Lexi Holdings Plc v Luqman & Ors

Lexi Holdings Plc entered into administration in October 2006, and its joint administrators are partners in KPMG. The principal activity of the company was the provision of bridging loan finance for the purpose of the acquisition of property. The loans were mostly to commercial property developers and the company obtained finance for its activities from a revolving credit facility of about £120 million, and under the terms of the facility all of the company’s receipts were to be paid into an account with Barclays in relation to which Barclays alone would have signing rights. The administrators claimed that the company had made in breach of these arrangements substantial loans or sales to companies owned or controlled by Mr Luqman, the first defendant, and that he and his co-directors paid large sums of money into other accounts which were then misappropriated.

The applicant today is Mr McGarry, who was a partner in a firm of surveyors and valuers called Dunlop Heywoods. The administrators’ case was that Mr McGarry provided valuations on certain properties to which the company advanced funds and that about £625,000 of the company’s money was paid into accounts held in his name, at the London Branch of the United National Bank (“UNB”) in Brook Street, Mayfair, and then into an account standing in his name with LGT Bank in Liechtenstein. The administrators’ case was that there was no legitimate basis for that payment and that Mr McGarry held the money on constructive trust with alternative pleas for monies handed and received or for equitable compensation.

Mr McGarry was one of the respondents to a freezing order made on 13 November 2006 by David Richards J containing extensive disclosure provisions. Following non-compliance by the respondents, including Mr McGarry, a further order was made by Briggs J on 14 December 2006, and in particular by that order Mr McGarry was required by 4 pm on 21 December 2006 to swear and serve an affidavit complying with the earlier order to the best of his recollection and belief on the basis of the materials and documents available to him and he was ordered to take all reasonable steps to obtain copies of further relevant documentation seized from him by the police or the Serious Fraud Office and his banks. When such documentation came into his possession he was required to swear and serve a further affidavit setting out such further information that he would then possess.

The reason for that provision was that in an entirely unrelated complaint relating to his activities as a valuer, there had been an investigation by the Serious Fraud Office which had taken into custody the greater part of the documentation which was then in his possession, custody or power. He failed to comply with either of the orders, and on 1 March 2007 the company applied for an Unless Order requiring him to comply in full with his obligations under the two orders within seven days, failing which his defence was to be struck out and the company was to be at liberty to enter judgment. Blackburne J made the order on 8 March 2007 and on 15 March 2007, there having been no compliance, the company applied for judgment and was granted it.

On 15 March 2007, the same day on which final judgment was entered, Mr McGarry applied for the judgment of Blackburne J to be set aside and for the Particulars of Claim to be struck out. In that application he accepted that the transfer of £625,000 had been made to him as a loan from one of the Lexi group companies but he said that he had repaid £678,000 into the accounts of the company. He also claimed that any document purporting to record a transfer from the company’s account with UNB into his account at the LGT bank in Liechtenstein was wrong, as no such transfer had ever taken place. He said that he destroyed all his correspondence but he produced a redacted bank statement. He declined to tell Pumfrey J, who heard the application, what the money was used for, if at all, but he said that the fact that he had repaid the money was so clear that the Particulars of Claim should be struck out on the footing that it was perfectly plain that he had returned everything to the company.

Pumfrey J held that the circumstances of the payments and the explanation for them were plainly unsatisfactory, Mr McGarry had never disclosed any bank statements which revealed the entire course of his dealing, nor had he explained why the payment was made when it was made. He accepted that it was possible that Mr McGarry had a defence, but it was quite impossible to say that it was so unanswerable that the claim should be struck out. That application had no foundation.

As regards Mr McGarry’s application for relief from sanctions, the judge said that Mr McGarry had accepted that he had been served with the application under the order and that the order was a regular order and that the only question was whether he should obtain relief against the sanctions which had been imposed. The judge took as his starting point the factors in CPR 3.9, which lists nine factors which the court would take into account on an application for relief from any sanction imposed for a failure to comply with any rule, and decided in terms of the factors; that the application for relief was prompt but that Mr McGarry had never had any real intention to comply with the orders, the destruction of many of his relevant documents would have made compliance very difficult and that the failure to comply was deliberate; the effect of the failure to comply was uncertain; and the company had been left in an even greater degree of uncertainty as to its past commercial history than was necessary. The application was not supported by evidence but it was also unaccompanied by any recognition that there had been a failure to comply with the Unless Order.

