Hartley v Hartley

This is an appeal, with leave granted by myself, from a judgment given against the defendant by HHJ Rudd in the Southampton County Court on 4^th April and his consequent order dated 7^th April 2003. The judgment was in respect of loans which the claimant alleged that he had made to the defendant totalling £66,000 in late 1995 and 1996, plus interest and costs.

The claimant, Jeremy Hartley, and the defendant, John Hartley, are brothers. They have for convenience been referred to simply as Jeremy and John, and I will continue to do this. At the time of the alleged loans, each controlled his own company: in the case of the claimant, Stagwood Industries Ltd. (“SIL”) trading as Dataracks and, in the case of the defendant, I. T. Region 2 Ltd, later known as QuMetric Technology Ltd. (“QTL”) trading as Inovex Technology. QTL has been in creditors’ voluntary liquidation since 5^th November 1998.

That five loans were made is common ground. The issues for trial were whether they were made by Jeremy and to John, as Jeremy claimed. John’s case was that the first four were made by SIL, and that all five were in any event made to QTL, not to himself personally. The loans were made as follows: £20,000 on 9^th November 1995; £15,000 on 22^nd December 1995; £15,000 on 28^th February 1996; £10,000 on 16^th May 1996; and £6,000 on 1^st July 1996. All five loans took the form of transfers to QTL. The first four transfers came from SIL, but were all debited to Jeremy’s director’s loan account with SIL. The fifth came from Jeremy direct.

It is common ground that, at the time of the first loan, Jeremy was contemplating the possibility of an investment, which would have led to the issue of shares to him, in QTL or some other company controlled by John. But no shares were ever actually issued or agreed to be issued. John wrote on 24^th November 1995 enclosing (in the form of a document dated 19^th November 1995) “the Business Plan we have been discussing”. This referred to Jeremy as one of three “investors” (the others being John and a third person) in a new company, to be called QuMetrics (or QuMetrics Systems) Ltd. which was to invest in QTL (then still known as I. T. Region 2 Ltd.). John prepared internal management accounts for November 1995 and subsequent months which went so far as to show a £20,000 increase in the share and share premium account of QTL. But at a meeting on 22^nd December 1995, attended by Jeremy, John and a Mr Peter Wall (Jeremy’s company accountant), Jeremy indicated that he did not want to invest in any company, at least at that stage. So it is common ground that the £20,000 already paid, the further £15,000 paid on 22^nd December 1996, and the subsequent three payments, all fall to be treated as loans. The third loan, made on 26^th February 1996, was shown in QTL’s cash receipts journal as loan capital under the name “Stagwood Industries”. QTL’s subsequent internal accounting documentation is not available.

The hearing before the judge started at 10.30 a.m. and lasted a full day. He heard oral evidence only from Jeremy and John, and had a number of documents before him. He started his judgment after 4.15 p.m., shortly after final submissions had been completed, and the case was over at about 5.00 p.m. It is an understandable wish of any judge, who has formed a clear view of the outcome in a relatively straightforward dispute, to give judgment immediately in order to avoid the parties having to come back on another day. But this should not be at the expense of a proper examination of the issues, and of the central factors bearing on their resolution. The judgment in the present case was regrettably short on such examination, a matter which has both led to this appeal and made it difficult to resolve. The following words of the Master of the Rolls giving the judgment of this Court in English v. Emery Reimbold & Strick Ltd. [2002] 3 AER 385, para. 18 are in point:

But, as the Court in English went on to underline at para. 26, this Court will review even an inadequately reasoned judgment, in the context of the material evidence and submissions at the trial, in order to determine whether, when all these are considered, it is apparent why the judge reached the decision that he did. If satisfied that the reason is apparent and that it is a valid basis for the judgment, the appeal will be dismissed. If despite this exercise the reason for the decision is not apparent, then the appeal court will have to decide whether itself to proceed to a rehearing, or to direct a retrial.

In the present case we have had a full transcript of the oral evidence, together with all the relevant documentary material; and we have heard detailed argument on all issues which could affect credibility and probability. The argument has probably been fuller than that presented at short notice before the judge. Mr Clutterbuck in his able opening submissions for the present appellant submitted that the judge had no proper grounds for disbelieving John, or, even if he did, for deciding the case positively in Jeremy’s favour. He invited us on that basis to reverse the judgment and decide the case in John’s favour. He expressly disclaimed any application for a retrial. Mr Van Tonder for Jeremy likewise invited us to decide the appeal one way or the other. Only in the last words of his reply did Mr Clutterbuck revise his approach by asking us after all to consider ordering a retrial, if we were otherwise against his client. That, as counsel recognised, should only be a last resort in a case like this, where the costs on both sides may already be in the region of the amount in issue, and must on any view be very substantial in comparison with it.

