Close Invoice Finance Ltd v Watts & Anor

This is an appeal by the Claimant from an order of HH Judge Simon Brown QC made in the Queen’s Bench Division, Birmingham District Registry, on 5 December 2008 (amended on 20 December 2008) by which he set aside an order which he had made on 16 September 2008 giving the Claimant summary judgment under CPR Part 24 against the Defendants for £53,024.66 and costs summarily assessed at £6,788.

Following the grant of permission to appeal, the Defendants were adjudicated bankrupt on 4 August 2009. It appears that a trustee in bankruptcy has not yet been appointed to either Defendant’s estate. Neither Mr nor Mrs Watts nor anyone representing the Official Receiver is present today or has made any representations in writing in relation to the appeal. The Claimant, which is represented today by Mr Jonathan Miller, counsel, wishes to continue the appeal notwithstanding the Court’s power to stay the proceedings under the Insolvency Act 1986 s.285. I consider it is right to permit the Claimant to do so. The hearing of the appeal has already been adjourned once at the request of the Defendants. All the preparations for the appeal, including the filing of documents, were made before the bankruptcy orders. The existing order of Judge Brown puts in doubt the validity and amount of any proof by the Claimant. For the reasons I give hereafter, the Claimant is clearly entitled to summary judgment, and the judgment of this court will therefore save the time, difficulty and cost which might otherwise be incurred in relation to the approval of any proof by the Claimant in respect of its claim in these proceedings.

The Claimant, Close Invoice Finance Limited (“Close”), carries on the business of factoring or discounting the debts of companies.

The Defendants, Robert Watts and his wife Dawn Watts, were formerly directors of Haydon & Jackway Limited (“Haydon”), which carried on business as an importer and distributor of “window fashions”, such as curtains, until it became insolvent in January 2007.

Close and Haydon entered into a Discounting Agreement dated 23 August 2005 (“the Discounting Agreement”). In broad terms, the Discounting Agreement provided for Close to purchase the amounts receivable by Haydon from its customers for their face value, less any discount or deduction allowed by Haydon to the customer. The date for payment of the purchase price for a receivable was the date on which payment was received from Haydon’s customer, but Close was to pre-pay, on account, 80 per cent of the value of the receivable.

Clause 6(1) of the Discounting Agreement provided that, upon a receivable being notified by Haydon to Close, Haydon should immediately pay to Close an administration charge, which was to be such a percentage of the value of the receivable as was specified in paragraph 6 of the Schedule to the Discounting Agreement. Paragraph 6 of the Schedule provided that the administration charge was:

“0.8% (with a minimum of £600 per calendar month and with a CPE minimum of £250 per calendar month)”

CPE is an acronym for “credit protection element” and was a reference to insurance against the insolvency of any of the customers of Close’s factoring clients, like Haydon. I shall describe this insurance in more detail later.

By clause 20(2) of the Discounting Agreement, Close was entitled to terminate the Discounting Agreement forthwith by notice in the event of, among other things, Haydon’s insolvency or an adverse change in Haydon’s condition or operating performance which Close in its absolute discretion considered significant or material.

By clause 5(4) of the Discounting Agreement, if Close had the right to terminate under clause 20(2), whether or not it did in fact terminate, Haydon was obliged to repay on demand any pre-payment which Close had paid to Haydon in respect of any receivable then unpaid.

The Discounting Agreement was for an initial minimum period of 12 months from 23 August 2005, and was to continue until terminated by 6 months’ written notice by either party or otherwise terminated in accordance with its terms.

By a joint deed of Guarantee and Indemnity also dated 23 August 2005 (“the Guarantee”) the Defendants guaranteed on Close’s demand in writing the due payment of all sums due to Close from Haydon and the performance of all Haydon’s obligations under the Discounting Agreement, limited to £50,000.

