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Scottish Court of Session Decisions
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Cite as:  ScotCS CSOH_102
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OUTER HOUSE, COURT OF SESSION
OPINION OF LORD HODGE
in the cause
SYMPHONY EQUITY INVESTMENTS LIMITED
JAMES PETER BAILEY SHAKESHAFT AND OTHERS
Pursuer: Simpson; Anderson Strathern LLP
Defender: McGregor; bto
26 June 2013
 The pursuer ("SEI") is the trustee of a syndicate of investors known as the Symphony Equity Investment Syndicate ("the syndicate"), which was established to enable its members to invest in and provide loans to businesses. In particular, the syndicate invested in businesses that were underperforming or in distress. The defenders are present or past members of the board of the syndicate ("the board").
 The syndicate was established by a deed of trust dated 23 August 2007 and a constitution of the same date. Clause 10 of the constitution empowered the board to manage the syndicate's portfolio of investments for the benefit of all of its members, oversee the strategic direction of the syndicate and consider the investment recommendations of the fund manager, which was Caledonia Capital Managers Ltd. The board's remit under the constitution thus included decisions whether or not to invest in a particular business, how much to invest, and the means by which to make such investment.
 The constitution restricted the powers of the board. Paragraph 2 of schedule 2(B) to the constitution stated that the duties of the board included the duty:
"Not to invest by way of Investment and/or Loan any more than 20% of the aggregate initial cash deposited by Members in a single investee company without the prior approval in writing of a Majority of the Members ..."
SEI avers that the aggregate initial cash which members deposited was £5,508,000. Thus the board could invest no more than £1,101,600 in a single investee company unless it obtained the members' prior written approval. SEI alleges that the board failed to comply with this restriction on its powers and seeks damages from the defenders for breach of contract.
 SEI avers that in about November 2007 the board decided to invest in the McTavish Ramsay group of companies ("the MR group"), whose principal business was the manufacture and sale of fire doors. The MR group comprised a holding company, Ramkor International Ltd, and two wholly-owned trading subsidiaries, namely McTavish Ramsay & Co Ltd ("MRC") and Norlandia Ltd. The board decided to invest:
(i) £300,000 in McTavish Ramsay Group Ltd ("MRG") as a vehicle to acquire the MR group of companies;
(ii) £300,000 by way of loan to MRG;
(iii) £300,000 by way of guarantee to Clydesdale Bank plc ("the bank") in respect of money that the bank agreed to lend to the MR group of companies; and
(iv) £80,000 to Mr Ken Shepherd, the proposed managing director of MRG to allow him to invest in that company.
SEI avers that this investment, in aggregate £980,000, was made on about 21 January 2008. Mr Shepherd repaid his loan in April 2008.
 The board also gave the MR group an overdraft facility from which the MR group drew down £219,861 in July 2008. SEI avers that at this point the board breached the constitutional limit which I set out in para  above. SEI asserts that in November 2008 the overdraft was converted into a secured loan by means of a sale and lease back of equipment used in the MRC's manufacturing process. According to SEI, the substance of the sale and lease back was the grant of a security by MRC for the amount outstanding on the overdraft and that the deal was organised to circumvent the restriction in Scots law on the grant of a security over moveable property without taking possession of that property.
 On 25 February 2009 MRG drew down £180,000 on the overdraft facility. On 19 June 2009 the board decided to purchase loan notes issued by MRG to the value of £430,000 and did so in the following ten weeks. MRG used part of the proceeds to repay its overdraft of £180,000. SEI avers that by this time the syndicate had invested £1,549,861 in the MR group.
 On about 3 April 2009 the board decided to purchase shares in MRG from a Mr John Munro for £20,000 and paid the price in two instalments in July and September 2009. Finally, in about 7 October 2009 the board lent a further £39,000 to the MR group. SEI avers that, as a result, the total amount invested in the MR group was £1,608,862. The difference between that sum and the constitutional limit in para  above is £508,862.
 On about 9 February 2010 MRC entered into a voluntary arrangement with its creditors and thereafter went into receivership. The MR group was insolvent. The syndicate recovered only £38,388 from the sale of assets which were the subject of the sale and lease back. SEI claims £468,874 as damages arising from the defenders' breach of contract.
 In the debate which I heard, the defenders sought to challenge SEI's interpretation of the phrase "single investee company" in the constitutional limit. SEI raised three legal challenges to the defenders' averments in relation to (i) the effect of the guarantees to the bank, (ii) the sale and lease back transaction and (iii) causation of loss. I deal with each issue in turn.