The judge said that it was a simple matter of deciding who was telling the truth. He found that the claimant, Jeremy, gave “straightforward” evidence, which he accepted. The credibility of the defendant, John, was on the other hand open to challenge, because (as John accepted in evidence) he had in January 1997 knowingly signed company accounts which gave an entirely false picture of QTL’s affairs as at 31^st March 1996. In particular they showed a further £20,000 of the loans to QTL as share capital issued to John, when there had never been any such issue. John’s explanation was that he had, by then, had to cede control of QTL, and that QTL’s new controlling shareholders pressurised him to present this false accounting position, to persuade QTL’s and perhaps others bankers that its debt to equity ratio was healthier than it in fact was. The judge was entitled to regard such misconduct as affecting John’s credibility, and there was no challenge to his so doing before us. The judge might also have pointed out that statements in QTL’s Business Plan Reviews dated 17^th June and 29^th July 1996, i.e. at times before John had found a buyer for QTL’s shares, referred to “a total of £65,000 provided in one way or another by the founders’”. John’s only explanation for this was that he was treating Jeremy as one of the “founders”. But Jeremy, by then, had made clear that the loans were loans, not capital investments. An alternative explanation, which would be consistent with Jeremy’s case, is that the “founder” providing the £65,000 was John, using loans made to him (though transferred direct to QTL).

The judge said at one point that “for me that [the judge’s view on credibility] ended the matter”. But he did a little later add that “That alone is not sufficient to say I do not believe what he [John] says”. He acknowledged that the QTL management accounts, for November 1995 and subsequently, lent some support to John’s case. But it was in his view insufficient to persuade him that John’s version was correct: “This was an affair between brothers”, and he went on to repeat that he accepted what Jeremy said about it. He also said that he took into account that Jeremy’s solicitor and Mr Peter Wall, his accountant, had originally made claims first on QTL alone by letter dated 17^th August 1999, and then by letter dated 19^th January 2000 on QTL’s parent, although this second letter contained a reservation of rights against John. Only on 25^th March 2000 did they claim against John. The judge said in this connection:

Mr Clutterbuck puts at the heart of John’s appeal the propositions (i) that the mere fact that John lacked credibility does not necessarily justify a conclusion opposite to his evidence, and (ii) that Jeremy’s case itself lacked support in his evidence and was improbable having regard to other material before the judge. The first proposition is correct. At the heart of the second proposition were Mr Clutterbuck’s submissions that Jeremy’s evidence was no more than that he was “clear in his own mind” that the loans were to John personally; that this was a description of a subjective state of mind, possibly even only now rather than in 1995-1996, and that Jeremy had never described any conversation or explained any matters from which it followed that payments being made directly to QTL were, when viewed objectively, loans to John.

In my judgment, the judge was entitled to treat Jeremy’s evidence as going further than Mr Clutterbuck submits. It is true that Jeremy used the phrase quoted, and also that his evidence was unspecific about, in particular, the course of the important meeting of 22^nd December 1995. But Jeremy recounted in his statement a previous bad experience he had had after giving extended credit terms to another of his brother’s companies (it had then gone suddenly into liquidation, to which John had simply said: “That’s business”); and he made clear that the agreement reached on this occasion was, in contrast, for loans to John, so that he could support his company, to which the funds were transferred direct in the interests of speed. It was a “brother to brother” approach, with John saying that he would repay such loans, albeit with sums which he envisaged obtaining from QTL as and when QTL received funds. In his oral evidence, he made similar statements, and said that he had felt happier lending to his brother. All this is only consistent with it having objectively been understood and agreed on both sides on 22^nd December 1995 that the loans would be brother to brother. John’s case was put to him in general terms, but Jeremy was not cross-examined more specifically as to the precise words or the course of the conversation on 22^nd December 1995, which led to this result, which on his evidence had been both understood and agreed. In these circumstances, there was sufficient basis for the judge’s finding that Jeremy’s evidence, if accepted, showed that the agreement was for personal loans between brothers.

The judge was clearly satisfied that he could rely on Jeremy’s evidence, which he was well-placed to evaluate. The transcript shows that there were points, which the judge might have held against Jeremy. In particular, he was apparently inconsistent in his evidence about the extent to which John promised, or he (Jeremy) was interested in, speedy repayment. But this point does not appear to have been emphasised before the judge, since it was not relied on in the appellant’s notice or skeleton before us. John also wrote an apparently unanswered letter dated 9^th June 1997 to “Elaine” at SIL, with a copy to QTL’s new parent, in which he referred (when responding to an enquiry about an entirely separate trade debt) to “the personal loans which Jeremy has made to my company”. But that letter was never put to Jeremy and there is nothing to suggest that he would ever have seen it. Further, it was written after John had had to cede control of QTL, and retained only 20% of its shares with additional shares in its new parent, so that it may well have been self-serving. I can therefore attach no significance to the letter dated 9^th June 1997 or the absence of any known answer regarding the reference to Jeremy’s personal loans.