Further, in consideration of Close entering into or continuing the Discounting Agreement, each of Mr and Mrs Watts entered into a separate written indemnity (“the Indemnities”), by which they agreed to indemnify Close against all loss that Close might suffer in consequence of, among other things, any breach by Haydon of any warranty or undertaking in clause 8 of the Discounting Agreement.

At the date all those documents were entered into, Haydon’s principal customer was Glyn Webb Limited (“Glyn Webb”). By January 2007 Glyn Webb had become insolvent. Further, on 22 January 2007 Haydon itself went into administration. Those circumstances entitled Close to terminate the Discounting Agreement under clause 20(2), and so triggering the right to repayment under clause 5(4) of the Discounting Agreement.

By a letter dated 22 January 2006 Close, by its solicitors, demanded that Haydon repay £190,498.73 pursuant to clause 5(4) of the Discounting Agreement, that is to say pre-payments made by Close to Haydon in respect of receivables for which payment by Haydon’s customer had not yet been received. That sum has not been paid.

In addition, Close claims that Haydon was in breach of clause 8 of the Discounting Agreement, causing loss of £59,000.

By letters dated 14 December 2007 from Close’s solicitors, Close demanded £50,000 from the Defendants under the Guarantee, and £59,000 from the Defendants under the Indemnities.

The Defendants having failed to make any payment pursuant to those demands, Close has claimed them in these proceedings.

The proceedings were commenced by a Claim Form issued on 21 December 2007.

The Defendants instructed solicitors and counsel, and a Defence dated 5 February 2008 was served on their behalf. So far as relevant to this appeal, the substance of the Defence was, first, that it was a term of the Discounting Agreement, as well as a collateral contract between Close and the Defendants, and also Close was under a duty of care to the Defendants to procure, that Close would provide Haydon with CPE insurance, that is to say insurance against Haydon’s customers, including Glyn Webb, not paying their bills due to insolvency. No such insurance was provided. The Defendants were thereby discharged from liability under the Guarantee. Alternatively, Haydon thereby suffered loss and damage equal to the amounts due to Close from Haydon, and so the Defendants were exonerated from liability under the Guarantee to the same extent and amount. Alternatively, by virtue of breach of the collateral contract or negligence the Defendants suffered loss and damage equal to the amount of their liability under the Guarantee. Secondly, the alleged breaches of clause 8 of the Discounting Agreement were denied, and so there was no liability under the Indemnities.

After service of the Defence, Close made an application on 18 August 2008 for summary judgment under CPR Part 24 in respect of the £50,000 claimed under the Guarantee. Close accepted that the balance of its claim, that is to say what is due under the Indemnities in respect of the alleged breach of clause 8 of the Discounting Agreement, must proceed to trial.

The application was supported by a witness statement of Mr Gareth Timms, Close’s solicitor. He exhibited a facility offer letter from Close dated 11 August 2005 (“the FOL”), which specified a minimum charge of £600 per calendar month, a CPE charge of 0.5% and a CPE minimum charge of £250 per month. The FOL was signed by Mrs Watts on behalf of Haydon. Mr Timms explained in his witness statement that the effect of this was that Close was entitled to charge minimum monthly fees in respect of the provision of the Discounting Agreement, including a minimum sum for provision of CPE insurance, whether or not Haydon took advantage of the CPE insurance. He said that, at the time the Discounting Agreement was entered into, the only debtor and customer advised to Close was Glyn Webb.

Mr Timms further explained that the CPE insurance was underwritten at that time by Euler Hermes. When a request was received to extend the cover to a new customer of Close’s factoring client, this was referred to Euler Hermes in order to obtain from them a credit limit in respect of that customer. Euler Hermes gave Glyn Webb a nil endorsement, which meant that Glyn Webb was not included in Close’s CPE insurance cover. Mr Timms said that the Defendants were always aware of that situation, and he referred, in that connection, to an e-mail sent on 20 October 2006 by Mr Watts to Clare Billing, one of Close’s client managers, which stated:

“Dear Claire,

I have just had a conversation with Chris Coom who has told us that we have no insurance cover on any of our customers. I was aware of the situation with Glynn Webb but assumed that QD and Latif were covered. It seems we have been paying insurance cover for the last 15 months but have not actually been insured. Obviously you can imagine how concerned we are at being charged for insurance that does not exist. So I think that you will agree that a full refund for all insurance charges from the beginning of the contract is justified. Chris Coom is going to discuss with you the ongoing insurance situation as this needs to be settled.

