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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2018/1032.html
Cite as: [2018] EWCA Civ 1032

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Neutral Citation Number: [2018] EWCA Civ 1032
Case No: A2/2016/4397/CHBKF

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Mr Andrew Simmonds QC sitting as a Deputy High Court Judge)

Royal Courts of Justice
Strand, London, WC2A 2LL
09/05/2018

B e f o r e :

LORD JUSTICE KITCHIN
LORD JUSTICE HENDERSON
and
LADY JUSTICE ASPLIN

____________________

Between:
BOTLEIGH GRANGE HOTEL LIMITED
Appellant

- and –


HER MAJESTY'S REVENUE AND CUSTOMS
Respondent

____________________

(Tarlochan Lall through Direct Access) for the Appellant
(Tiran Nersessian instructed by HMRC Solicitors' Office and Legal Service) for the Respondent

Hearing date: 25th April 2018

____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Crown Copyright ©

    Lady Justice Asplin:

  1. The single remaining issue on this appeal is the proper construction of a consent order and, therefore, whether a cross claim upon which the Appellant relies has been preserved. The Appellant, Botleigh Grange Hotel Limited (the "Company"), says that Andrew Simmonds QC, sitting as a Deputy High Court Judge in the Chancery Division, wrongly construed a consent order and, accordingly, was wrong to dismiss the application to restrain presentation and advertisement of a winding up petition which was before him. It is no longer argued that it was not open to the court on such an application to determine the merits of the underlying dispute in relation to the petition debt or an alleged cross claim rather than merely to decide whether the debt was the subject of a genuine and substantial dispute or was subject to a cross claim which was genuine and of substance, that an incorrect test was applied or that there was other evidence which would have been relevant to the task of construction.
  2. I take the essential facts from the Judge's judgment. The Company carries on business running a hotel outside Southampton and a number of coffee shops. A winding up petition was presented by the Respondent, Her Majesty's Revenue and Customs, ("HMRC") on 28 January 2014 based on a debt of £224,164 in respect of unpaid National Insurance contributions, PAYE, Corporation Tax and VAT (the "First Winding Up Petition"). The First Winding Up Petition was amended in January 2015 and after the deletion of some items and the addition of others, the petition debt amounted to £313,447 odd. Unaware that the First Winding Up Petition had been presented, in February 2014, the Company applied to restrain presentation. That application was subsequently continued as one to restrain advertisement and dismiss the petition on the grounds that the debt was disputed. A large amount of evidence having been filed, the application was heard before Stuart Isaacs QC, sitting as a Deputy Judge of the Chancery Division on 22 January 2016.
  3. Before judgment was handed down, settlement discussions took place. They are described succinctly by the Judge at paragraphs [6] – [11] of his judgment. There is no dispute in relation to the way in which the discussions are described and, therefore, it is convenient to set out those paragraphs as follows:
  4. "6. . . . This started with a letter dated 28th January this year from HMRC to the Company's then solicitors, Shakespeare Martineau LLP, and the relevant parts of that letter went as follows:
    "I write following receipt of an email from Mr. Doherty dated 27th January 2016, forwarded to me by Mr. Donnelly."
    Just pausing there, that should be a reference to Mr. O'Doherty, who is a director of the Company. The email referred to does not appear to survive. The letter continued:
    "I can now confirm that HMRC have reviewed the recent s.458 claim submitted on behalf of the Company in respect of the written-off director's loan account and agree a reclaim amount in the sum of £159,974 plus accrued interest of £994.91. This credit will be offset in priority against the outstanding Corporation Tax arrears included within HMRC petition number 672 of 2014, as amended, and reduce the PAYE arrears also listed within the petition. Charges included within the petition reduce to nil." Then it set out what those charges were and continued: "The balance will be utilised in reducing PAYE, NIC and student loan arrears for 2013/2014. Although the allocation of the credit has yet to be actioned the above represents the instruction I have provided to the Corporation Tax Officer reviewing the case. Taking into account the above, the balance of the petition debt outstanding amounts to £152,478.87. Upon receipt of CHAPS confirmation of payment in cleared funds received HMRC's solicitors will make the court aware of the settlement position and immediately seek dismissal of the petition with an order for costs."