The defenders' challenge
"Single investee company"
 The board's submission was simple. The phrase "single investee company" should be given its primary meaning in ordinary speech. It meant a distinct corporate entity in which an investment was made. SEI's case involved treating the aggregate of the companies in the MR group as a "single investee company". That case is irrelevant. Mr McGregor referred me to well-known cases which vouch that the separate personality of a company is a real thing (Salomon v Salomon & Co Ltd  AC 22, Woolfson v Strathclyde Regional Council 1978 SC (HL) 90, Adams v Cape Industries plc  1 Ch 433 and Watt's Trustee v SPS (Holdings) Ltd 2000 SC 371).
 There is, in my view, no doubt about this established line of authority, which recent pronouncements of the UK Supreme Court uphold (VTB Capital plc v Nutritek International Corp.  UKSC 5, Lord Neuberger at para 138 and Prest v Petrodel Resources Ltd  UKSC 34, Lord Sumption at para 8). Thus the starting point, in determining the ordinary meaning of the words in question, is a recognition of that separate personality. As Slade LJ stated in Adams (above) at 532D-E:
"There is no general principle that all companies in a group of companies are to be regarded as one. On the contrary, the fundamental principle is that 'each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate legal rights and liabilities:' The Albazero  AC 774, 807, per Roskill LJ."
 In answer, SEI submitted that the contract, being a commercial document, should be given a commercial interpretation. Its case was that the true construction of the phrase "single investee company" in the constitution was not the ordinary meaning of those words but a meaning which made commercial sense of the phrase by making it an effective means of regulating investment risk. The constitutional limit was designed to protect the funds of the members by spreading risk, unless the members consented to a concentration of risk. Where a number of companies were part of a group of companies, they were often financially inter-dependent. It was often the case that the companies would have granted cross-guarantees in favour of a bank or other funder. The deed of trust in recital A spoke of making investments in "businesses". Clause 3.2 of the constitution listed as one of the objects of the syndicate the purchase of a portfolio of investments "from businesses". The purpose, Mr Simpson submitted, was to invest in particular businesses or undertakings. SEI's averred case was that
"the term 'single investee company' is to be interpreted as encompassing a single undertaking, even if operations of that undertaking are carried out by different companies."
He accepted that the concept of an "undertaking" was less clear cut than that of a single company. But the board could protect itself by the obtaining of members' consent where there was any uncertainty whether a group of companies comprised a single undertaking and was thus a "single investee company".
 Mr Simpson submitted that in this case the syndicate had targeted MRC. It created MRG as the vehicle to take over the MR group and thereafter invested in the group companies as one undertaking. It would make no commercial sense to treat the investments in different companies in the group as separate investments for the purpose of the constitutional limit. SEI averred that the board treated the investment in the MR group as a single investment and reports to the board treated investment in the MR group in that way. The companies in the MR group had granted cross-guarantees to Clydesdale Bank plc. They were thus financially interdependent. The board's treatment of the investments as a single investment reflected that reality.
 The issue is one of the construction of the deed of trust and the constitution, as clause 1.1 of the latter provides that words and expressions on those documents have the same meaning unless expressly provided otherwise. The task of construction is to ascertain objectively what the parties to a contract meant by the document they chose to agree. This involves ascertaining the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were when they made the contract (Investors Compensation Scheme Ltd v West Bromwich Building Society ("ICS")  1 WLR 896, Lord Hoffmann at 912H-913F). When the court is called on to interpret a commercial document, it will seek to construe the words which the parties have used in a common sense, practical way. As Lord Steyn said, the courts will seek to apply a "commercially sensible construction" of a contractual provision and so uphold the reasonable expectations of honest business people (Mannai Investment Co Ltd v Eagle Star life Assurance Co Ltd  AC 749, at 771A; and his extra-judicial writing in  113 LQR 433 at 434). But that does not empower the court to rewrite the contract which the parties have made to achieve what it considers to be a more sensible commercial arrangement.
 In construing the contract the court must have regard to the shared knowledge of the parties which comprises the factual matrix (Inglis v Buttery & Co (1878) 5 R (HL) 87, Lord Blackburn at 103; Bank of Scotland v Stewart (1891) 18 R 957,Lord President Inglis at 960; ICS, Lord Hoffmann at 912H-913B). The emphasis on context in the interpretation of words and phrases in a contract enables the court to correct mistakes which are apparent from a consideration of the surrounding circumstances (Credential Bath Street Ltd v Venture Investment Placement Ltd  CSOH 208, Lord Reed at para 23). In this case the parties have not averred particular circumstances of shared knowledge which would affect the interpretation of the document which they agreed. Rather, I am invited to have regard to (i) the nature of the document as a constitutional document which governs the commercial relationship between the members of the syndicate and the board and (ii) the commercial purpose of the limit which the constitution placed on the board's powers of investment.