Regards,

Bob.”

Finally, Mr Timms said that at the time Haydon went into administration Glyn Webb was the only debtor, and all of Close’s losses were as a result of pre-payments made in respect of receivables from Glyn Webb.

By the time the summary judgment application came before Judge Brown on 16 September 2008 the Defendants had not served or filed any evidence in opposition to the application for summary judgment. They had been abroad for several months, and they had terminated the retainer of their solicitors. In their absence, and in the absence of anyone appearing on their behalf, Judge Brown gave judgment in favour of Close and ordered the Defendants to pay £53,024.66 (inclusive of interest at the date of judgment) and Close’s costs summarily assessed at £6,788.

On the same occasion, Judge Brown gave trial management directions for the balance of Close’s claim.

On 29 September 2008 the Defendants applied to set aside the judgment on the grounds that they were unable to attend because they were out of the country and they believed that they had a credible defence. That application appears to have been supported in the first instance by a typewritten statement by the Defendants, in which they said:

“At the start Glynnwebb was declined insurance but neither were charges for the CPE deducted. I have a letter from E Edwards stating that GlynnWebb would be kept under review and at such time as they became acceptable they would be insured not the exact words of the letter but by implication, and as the CPE was implemented 2/3 months after, we assumed that Glynn Webb was then insured as they were the only customer who had placed orders at that time.”

That statement also referred to an e-mail from Clare Billing to Mrs Watts dated 23 November 2006, in which Ms Billing said she was “trying to negotiate a refund of some of the Credit Protection element on the facility.”

Mrs Watts then made a witness statement dated 13 November 2008 in support of the application to set aside. In it she made the following points relevant to the summary judgment claim and this appeal. Having commented that the Discounting Agreement contained a clause for CPE insurance, she said:

“7.

At the beginning of the agreement it is agreed that Glynnwebb [were] not insured but an assurance was given by the sales representative E Evans that when Glynnwebb became insurable then the CPE would come into force. The first payment for the CPE was the 21st September 2005.

…

10… We are of the opinion the evidence supplied clearly states that the company was insured and the claim by the claimants under the Guarantee and Indemnity clause to be false.”

Mr Watts made a short formal witness statement stating that he believed the contents of Mrs Watts’ witness statement to be true.

Evidence in opposition to the application to set aside the judgment was given in a second witness statement of Mr Timms. He said that the evidence, as indeed contained in Mr and Mrs Watts’ own witness statements, showed quite clearly that there was no CPE insurance in respect of Glyn Webb. He said that, in order for a debtor to be within the credit protection cover, Haydon would have had to seek a credit limit. He said that this was clear from a User Guide which was available to Haydon by downloading from the internet. Haydon, however, never applied for a further credit limit in respect of Glyn Webb and so the status of Glyn Webb remained exactly as it had always had been since the time of the Discounting Agreement. He said that the CPE insurance element of Close’s administration charge was included whether or not a debt was insured. The minimum fees were charged by Close regardless of whether or not a credit limit had been applied for or obtained. He exhibited as Exhibit GWT10 to his second witness statement the insurance policy issued by Euler Hermes to Close. It includes the following provisions:

“Section 5

For the purpose of the DEFINITION OF INSURED DEBT in the POLICY the PERMITTED LIMIT of any indebtedness by the INSURED BUYER shall be

(a)

the limit specified in writing by the COMPANY for that buyer on the COMPANY’S official limit endorsement form;”

“

900 AA

The INSURED and the SUPPLIERS whose names shall from time to time be notified by the INSURED to the COMPANY in writing have entered into an Agreement whereby it has been agreed inter alia:-

(a)

that subject to the said Agreement the SUPPLIER may from time to time sell goods or provide services on agreed terms to INSURED BUYERS specified within the scope of the Agreement and sell (whether by assignment or otherwise) the debts arising on the relative invoices to the INSURED for consideration stated therein.