    That last reference I think is clearly to an order for costs in favour of HMRC. By a matter of simple arithmetic, it will be seen that the total of the two amounts together, the s.458 reclaim capital plus interest was £160,968.91.
    7. That letter was acknowledged by an email sent by Shakespeare Martineau the next day, 29th January, at 14.34. This acknowledged receipt and replied as follows:
    "Further to our earlier email as requested we acknowledge receipt of your facsimile transmission and are pleased to see that the s.458 claim has been agreed. However, the allocation of the relevant monies remains in issue. It ought properly to be allocated to undisputed elements of the petition debt and not to disputed elements. Accordingly, we must reserve our client's position in this regard."
    8. The "relevant monies" in that email in my judgment is clearly a reference to the £160,968 reclaim amount, even though that was, of course, a credit being allowed by HMRC rather than a payment made by the Company. I consider that to be clear, firstly, from the reference to the s.458 claim in the first paragraph of the email and, secondly, the fact that HMRC's letter was concerned to set out in detail the "allocation" of that credit. Mr. Nersessian, for HMRC, suggested that the relevant monies in the context of that email were the £140,500 payment to which I have already referred. I do not accept that. There is no reference to that sum in The Revenue's letter of 28th January.
    9. This was followed by a letter dated 2nd February from HMRC. It is stated to be without prejudice but nobody has raised any objection to my considering it. It stated as follows:
    "I write with reference to the above company and the schedule produced by UHY and exhibited to the witness statement of Mr. O'Doherty dated 21st January."
    Pausing there, that is a reference to a schedule produced by UHY Hacker Young, the Company's accountants, for the purposes of the hearing before Mr. Isaacs. The schedule, which I have seen, asserted that many of the charges included in the first petition had been paid by the Company and it referred in terms to the £140,500 payment. The letter continued:
    "Within the UHY schedule it is indicated that many of the PAYE charges have been paid. Unfortunately, no information has been provided as to the specific payments that it is claimed clear the charge due. For example, I would need precise details of the payment intended to clear the charge together with details of the allocation instruction submitted along with the payment when it was made."
    The next paragraph:
    "I have attached for your information details of the payments received from the Company for the 2011/2012 to 2013/2014 periods and the allocation of these payments. If the Company has made payments in addition to these I can investigate the matter further if I am provided with full details of the payment. If full details are not provided I can only assume that your client is attempting to reopen points that have already been debunked in HMRC's witness statements."
    10. There has been some debate before me about whether the statements made in that letter were justified or not. It seems to me that the only thing that really matters is that it is clear from the two paragraphs I have just read that the Company's case in the first petition, based on payments including the £140,500 payment, remained disputed by HMRC.
    11. There was no response to that letter until a letter was sent by Shakespeare Martineau to HMRC on 17th February. That was headed "Without Prejudice Save as to Costs" and as it is an important letter I should read all of it.
    "We refer to your letter of 2nd February. As you are aware, our client disputes the petition debt and is confident the judge will find in its favour when judgment is handed down on 23rd February 2016. In such circumstances, our client will seek to recover costs. Notwithstanding, we are instructed that our client is prepared to pay the full amount of the petition debt, £152,478.87, on the basis that HMRC consent to the petition being dismissed and that each party pays their own costs in respect of the petition. For the avoidance of any doubt, the petition remains disputed and our client reserves its rights in this regard. We anticipate being in funds to pay the entire petition by close of business on Friday, 19th February. Please confirm your acceptance to our client's proposal and we will prepare a short settlement letter and notify the judge that settlement has, in principle, been agreed."
    It will be noted, of course, that the figure of £152,478.87 stated to be the full amount of the petition debt is the same figure referred to towards the end of HMRC's letter of 28th January. I have not been referred to any response from HMRC to this letter and I proceed on the basis that there was none. In fact, as indicated in the letter, the balancing payment was made by the Company on 19th February."