The judge said that he was required by the decision of the Court of Appeal in CIBC Mellon Trust Co Ltd v Stolzenberg [2004] EWCA Civ 827 para 1778 to form an overall impression of what was best to do in all the circumstances. Mr McGarry’s case was that judgment had been entered against him for nearly £700,000 which he had in fact paid. Against that the judge said that he had to consider Mr McGarry’s complete reluctance to put all the cards on the table and be frank about the transactions into which he had entered. He was satisfied that the order was a proportionate and reasonable response to the repeated failures to comply with the orders of the court. Accordingly, he declined to accede to Mr McGarry’s application to be able to continue to defend the action and dismissed his application.

On this application Mr McGarry admits that at the outset his default in complying with the orders was, at least in part, deliberate. He has now very dramatically changed his account of the payments. He now admits that he received a total of about £1 million from Lexi accounts between January and March 2006, which he says was received by way of a loan pursuant to an oral agreement between himself and Mr Luqman. All of the payments went to his accounts at UNB. The funds were intended as bridging finance and he repaid £684,000 in March 2006, and bought and sold shares or similar investments eventually affecting the repayment on 28 March 2006. He says he attempted to repay a further sum of £225,000 from his UNB account to that of the Lexi account but the payment was returned to him. Accordingly, he accepts that, in any event, the company would be entitled to judgment in the sum of about £316,000 if it is the true owner of the UNB account. I add that Henderson J has recently decided on a committal application relating to Mr Luqman that the UNB account did indeed belong to the company. Mr McGarry says that it was disproportionate and wrong to prevent him from defending the claim altogether, although he accepts that there is a public interest in the court ensuring that its orders are complied with.

The principal matter taken today by Mr Fadipe on Mr McGarry’s behalf is that Blackburne J’s order was irregular because of a failure to serve the application notice at least three days before the hearing of the application CPR 23.7(1)(b). The facts relating to service are as follows. The application notice was sent on Friday 2 March by the company’s solicitors to Mr McGarry both by courier and also by special delivery. The deemed date of service was Saturday 3 March for the courier delivery and Sunday 4 March for the special delivery (CPR 6.7(1)), the effect of which is the subject of Anderton v Clwyd County Council (No 2) [2002] EWCA Civ 3174, [2002] 1 WLR 3174. The hearing was to be on 8 March and three days’ notice had to be given. Saturdays and Sundays are excluded from the calculation where we specify a period is as in this case five days or less (see CPR 2.8(4)). In fact, Mr McGarry received the couriered copy on Friday 2 March, which would have been in time, but there is binding authority that the deemed provisions in the CPR take precedence over the actual facts of service (see Godwin v Swindon Borough Council [2001] EWCA Civ 1478, [2002] 1 WLR 0997 at paragraph 46).

Mr Philip Jones QC for the company accepts that there is an arguable point that there was insufficient notice of the application before Blackburne J. The application to set aside was, as I have said, before Pumfrey J and this point was not squarely before him, although as I have said he did deal with the actual facts of service and decided that there had been sufficient service. But if the point had been before him in the way it has been put today, I have no doubt that he or this court, were there to be an appeal in like circumstances, would not have thought it right to set aside Blackburne J’s order on the ground that insufficient notice had been given because of the actual fact that Mr McGarry had received notice on Friday 2 and that he was taking a purely technical point devoid of merit in the circumstances of this case. Where the exercise of a discretion to set aside is concerned, the actual facts and the merits can be taken into account, and it is not a case like those which I have cited involving limitation periods where the actual date of service is determinative.

Except for the technical service point, Mr Fadipe accepted that he would have had an uphill task in persuading this court that there were arguable grounds for appeal. On the application Mr McGarry says that the judge erred in a number of ways, the most important of which are as follows: that he did not take proper account of the fact that Mr McGarry had not recognised that he was in default; it was in the interests of the administration of justice that Mr McGarry should be allowed to defend the claim; and the judge was wrong to hold that his failure to comply was intentional, even though it was in part motivated by a desire on his part not to inform the company of the true extent of his potential liability.

It seems to me that there is no possible ground for interfering with the exercise of discretion. Mr McGarry has been in deliberate breach of the court’s orders. He was personally served with both freezing orders and made no attempt to comply with his obligations. He refused to provide the information on the basis of a plea of self-recrimination, which he now accepts was misconceived. He produced only redacted bank statements. He made a submission to Pumfrey J that he had only ever engaged in one transaction with the company involving the receipt of £625,000 and a repayment of £684,000, but now admits to having received a series of additional payments. The judge went carefully through all of the factors in CPR 3.9. This court has emphasised on a number of occasions the importance of strict compliance with Unless Orders, and the gravity of non-compliance greatly increases where it results from a conscious decision. This was a case of a deliberate breach of an Unless Order designed to enforce a compliance with orders which were intended to ensure not only the effective operation of the freezing injunction but also the preservation of evidence for trial.

I have therefore no doubt that there is no basis for interfering with the exercise of discretion by Pumfrey J and would refuse the application.

I agree.