Staplehurst Trading Ltd v Hill Station & Ors

This is an application for permission to appeal from a determination of HHJ Simon Brown QC, in February of this year, in summary judgment proceedings that have been issued by the claimant, Staplehurst Trading Limited, against the defendant, Hill Station PLC. The claim in this case and the application for summary judgment stems from what has been a -- I think I am justified in saying -- bitterly contested dispute arising out of the sale by Staplehurst to Hill Station of its ice cream manufacturing business. That was implemented by an agreement that was dated 9 July 2007. It is an agreement that is extremely detailed and complex and clearly, I think, sought to cover every possible contingency of the sale.

The claim with which the learned judge was concerned was two-fold. One is for the balance of purchase money that should have been paid over on completion, a sum of £200,000; and also a sum of £283,000 in relation to certain immunities or perhaps, accurately, promises made under the agreement to which I have already referred.

The judge after hearing submissions from both sides gave summary judgment in respect of both of those matters. I have come to the conclusion that it is arguable that in various respects he misdirected himself. I will now set out what those respects are, having emphasised that I say no more than that these issues are arguable. I shall state them in fairly dogmatic terms subject to that qualification, because that will shorten this hearing. I shall not refer, save where I need to, to the detailed terms of the agreement, which are part of the record and are well known to all concerned.

The first concerns the £200,000. That sum arose under a supplemental agreement entered into on 22 August 2007. The judge found that the arrangement was that the purchaser would transfer the sum of £200,000 to be held by their solicitors. As soon as certain conditions had been agreed the solicitors were to transfer the £200,000, together with any accrued interest, to the vendors’ solicitors’ client account. The judge found that those conditions had been fulfilled and he said that by that consideration alone that money became due and owing to the claimant. Various contractual reasons are adduced by the purchaser why as a matter of contract that money is not at the moment owing; I shall come to those in a moment. But the judge said that such arguments were irrelevant. That was because, as he said, by depositing this money with their solicitors, the purchaser had created what is known as a Quistclose trust, so known from the case of Barclays Bank v Quistclose Investments Ltd [1970] AC 567. The judge quoted this passage from Lord Wilberforce:

“That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors…”

The judge took the view that the solicitors were in a fiduciary position but were withholding the sums for the benefit of the claimant, and thus that there had been a breach of their trust. The money, therefore, became payable there and then irrespective of the contractual background. Now the essence of a Quistclose trust is that when A advances money to B, or hands money over, as happened in this case, a trust will be imposed on B, the recipient, if A requires and makes it clear that he restricts B’s freedom to dispose of the money, by requiring that it should not be applied for any purpose other than stipulated. If we translate that to this case, the person creating the trust was Hill Station. The fiduciary obligation of Hill Station’s solicitors was thereby created towards Hill Station and not towards Staplehurst.

Though the supplemental agreement no doubt was entered into because of concerns about payment, the fact that this arrangement was made does not it seemed to me to entail, as Mr Zaman argued, that Hill Station was creating itself as a fiduciary for the benefit of Staplehurst and therefore with the solicitors merely as its agent to hold the money. If that had been intended, that is to say that the £200,000 should be payable over as a matter of equitable trust rather than as a contractual obligation, I would have expected significantly different arrangements to be made than those that arose in this case. Certainly I have to say, and on any view, the way in which the judge thought there to be a Quistclose trust in existence was arguably wrong. That, however, is only the starting point because (inaudible) that issue does not arise unless there are legitimately arguable reasons why Hill Station can resist as a matter of contract the payment over of this money. What is now principally relied on is a failure on the part of Staplehurst to comply with various obligations in the contract. In particular that the vendor had not complied with two particular obligations imposed by clause 6.4 and 6.5 of the contract and set out in part 2 of schedule 2 to the contract. The first objection is under clause 1(a) of part 2 which says:

The principally contested item under that head is something that is known as a spiral freezer, which appears to be, as one might imagine, an important element in this ice cream business. The obligation that I have just stated is not, as the vendor appears to have argued, at least in correspondence, merely to give physical possession: it is an obligation to give physical possession with the intent to pass title. That does not appear to be the case, or indeed appear to be possible, in the case of the spiral freezer because after dispute had broken out about this item after completion, the accountants on behalf of Staplehurst made it clear that the spiral freezer cooling system and accessories were not in fact owned by the company at all, but were owned by two of the directors. It appears to have been envisaged that the purchaser might like to purchase those items as an agreement supplementary to that within the contract. That is recorded in a letter written by the accountants on behalf of Staplehurst on 10 October 2007; it is at page 638h of our bundle. If that is correct, or arguably correct, part 2 clause 1(a) has not been respected.