  5. On 23 February 2016 a consent order was made, having been approved by Mr Isaacs QC (the "Consent Order"). The first recital to the Consent Order sets out the fact that HMRC had presented the First Winding Up Petition on 28 January 2014 and the second recital explained the nature of the application which had been heard by Mr Isaacs QC, namely that it had been treated as an application to restrain advertisement and to dismiss the First Winding Up Petition. The next relevant recitals and the body of the Consent Order itself are as follows:
  6. "AND UPON HMRC having allowed the Company's claim for relief under section 458 Corporation Tax Act 2010 in the sum of £159,974, plus interest of £994.91
    AND UPON the Company having paid the sum of £152,478.87 to HMRC on 19 February 2016
    AND UPON the only supporting creditor to the winding up petition having been paid by the Company
    BY CONSENT IT IS ORDERED THAT:
    1. The winding up petition presented on 28 January 2014 be dismissed.
    2. The Company's application dated 4 February 2014 be dismissed.
    3. Any other pending or outstanding application to the petition do stand dismissed.
    4. No order as to costs."
  7. Shortly thereafter, HMRC served a further demand for £221,270 by a letter dated 24 March 2016 (the "March 2016 Demand"). The Company issued an application to restrain presentation and advertisement of a winding up petition based on the March 2016 Demand on 1 April 2016 and it was that application which was heard by the Judge in November of that year and which led to the judgment which is the subject of this appeal. On 18 April 2016, the Company's solicitors had written to HMRC making clear that the March 2016 Demand was disputed and suggesting that matters be resolved without reference to the winding up court, by means of the exchange of position papers and, in default of agreement, the appointment of an expert or arbitrator. That suggestion had been rejected by HMRC.
  8. By the time the matter came before the Judge, the Company's case was that, despite the Consent Order by which the First Winding Up Petition had been dismissed, the dispute about whether the First Winding Up Petition debt was due in its entirety had been preserved with the effect that the Company had a cross claim which exceeded the March 2016 Demand and, therefore, the presentation of any winding up petition based upon it should be restrained. The precise position was explained by the Judge at paragraph [20] of his judgment:
  9. ". . . The Company's case is that the effect of the consent order was to dismiss the first petition but to preserve as an ongoing unresolved dispute with HMRC the question whether the first petition debt was, in fact, payable in its entirety. It follows, so the Company argues, that it is entitled to offset the s.458 reclaim amount, namely £160,968, and the payment made on 19th February, namely £152,478, against only the undisputed part of the first petition debt, namely £128,995, so that also taking into account certain so-called time to pay payments, that results in a balance in the Company's favour which exceeds, by a small amount, the further debt claimed by HMRC in March 2016."

    HMRC's position was that the effect of the Consent Order was to discharge the entire debt which had been the subject of the First Winding Up Petition whether or not it had previously been disputed, that, accordingly, there could be no surviving cross claim to set against the March 2016 Demand and, therefore, it should not be restrained from presenting a petition based upon it.