 In my view, this is a case in which it is correct to give effect to the ordinary meaning of the words which the parties have chosen to use. In Charter Reinsurance Co Ltd v Fagan  AC 318 Lord Mustill stated (at 384B-C):
"I believe that most expressions do have a natural meaning, in the sense of their primary meaning in ordinary speech. Certainly, there are occasions where direct recourse to such a meaning is inappropriate. Thus, a word may come from a specialist vocabulary and have no significance in ordinary speech. Or it may have one meaning in common speech and another in a specialist vocabulary; and the content may show that the author of the document in which it appears intended it to be understood in the latter sense. Subject to this, however, the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used."
Lord President Rodger referred to this statement with approval in Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657 at 661E-H.
 I do not think that the word "company" in the phrase "single investee company" should be given an extended meaning. I have reached this view for the following four reasons. First, the deed of trust and the constitution were drafted by skilled solicitors who had extensive commercial experience. They must be taken to have been very familiar with the principle of separate corporate personality. There is no ambiguity in the phrase "single investee company". If they had wished to express a limit on the power of the board to invest in companies within a group of companies, they could have chosen words which clearly achieved that result. Secondly, the document is a formal constitution which delimits the powers and duties of the board and the trustees. It is important that there is clarity in such a document. Mr Simpson sought to persuade me that the limit was on investing in a single undertaking or business. But the concept of a business or an undertaking in which a group of companies is involved is much less clear than that of a single company. There would be difficult questions as to the degree of financial inter-dependence required for a group of companies to be a "single investee company" for the purposes of the constitution. It would be necessary to decide whether there had to be cross-guarantees or a particular degree of integration of the businesses carried on by separate companies within a group.
 Thirdly, consistency of construction of phrases used in the deed of trust and the constitution points towards the ordinary meaning of the phrase. The phrase "investee company" is used in clause 1.1 of the deed of trust in the definitions of "loan" and "security" where the recipient of a loan or the granter of a security would have to be a single corporate entity. Fourthly, I consider that if I were to uphold Mr Simpson's submission I would be doing violence to the language that the parties had used. This is not a case where the contract is unclear or where one can infer that the parties have made a mistake in the words they have chosen to express their agreement. In Pink Floyd Music Ltd v EMI Records Ltd  EWCA Civ 1429, Lord Neuberger MR stated (at para 22)
"... before the court can be satisfied that something has gone wrong, the court has to be satisfied both that there has been 'a clear mistake' and that it is clear 'what correction ought to be made' (per Lord Hoffmann in Chartbrook  1 AC 1101, paras 22-24, approving the analysis of Brightman LJ in East v Pantiles (Plant Hire) ltd (1981) 263 EG 61, as refined by Carnwath LJ in KPMG LLP v Network Rail Infrastructure Ltd  Bus L R 1336)."
I am not confident that there was a mistake or that the parties would have agreed a restriction which referred to a single investee business or a single investee undertaking because of the uncertainty inherent in such phrases. It is not open to the court in these circumstances to substitute for the parties' contract an arrangement which it considers to be more sensible.
 What the board actually did after the contract was signed does not determine meaning of words the parties used in their contract. It is a well-established general rule that a contract should be construed without reference to the subsequent conduct of the parties (Cameron (Scotland) Ltd v Melville Dundas Ltd 2001 SCLR 691; McBryde, The Law of Contract in Scotland (3rd ed.) para 8-30). I do not doubt that it was consistent with the spirit of risk limitation, which para 2 of schedule 2(B) of the constitution addressed, that the board analysed its investment in companies within the MR group of companies as one investment. But that cannot determine the meaning of the constitutional limit in that paragraph.
 I am therefore persuaded that SEI's averments in articles 9 and 13 of condescendence which assert that the MR group was a "single investee company" are irrelevant and should be excluded from probation.
The pursuers' challenges
(i) The effect of the guarantees
 The board in its defences seeks to argue that the guarantee which it provided to Clydesdale Bank plc on behalf of SEI in respect of £300,000 of MRG's indebtedness does not fall within the calculation of sums invested in MRG so as to count toward the constitutional limit on the board. The definition of "loan" in the deed of trust includes a guarantee in consideration of a lender providing a loan or other financial accommodation to an investee company. Thus a guarantee could be included within the constitutional limit. But, the board avers, the guarantee was not a loan in respect of the aggregate initial cash deposited by members because clause 5 of the guarantee provided that
"the bank shall only seek to recover sums due under this guarantee to the extent that the Syndicate has made a gross profit on the sale or other disposal of any part of the Portfolio (as defined in the Deed of Trust) which has been funded by the bank prior to such sale or disposal."