Secondly, part 2 clause 1(g) requires transfer of the business contracts, books, accounts, reference lists and a whole other list of documents and papers, and an account of the assets written up to the completion date. The purchaser has put in a good deal of evidence complaining that he did not receive the required documents. This is to some extent contested but it is, it seems to me, not a matter that can be resolved at this stage of the dispute. In particular, the purchaser has drawn attention in paragraph 8 of the first witness statement of Mr William John Dixon to an e-mail from a gentleman apparently representing or advising Staplehurst, which says, or appears to say, that, since Hill Station have not bought the company records, they will still be held by the vendor. If that was the claim, I have to say it appears to have been incorrect, because it is inconsistent with the obligation to deliver the books and accounts.

This is not, as the judge seemed to think, an oversight (if it was an oversight) that caused no damage to the purchaser. The purchaser has put in a great deal of evidence demonstrating what one would expect to be the case: that running the business has proved to be extremely difficult without the benefit of the past records. It is said against him that all the records were inspected during the due diligence procedure before the sale. But again, as at present advised, I think that that was not good enough. It is one thing to inspect the records when one is buying the business; it is quite another thing not to have access to them when one is trying to run the business itself.

It therefore seems to me that this complaint is significantly arguable. Mr Zaman said, well, they never said this in their original defence, therefore HHJ Brown was perfectly entitled and cannot be criticised for not taking this objection on board in the process before him. I have not investigated that complaint. This court must -- at least on an application for permission to appeal -- look at the reality of the situation without seeking to criticise the judge, but differing from him, if there are factors not put before him that could have been put before him which cause this court to take a different view.

Next there is a significant counterclaim set out in the affidavit of Mr Dixon to which I have already referred. That is met by an affidavit in reply by Mr Patel, a director of the claimant company. These documents are formidable on both sides: a lot of evidence is adduced; a lot of allegations are made; both sides complain of the lack of documentation. I have not been through the items item by item, but I have read, I have to say, a significant amount of material in relation to them. They are far more extensive than would normally be appropriate, even on a first instance application for summary judgment, let alone on an application to this court. Mr Zaman said that in forming the view that I have, contrary to that of the learned judge, that the counterclaim is not plainly shadowy and therefore cannot be disregarded, I have not had the benefit of hearing submissions as to the extent of the various claims. That, I accept, is quite right. But we are concerned here with whether there should be permission to appeal to this court. It is not an attempt to litigate the whole case. Having viewed this material, I am not satisfied, and I think it unlikely that further argument would satisfy me, that the judge was entitled to conclude that this counterclaim was so plainly without foundation that it should not be allowed to be taken into account in these proceedings.

As to the claim for what were called the “assumed liabilities”, apart from other objections there is a short point that the assumed liabilities are defined as liabilities appearing in the completion accounts. The completion accounts do not exist. It is the responsibility under the contract of the purchaser to produce them, but he says that he has not been able to do so because of the problem about the records to which I have already referred. Either the point about the records is right or it is wrong. At the moment it seems to me to be arguable. If it is arguable it therefore excuses, or at least sets on one side, the obligation of the purchaser to produce those completion accounts.

Finally, Mr Knox has set out in paragraph 4(2) a more extended objection to the assumed liabilities, including that there was no liability to pay unless the claimant itself had discharged the liabilities; and also that the liabilities should not include debts that, in breach of his undertakings in the agreement, the vendor had allowed to stand open for more than four weeks. I raised with Mr Knox the question of whether this matter had been covered in the disclosure letter, which I had not, I fear, looked at before coming into court. He took me to a paragraph in the disclosure letter, which in my judgement does not adequately meet these objections; it merely sets out in general terms that there has been failure to pay creditors. It does not explain in detail how those debts are made up, and does not make it clear that the undertaking to pay within four weeks in the future is thereby (and in respect of debts arising after, as I understand it, the year-end accounts) set aside.

There again, therefore, these objections to payment of the completion accounts seem to me to be arguable in addition to the objection that I have set out with regard to the definition of the assumed liabilities in connection with the completion accounts. I have looked at the debts that are in issue, or some of them, and it is clear, it seems to me, that if Mr Knox’s objection is correct a significant amount of the assumed liabilities claimed do not fall under the definition in the contract.

For all those reasons, therefore, I grant permission to appeal in this case on the points that I have set out in this judgment. We will, in due course, come to any further directions that are needed for the promotion of the appeal.