  10. It is not in dispute that it is not the practice of the Companies Court to resolve disputes in relation to the liability to pay a petition debt whether arising in relation to the debt itself or a cross claim which equals or exceeds that debt. Generally, the Court restricts itself to determining whether the dispute is genuine and is based on substantial grounds, and if it is, the normal practice is to dismiss the winding up petition or to restrain presentation and/or advertisement and to require the petitioner to establish its claim in the usual way by bringing a Part 7 claim. If the Court decides that the dispute is not genuine and/or is not based upon substantial grounds, the creditor/petitioner will not be prevented from continuing with the winding up procedure. The reasons for this practice are threefold: first, care must be taken to avoid abuse of the winding up procedure by allowing a creditor to put pressure upon a company so that it has little alternative other than to pay a debt which is disputed on genuine and substantial grounds; secondly, it is usually the case that there is insufficient time to canvass all of the relevant evidence at the hearing of an application to restrain presentation or advertisement of a winding up petition and often the relevant evidence will not be available; and thirdly, the Companies Court procedure is not designed to cater for lengthy and complex hearings.
  11. It is now also accepted that the approach of the Companies Court in not determining the merits of genuine disputes that are based on substantial grounds is a matter of practice and not one of jurisdiction and that the court retains a discretion to do so: Brinds Ltd v Offshore Oil NL (1986) 2 BCC 98,916 per Lord Brightman at 98,921 and 98,922; Claybridge Shipping Co SA [1997] 1 BCLC 572 per Oliver LJ at 578h; Parmalat Capital Finance Ltd v Food Holdings Ltd (in liquidation) [2008] BCC 371 per Lord Hoffmann at [9]; and Tallington Lakes Ltd v Ancasta International Boat Sales Ltd [2014] BCC 327 per David Richards J (as he then was) at [5] and [41] with whom Patten and Thorpe LJJ agreed. There may be cases in which it is in accordance with the overriding objective to exercise the Court's discretion to determine the merits of the underlying dispute because: it is clear that all of the relevant evidence is before the court; the matter can be decided on the documents alone and that is accepted to be the case; counsel is fully prepared to argue the merits of the substantive dispute; and there is sufficient court time to do so.
  12. In this case, having recorded that: Mr Boardman, who appeared for the Company on the application, had stated that the application turned on one central issue, being whether the Consent Order compromised the First Winding Up Petition debt; the Consent Order had to be interpreted in the light of the correspondence between the parties which led up to it; the test to be applied in the construction of documents is an objective one; and that neither side suggested that oral evidence would be relevant or that there was any additional evidence which would assist which was not before the court, the Judge went on to determine the proper construction of the Consent Order. See paragraphs [20] and [22] – [24] of the judgment.
  13. The Judge considered the Consent Order in isolation and then went on to interpret it against the background of the email correspondence which preceded it. He considered that the terms of the Consent Order alone supported HMRC's position and reasoned in the following way:
  14. "25. . . Although the order does not explicitly state the amount of the amended petition debt it cross-refers to the petition so the amount is easily ascertainable. In my judgment, the obvious inference which a reasonable person would draw from the fact that the sum of the s.458 reclaim and the payment made by the Company on 19th February is precisely equal to the amount of the amended petition debt is that the Company was discharging the amended petition debt in full and that, in turn, explained why the petition was being dismissed. If that was not the intended effect of the order the reasonable person would expect the order to contain qualifying wording which explicitly preserved the dispute as to the recoverability of the petition debt. In other words one would expect to see a similar reservation of rights on the part of the company as is contained in the correspondence to which I have referred and will refer again shortly.

    26. The Company relies on the fact that the order states without more that it had "paid" the sum of £152,478 without stating what the effect of that payment was. But that, in my judgment, is insufficient to justify the inference that a dispute over recoverability was being maintained or preserved. The order also recites that the sole supporting creditor was "paid" by the company without more. Nobody has suggested that this creditor's debt was not fully discharged and I see no reason why the word "paid" should carry a different connotation in the previous recital. So, the question then arises whether the preceding correspondence between the parties to which I have already referred requires a different interpretation of the order."
  15. He then analysed the correspondence which preceded the Consent Order. He viewed the first letter in the sequence, being HMRC's letter of 28 January 2016, as an invitation to discharge the petition debt in full in the light of the way in which the section 458 reclaim had been offset against stated elements of the petition debt and then the Company had been invited to pay £152,478, described in the letter as "the balance of the petition debt outstanding". He then noted that Shakespeare Martineau's response on behalf of the Company of 29 January 2016 did not accept HMRC's proposal in relation to the section 458 reclaim, that they contended that that amount should be allocated to undisputed elements of the petition debt only and that they intended to preserve the dispute as to the recoverability of the debt. However, the Judge concluded at paragraph [28] of the judgment that Shakespeare Martineau's counterproposal that the section 458 reclaim be offset only against undisputed elements of the petition debt was not accepted in the light of the fact that there was no direct response to the 29 January 2016 letter and HMRC's letter of 2 February 2016 "shows that HMRC's position on the substantive merits of the dispute remained unchanged."
  16. The Judge then turned to the final letter in the sequence, being Shakespeare Martineau's letter of 17 February 2016 (the "17 February Letter"). He interpreted the phrase "For the avoidance of any doubt the petition remains disputed and our client reserves its right in this regard" as attaching a condition to the proposed payment of £152,000 odd and concluded at paragraph [29] as follows:
  17. ". . . In other words, what the Company's solicitors are proposing is that the ongoing dispute about recoverability of the petition debt is preserved. But crucially, it seems to me, the letter ends with the following statement: "Please confirm your acceptance to our client's proposal." This never happened. HMRC did not agree to a conditional payment. It no doubt considered that it would rather see what Mr. Isaacs decided than accept payment on a footing which required further litigation. In my judgment, therefore, what this correspondence reveals is that in respect of both the s.458 reclaim and the payment made on 19th February the parties were at loggerheads as to the treatment or proper allocation of those amounts. Accordingly, there was no agreed position which requires a different interpretation of the consent order from the one I have provisionally set out. What it amounts to is this. All the parties were able to agree on was the wording of the consent order and that order must be given effect in accordance with the meaning which a reasonable person with knowledge of the background would attribute to it. For those reasons, my conclusion is that the Company does not have a valid cross-claim and its application must be dismissed."

