Smith v. Bridgend County Borough Council

Factual and Procedural Background

In 1991 the Defendant (“the council”) engaged Company A (“the contractor”) to carry out large-scale land rehabilitation works. The contract incorporated standard conditions issued by the Institution of Civil Engineers (ICE). Two coal-washing plants, purchased with £1.8 million advanced by the council, were brought onto the site and expressly included within the contractual definition of “plant.”

In August 1993 the contractor abandoned the works and, pursuant to ICE condition 63(1), the council entered the site, expelled the contractor and arranged for Company B to complete the project while using the contractor’s washing plants. On 8 September 1993 the contractor entered administration and the Appellant was appointed administrator.

The Appellant demanded the return of the washing plants, asserting that the council’s contractual power to sell or use the plant constituted an unregistered floating charge void against an administrator under section 395 of the Companies Act 1985. Summary proceedings under section 234 of the Insolvency Act 1986 were issued in November 1993. In January 1994 the council and Company B executed a “continuation contract” under which Company B would become owner of the washing plants upon completion of the works; the plants were later removed and sold.

At first instance the charge was held to be fixed and therefore valid; the application was dismissed. The first Court of Appeal rejected that view, holding the power of sale to be an unregistered floating charge and therefore void against the administrator. Relying on that guidance, the Appellant issued a fresh writ for damages in conversion and obtained summary judgment plus an interim payment. A second Court of Appeal, however, set aside the judgment on the ground that section 395 renders the charge void only against the administrator personally, leaving it valid against the company and therefore an effective defence to conversion. The Appellant appealed to the House of Lords.

Legal Issues Presented

1. Whether the council’s contractual right to sell the contractor’s plant and apply the proceeds to the contractor’s debt created a registrable floating charge within section 395 of the Companies Act 1985.
2. If the charge was registrable but unregistered, whether it was void against the company acting by its administrator, thereby invalidating the council’s power of sale and use.
3. Whether the council’s disposal of the washing plants to Company B constituted the tort of conversion.
4. Whether the council could rely on equitable or insolvency set-off to reduce or extinguish any damages for conversion.
5. Whether the action should have been brought in the name of the administrator or in the name of the company in administration.

Arguments of the Parties

Appellant's Arguments

• ICE condition 63(1) granted the council a security interest that operated as a floating charge over fluctuating plant and materials; the charge therefore required registration under section 395.
• Because the charge was unregistered, section 395 renders it void against the administrator, i.e., void against the company in administration.
• The council’s grant to Company B of ownership rights over the plants amounted to conversion once the company became entitled to possession.
• Equitable and rule 4.90 set-off are unavailable because conversion is not a “mutual dealing” and the council cannot improve its position through its own wrongful conduct.
• The claim properly vests in the company; any technical misdescription of parties should not bar relief.

Defendant's Arguments

• Condition 63 did not create a charge at all; alternatively, it created a fixed charge that required no registration.
• Even if floating, section 395 invalidates the charge only against the administrator personally, not against the company, preserving a defence to conversion.
• No conversion occurred because (a) the council was entitled to retain possession until completion of the works and (b) the physical removal was carried out by Company B.
• In any event, the council is entitled to set off its substantial contractual claims against any damages awarded for conversion.

Table of Precedents Cited

Court's Reasoning and Analysis

The House, per Judge Hoffmann (with all other Lords concurring), proceeded in four analytical steps:

1. Nature of the Security. Condition 63(1) granted the council a right to sell fluctuating plant and materials and to apply proceeds to the contractor’s debt. Such a right is “nothing other than a charge” and, because the contractor could ordinarily remove or replace assets (subject to the engineer’s consent), the charge floated over a shifting body of assets.
2. Effect of Non-registration. Section 395 renders an unregistered floating charge “void against the administrator,” which the House interpreted as void against the company acting through its administrator. Consequently, once administration commenced, the council had no effective security over the washing plants.
3. Tort of Conversion. By contracting in January 1994 to transfer title in the plants to Company B, and by affirming that consent when Company B later removed the machines, the council wrongfully interfered with the company’s proprietary rights, constituting conversion. The absence of an immediate possessory right at the contract date merely postponed—rather than negated—the tort.
4. Set-off and Equitable Relief. Conversion is not a “mutual dealing” for rule 4.90 purposes, and equity will not grant a set-off that would resurrect a security rendered void by statute. The council’s cross-claims therefore do not reduce liability.

Holding and Implications

HELD: The appeal is allowed; the judgment and interim payment order of Judge Toulmin QC in favour of the company (for damages to be assessed and an interim payment of £389,000) are restored.

Implications: The decision confirms that (1) contractual powers of sale akin to those in ICE condition 63 create floating charges requiring registration; (2) failure to register renders the charge void against a company in administration or liquidation; and (3) parties cannot rely on equitable or insolvency set-off to circumvent the statutory consequence. The ruling provides authoritative guidance for construction industry contracts but sets no new statutory rule.