The board avers that the bank did not fund any other part of the syndicate's portfolio and that it could not therefore call upon its guarantee.
 Mr Simpson submitted that the board's averments were irrelevant because the guarantee subjected the funds otherwise available to the members of the syndicate to further risk. It did not matter that the bank could recover only from profits from the disposal of parts of the portfolio which it funded. For the purpose of the constitutional limit, it was the maximum potential exposure of the fund that was relevant. The board did not know when it gave the guarantee what the future profits would be. The constitutional limit was designed to restrict the fund's exposure to a particular business. The sums committed under a guarantee fell to be counted towards that limit.
 I am satisfied that the board is wrong in its averment that the guarantee cannot count towards the constitutional limit because
"the guarantee was not a loan in respect of the aggregate initial cash deposited by members."
In my view the parties did not intend the formula of the constitutional limit to mean that the limit applied only in relation to investments made out of the initial cash deposited. The parties must have envisaged that, over time, if there were successful investments, the fund would grow as the board disposed of investments at a profit. While those profits might be characterised as the fruits of the members' initial investment, they would not be the initial investment. I see no commercial rationale in allowing the board complete freedom in the investment of the profits, which were part of the fund, while maintaining the constitutional limit in respect of funds which were to be identified as the aggregate initial cash deposited. Rather, I construe the constitutional limit as involving a formula in which the initial cash deposited, being a known or easily ascertained sum, is simply the denominator and the total invested in the single investee company is the numerator.
 I do not consider the board's averments about the guarantee are otherwise irrelevant.
(ii) The sale and lease-back transaction
 In article 13 of condescendence SEI avers that the sale and lease back of equipment to which I referred in para  above was in substance the grant of a security and that it therefore counted towards the constitutional limit. While the transaction took the form of a sale and lease back between MRC and Symphony Corporate Ltd dated 3 November 2008, SEI avers that the price of the equipment (£219,861) was fixed by reference to the outstanding overdraft and not any valuation of the equipment. Neither SEI nor Symphony Corporate Ltd took possession of the equipment. Thereafter, the board's reports referred to the sum of £219,861 as part of the amount invested in the MR group. In answer 13 of its defences the board denies these averments but refers to the sale agreement and avers that Symphony Corporate Ltd acted as agents for SEI. It avers that the equipment was marked with plaques stating that SEI was the owner. It asserts that it was empowered under clause 12 of Schedule 2(A) to the constitution to acquire such property "as was reasonably necessary for the proper management of the portfolio" and that the purchase of the equipment did not represent an investment by the board.
 Mr Simpson submitted that the board's averments were irrelevant to set up a genuine sale and lease back. He referred to section 62(4) of the Sale of Goods Act 1979 which provides that the provisions of the Act about contracts of sale do not apply to a transaction in the form of a contract of sale which is intended to operate by way of security. He also referred to Robertson v Hall's Trustee (1896) 24 R 120 and Ladbroke Leasing (South West) Ltd v Reekie Plant Hire 1983 SLT 155.
 I am not persuaded that it is appropriate to exclude from probation the board's averments on this issue. The intention behind the transaction is a question of fact to be inferred from the circumstances which are established after a proof (Ladbroke Leasing (above), Lord Grieve at 159). I therefore refrain from further comment.
(iii) Causation of loss
 Finally, Mr Simpson attacked the board's unflattering defence in answer 15 to the effect that SEI had suffered no loss because none of the board's investments had been successful and, if it had not invested as much in the MR group, it is likely that it would have lost the money in some other ailing business. Mr Simpson submitted with some justification that that defence lacked specification and thereby failed to give fair notice of what was to be asserted. Mr McGregor accepted that there was not sufficient notice but explained the board's position that it would probably have invested spare funds in other companies already within its portfolio. None of those investments had succeeded.
 I am persuaded that it is not appropriate to delete the averments on causation for want of specification. The rules governing commercial actions give the court sufficient powers of case management to require timely disclosure of a party's case where the pleadings are not sufficiently specific, for example by the early disclosure of signed witness statements. I think that fair notice can be achieved by those means.
 I will have the case put out by order to allow parties to consider my findings and to discuss further procedure, including the adjustment of their pleadings to reflect those findings.