  18. Was the Judge wrong? Mr Lall on behalf of the Company says that the Judge erred in failing to recognise that the Consent Order was capable of two meanings and that, if it is construed in the light of the relevant factual matrix being the settlement correspondence, it is clear that it was intended that the dispute would remain live despite the payment of the petition debt in full. He relies upon the 17 February Letter in which it is stated twice that the petition debt is disputed and in particular, upon the second paragraph in which the proposal is set out. Given its importance, I will set it out again here:
  19. "Notwithstanding, we are instructed that our client is prepared to pay the full amount of the petition debt £152,478.87 on the basis that HMRC consent to the petition being dismissed and that each party pays their own costs in respect of the petition. For the avoidance of any doubt, the petition remains disputed and our client reserves its rights in this regard."

    Mr Lall submits that, despite the fact that there was no direct response to the 17 February Letter, HMRC accepted the proposal by conduct by receipt of £152,000 odd and their agreement to the terms of the Consent Order. He says that the Judge's conclusion that HMRC did not agree to the conditional payment is wrong and that his conclusion that it "no doubt considered that it would rather see what Mr. Isaacs decided than accept payment on a footing which required further litigation" is misconceived because that is exactly what HMRC did not do. Instead of waiting for the outcome of the hearing in relation to the First Winding Up Petition, it agreed to the terms of the Consent Order. By concluding that the proposal had not been accepted, Mr Lall says that the Judge was taking the impermissible step of drawing an inference in relation to what he had decided were HMRC's subjective intentions.

  20. Mr Lall submits that the Consent Order can be interpreted in two different ways, either as dismissing the First Winding Up Petition on the basis that the petition debt has been paid or as dismissing it whilst preserving the dispute and if one assesses its meaning in the light of the factors set out in the judgment of Lord Neuberger PSC in Arnold v Britton [2015] AC 1619, the latter is the correct interpretation. He says that the first substantive paragraph of the Consent Order is silent about the underlying debt and that the other relevant provisions being the recitals read as a whole are neutral as to whether the dispute is preserved. He submits that it is clear that the overall purpose of the Consent Order was to bring about the dismissal of the First Winding Up Petition and that if one interprets the Consent Order in the light of its factual matrix, being the preceding settlement correspondence, which evidences the facts and matters known or assumed by the parties at the time the Consent Order was made, the position is clear. The dispute was to be preserved. Furthermore, he says that his construction makes commercial common sense. The Company wanted to bring the winding up procedure to an end and to resolve the dispute about the extent of the petition debt in a more appropriate forum and HMRC obtained the security of having received the £152,000 odd, albeit that the dispute remained to be resolved.
  21. The particular passage to which Mr Lall referred us is at paragraph [15] of Lord Neuberger's judgment in the Arnold case:
  22. "When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38[2009] 1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. In this connection . . ."
  23. It is also important not to lose sight of Lord Neuberger's further guidance at paragraphs [17] – [20] as follows:
  24. 17. First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

    18. Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. . . .
    19. The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. . . .
    20. Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party."