The judge was satisfied that the serial demands made through solicitors in 1999-2000 - first on QTL, then on its parent with a reservation of rights against John and finally on John - should not be regarded as undermining Jeremy’s account. The judge’s examination of the relevant evidence and considerations in this area was rightly criticised before us. Jeremy’s evidence was that he had given clear instructions to Mr Wall to pursue John. Yet, according to him, Mr Wall, who was not called, must have made a mistake in writing (first) to the liquidator who was by then responsible for QTL’s affairs. Yet Mr Wall was at the meeting on 22^nd December 1995 when, according to Jeremy, it was agreed that any loan would be personal. Also, according to Jeremy, Mr Wall failed to revert to Jeremy for instructions between 17^th August 1999 and some date between 19^th January and 25^th March 2000. On the other hand, the claims made through solicitors in 1999-2000 cannot on any view have been given the benefit of much attention. The large gaps in timing and the (from a legal viewpoint) hopeless direction of the second claim on 19^th January 2000 at QTL’s parent, with no more than a reservation of rights against John, speak for themselves. The first claim was also written under the heading “Our client: [SIL]”, but the text of all three letters referred to the solicitors as acting for both SIL and Jeremy.

Mr Clutterbuck also fairly criticises the absence of express reasoning by the judge in relation to the identity of the lender, beyond a general acceptance of Jeremy’s evidence. But the way in which the first four loans were treated by SIL (their debiting to Jeremy’s loan director’s account) made clear that the monies were being treated as an advance by SIL on Jeremy’s behalf. On Jeremy’s case, it was expressly agreed with John that all five loans were being made by Jeremy personally, from whatever source he procured the money. Consistently with his general view of Jeremy’s credibility, compared with John’s, the judge must have accepted this. Even John in his letter dated 9^th June 1997 did not suggest the contrary. I add that, if nothing had been said to indicate that these were loans by Jeremy personally, the fact that the loans were debited by SIL to Jeremy’s personal account would have been a clear indication that, as between SIL and Jeremy, they were being made by SIL as agent for Jeremy as an undisclosed principal. Although the claim was not put in this way, it appears wholly unrealistic to suggest that John or QTL could or would have insisted, or had any reason to insist, that the loans should come from SIL, rather than Jeremy. So, Jeremy would appear to have had a right to intervene and claim as an undisclosed principal in any event. Be that as it may, the judge’s conclusion that the loans were made by Jeremy personally seems to me to have been inevitable.

In view of the limitations in the judge’s reasoning, it is necessary to examine closely all the material before us, in order to assess whether it provides any sensible basis for upsetting the judge’s preference for the evidence given by Jeremy as opposed to that given by John. The course of argument before us has highlighted several points which were made before the judge, but were referred to at best obliquely in his brief judgment. The first is the frequency with which loans were made, and the improbability that they would have been made, save in the context of a brotherly relationship. That money was urgently required is consistent with the timing of the first two payments - the first made while the brothers were discussing the basis on which it might be made, and the second made in the next month and on the same day as they agreed such basis. John himself admits that the fifth loan was requested because QTL found itself with unexpected cash flow difficulties caused by late payments from a previously good major client. On Jeremy’s case all the loans were urgent.

Second, in John’s business plan of 19^th November 1995, any share holding to be assigned to Jeremy was to be determined by two factors, the first the assurance of getting at least a building society return if the company did not do well or “nothing goes right” and the second the reasonable prospect of realising a ten-fold increase in value, if the company could achieve a value of £5 million over about five years. The actual loans were clearly made on a completely different basis. There was no possibility of any participation in growth. There was no payment, and no agreement for payment, of interest at any rate, although John maintained, without being able to point to any positive support for this, that interest was to be rolled up and repaid with the capital in some way and at some time. The circumstances in which repeated loans came to be made and simply left outstanding have the flavour of the brotherly relations which the judge found. The judge noted in the course of his reasons that “there were no interest terms”. In this respect also he must therefore have been accepting Jeremy’s rather than John’s evidence. I do not find that surprising.

Looking at the matter overall, I do not consider that the limitations in the judge’s reasoning constitute a basis for upsetting the judge’s general conclusion that he could accept Jeremy’s, rather than John’s, account. The judge could and should have dealt with some of the sub-issues arising on the evidence more fully. But either he had in mind the points which can be made in favour of Jeremy on these sub-issues; or, if the matter is treated as one on which this court should form its own conclusion as to the correctness of the result he reached, they are in my opinion insufficient to lead to an opposite conclusion to that which the judge reached regarding the two brothers’ relative credibility and reliability on the central issue regarding the nature and basis of the loans agreed. The suggestion made at the end of Mr Clutterbuck’s reply, that the position is so unsatisfactory and uncertain that we should set aside the judgment and order a retrial, is one that I reject. That would, as both counsel initially accepted, make this case a legal disaster, and would prolong this litigation and incur further costs in a manner which would be out of any proportion to its significance, financial or other.

I agree.

I also agree.