference to the Football League Pre-Tender Document of 27th March 2000…and will include clauses such as standard legal boilerplate, confidentiality, compensation for ONdigital if there are significant changes in competition structure which adversely affect the value of the rights granted to ONdigital, minimum broadcast commitments, quality guarantees for programmes and competitions and the like.”

In December 2001, talks began which centred around the alleged winding down of ONDigital, and so the claimants proposed that the defendants Carlton and Granda were now liable as guarantors for any sums due, which at the point of litigation, was little under £134m. As was expected, the defendants noted that while assisting as a parent company, at no point did they enter into a contract with the claimants, and as such, were not responsible for any ONDigital debts outstanding.

Relying upon the comments made in the pre-contract documentation, as well as a vague mention of guarantees in Clause 18, the court examined how corporate contracting and personal liability are distinctly different animals. With reference to principles espoused in Salomon v Salomon, Kerr LJ had himself expressed in JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry how:

“The crucial point on which the House of Lords overruled the Court of Appeal in that landmark case was precisely the rejection of the doctrine that agency between a corporation and its members in relation to the corporation‟s contracts can be inferred from the control exercisable by the members over the corporation or from the fact that the sole objective of the corporation’s contracts was to benefit the members.”

While due reference was given to the Statute of Frauds 1677, in which s.4 clearly explains how:

“No action shall be brought whereby to charge the defendant upon any special promise to answer for the debt default or miscarriage of another person unless the agreement upon which such action shall be brought or some memorandum or note thereof shall be in writing and signed by the party to be charged therewith or some other person thereunto by him lawfully authorised.”

While it was further noted that in ‘Chitty on Contracts’, paragraph 4-022 stressed how:

“Apart from the exceptional case of a written offer signed by one party and accepted orally by the other, the writing must acknowledge the existence of a contract. It is now settled, after some hesitation, that a letter expressed to be ‘subject to contract’ is not in itself a sufficient memorandum to satisfy the statute.”

This rendered any argument for financial guarantee fatal to the claim, and left the court no choice but to exempt the defendants from all liability relating to damages for breach of contract, while holding that:

“[A] subject to contract proposal is the antithesis of or at the least incompatible with a unilateral offer. The former is not open to acceptance; it is the essence of the latter that it is.”