  25. The approach to the interpretation of contracts has received further judicial attention in Wood v Capita Insurance Services Limited [2017] UKSC 24, [2017] AC 1173 per Lord Hodge in particular at [8] – [15]. Lord Hodge declined to reformulate the guidance in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 and Arnold v Britton. However, he described the Court's task at paragraph [10] as:
  26. " . . . to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning."
  27. He went on at paragraph [11] to endorse Lord Clarke's approach to construction in Rainy Sky and to make clear that all of the judgments in Arnold v Britton confirmed that approach. He added:
  28. "11. . . Interpretation is, as Lord Clarke stated in Rainy Sky (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause (Rainy Sky para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 paras 13 and 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: Arnold (paras 20 and 77). Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.
    12.              This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: Arnold para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 10 per Lord Mance. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each."
  29. In this case, the document to be interpreted is a Consent Order which not only embodies an agreement between the parties but is also a formal court document which has public significance. It is important therefore, to interpret it, not only in accordance with the guidance in relation to contracts which are bilateral or synallagmatic arrangements, but also in the light of its public significance. Mr Isaacs would not have approved the Consent Order if he had not been satisfied that it was appropriate for the Court to make such an order and that it properly addressed the relevant Companies Court procedure and issues. It must be construed in that context.
  30. In my judgment, the natural and ordinary meaning of the words contained in the operative part of the Consent Order is quite clear and the words do not, in themselves, give rise to rival meanings. Both the First Winding Up Petition and the application before Mr Isaacs in which he was being asked to determine whether there was a genuine and substantial dispute in relation to the petition debt are dismissed with no order as to costs. Those operative provisions must be construed in the light of the remainder of the Consent Order to be found in the recitals. They set out the context of the First Winding Up Petition and the application which was treated as an application to restrain advertisement and dismiss the petition. The sixth recital recorded the fact that the only supporting creditor had been paid. Such a step was essential if the Court was to make the Consent Order. A winding up petition is a not a bilateral matter. There may be supporting creditors and the Court is concerned to protect the public and to determine whether the company in question can pay its debts as they fall due.
  31. The fourth and fifth recitals refer respectively to the relief under section 458 Corporation Tax Act 2010 in the sum of £159,974 plus £994.91 interest having been allowed and the "Company having paid the sum of £152,478.87 to HMRC on 19 February 2016". Those sums amounted to the entirety of the amended petition debt of £313,447. Those recitals make no reference of any kind to the preservation of the dispute as to whether the entirety of the petition debt was due and the allocation of the sums allowed under the section 458 reclaim. It seems to me therefore, that the natural and ordinary meaning of the operative parts of the Consent Order when read in the light of the remainder of the document, is that the First Winding Up Petition was being dismissed without any reservation or condition. I agree with the Judge that the obvious inference which a reasonable person would draw from the fact that the sum of the section 458 reclaim and the payment made by the Company on 19th February 2016 was precisely equal to the amount of the amended petition debt was that the Company was discharging the amended petition debt in full and that was why the petition was being dismissed. It seems to me as it did to the Judge that had it been intended to preserve the dispute, the recitals would have contained at least some indication that that was the case. They do not.
  32. As Lord Hodge made clear in Wood v Capita, it has long been accepted that ascertaining the objective meaning of the language used by the parties is not a literalist exercise and that the court must consider the contract as a whole and depending on its nature and the quality of the drafting, give more or less weight to elements of its wider context. In this case, it is an important factor that the language is found in the most formal of documents, a court order, and save for the failure to mention the amount of the petition debt directly, on the face of it, it contains no drafting errors or ambiguities.
  33. As Lord Neuberger pointed out at paragraph [17] of his judgment in Arnold v Britton commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language actually used. There is no suggestion in this case that Mr Isaacs thought it necessary to make any amendment to the draft Consent Order with which he was presented. The language used was what the parties had agreed.
  34. It seems to me that Mr Lall was trying to encourage us to do exactly what Lord Neuberger counsels against. He wanted us to rely upon the surrounding circumstances, in the form of the settlement correspondence, in order to come to the conclusion that the operative parts of the Consent Order can be construed in more than one way and then to use that correspondence once again to provide the answer to the uncertainty created. As Lord Neuberger stated at paragraph [18] of his judgment in the Arnold case, the Court must be careful not to search for or construct drafting infelicities in order to depart from the natural meaning of the words.
  35. Of course, the operative provisions must be construed in the light of the facts and circumstances known or assumed by the parties at the time and commercial common sense, having disregarded subjective evidence of the parties' intentions and mere pre-contractual negotiations. Furthermore, as Lord Hodge pointed out in the Wood v Capita case, when carrying out the iterative process by which each rival interpretation is checked against the provisions of the document as a whole and its commercial consequences, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract. The court must balance the indications which arise from each of the relevant sources.
  36. At paragraphs [27] – [29] of his judgment, having looked at the relevant language in the context of the Consent Order as a whole, the Judge quite properly went on to construe the language in the light of the facts and circumstances known or assumed by the parties at the time. He concluded that the settlement correspondence contained nothing which required a different interpretation of the Consent Order from the one he had arrived at on the basis of the natural and ordinary meaning of the words construed in their factual context. He found that the proposal contained in the 17 February Letter had not been accepted and that the parties remained at "loggerheads".
  37. Mr Lall asks us to assume that the Company's proposal was accepted when the Consent Order was made. However, it seems to me that that is asking us to interpret the operative parts of the Consent Order by reference to what may have been the subjective intentions of the parties or to put the matter another way, to take into account pre-contractual negotiations in an impermissible way. Mr Lall seeks to undermine the natural and ordinary meaning of the operative parts of the Consent Order by reliance upon an assumption as to the parties' intentions for which there is no basis and which is inadmissible. He is seeking to depart from the objective test. Therefore, although I agree that the Judge was wrong to speculate about HMRC's intentions at paragraph [29] of his judgment when he stated that it "no doubt considered that it would rather see what Mr. Isaacs decided than accept payment on a footing which required further litigation" and was also probably wrong in relation to the speculation itself, nothing turns on it. It did not affect his conclusion.
  38. Lastly, what of commercial common sense? If Mr Nersessian who appeared on behalf of HMRC is right and the dispute was not preserved, what was the advantage to the Company of agreeing to the Consent Order? It brought an end to the pressure and potential detrimental effect on the Company of an impending winding up petition. It also secured no order as to costs. Had Mr Isaacs given judgment he may have found that there was no genuine and substantial dispute, HMRC would have been free to proceed with a petition and costs would have been likely to have been awarded against the Company. Alternatively, Mr Isaacs may have found in the Company's favour. What did HMRC gain from the Consent Order? If Mr Nersessian is right, the Consent Order amounted to a complete capitulation by the Company, other than in relation to the neutral costs order. If he is wrong, the only advantage to HMRC of the Consent Order would be the security of being in receipt of the £152,000 odd, albeit subject to the dispute instead of being at risk of Mr Isaacs deciding that there was a genuine and substantial dispute which had to be pursued by way of claim.
  39. As Lord Neuberger reminded us, commercial common sense is only relevant to the extent that it provides an indicator of how matters might have been perceived by the parties or by reasonable people in their position at the date at which the contract or, in this case, Consent Order was made. In this case, it seems to me that it does not provide a clear indication one way or the other. In the light of the fact that HMRC had not accepted the proposal in the 17 February Letter it may have made commercial common sense to accept the risk that Mr Isaacs might decide against the Company and therefore, to relieve the pressure on the Company and obtain a neutral order as to costs by agreeing to the Consent Order. If there was a real risk that Mr Isaacs would decide against HMRC it might have made commercial sense to agree to preserve the dispute, accept £152,000 on that basis and agree to the First Winding Up Petition being dismissed. It is impossible to say and it seems to me that the very exercise verges on the impermissible. In any event, as Lord Neuberger pointed out, the court should be very slow to override the natural and ordinary meaning of the language used because it appears that an imprudent term has been agreed.
  40. Overall, therefore, in my judgment, the Judge was right to decide that the Consent Order should be construed as a discharge of the First Winding Up Petition debt without the reservation of a dispute as to allocation and that, accordingly, there was no valid cross claim and the application before the Judge had to be dismissed. It follows that, for the reasons I have given, I would dismiss this appeal.
  41. Lord Justice Henderson:

  42. I agree.
  43. Lord Justice Kitchin:

  44. I also agree.


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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2018/1032.html