(b)

that the SUPPLIER shall be responsible for any loss the INSURED may sustain in connection with any such Contract of Sale under such assignment other than loss arising from the INSOLVENCY of the INSURED BUYER.”

“

900 AD

…

4.

Upon the occurrence of INSOLVENCY of an INSURED BUYER the INSURED must within six months thereafter submit a claim under the POLICY in respect of any INSURED DEBT arising by reason of such INSOLVENCY and (subject always to the provisions of Condition 5 and 6 of the POLICY and after taking into account any interim payments and recoveries) the COMPANY shall thereafter pay to the INSURED the INSURED Percentage of the INSURED LOSS within thirty days after the COMPANY has received confirmation that the INSURED DEBT has been admitted to rank against the insolvent estate in favour of either the INSURED or the SUPPLIER as Trustee for the INSURED.”

Mr Timms also exhibited as Exhibit GWT9 to his second witness statement a print out received by Close, showing that on 23 August 2005 a credit limit request for Glyn Webb had been refused and there was a nil endorsement in respect of credit for it.

There was no further evidence from the Defendants by the time of the hearing of the application to set aside the order of 16 September 2008.

In giving judgment on 5 December 2008 setting aside his earlier order Judge Brown quoted paragraph 7 of Mrs Watts’ witness statement. He said that, if that was correct, it would amount to a defence. He said it had some support from the documents since Close’s first invoice to Haydon did not include a charge for CPE insurance, but subsequent monthly invoices did include such a charge. He said that the calculations indicated that 0.8% was levied on Haydon for insurance cover. He said there was no dispute that there was insurance cover, but there was also no dispute that there was no insurance for Glyn Webb’s debts. However, the Defendants said that they believed that they were covered. The Judge said that the e-mail from Mrs Watts to Claire Billing, which I have already mentioned, was “equivocal”, and that “it could mean something else, because ‘aware of the situation’ does not expressly state ‘we knew all along that Glyn Webb was not insured, so we are not paying for that insurance’.”

The Judge said that he had done his best to try to understand the Defendants’ case, which had taken some time to do earlier in the afternoon, and that, while it had not been put as eloquently as it might have been, it had a reasonable prospect of success, and that the appropriate way to deal with the case was to deal with the whole amount being sued upon, and direct that the Guarantee part be dealt with as part of the whole trial.

The only basis for the Judge’s decision to set aside his earlier order for summary judgment was that the Defendants had sound grounds for resisting summary judgment. That is the issue on this appeal.

The following matters are perfectly clear and not in dispute. It was part of the arrangements between Haydon, the Defendants and Close that a CPE insurance facility would be available. Such an insurance facility was in fact available but it required the underwriter, Euler Hermes, to agree to provide a credit limit for individual customers of Close’s factoring clients, such as Haydon. Such a credit limit had been refused in respect of Glyn Webb as at the date of the Discounting Agreement. The Defendants were aware of that. The credit status of Glyn Webb, for the purpose of the CPE insurance cover, never changed. Nevertheless, Haydon was invoiced by Close and paid £250 per month, beginning in September 2005, for CPE insurance, that being the minimum CPE insurance charge under the FOL and the Discounting Agreement.

It is not, and cannot be, contended that those facts of themselves are capable of supporting the Defence. There is no basis whatever for any argument that it was a term of the Discounting Agreement that CPE insurance cover would extend to Haydon’s customers irrespective of whether or not a nil credit rating was given by Euler Hermes. The Discounting Agreement nowhere says that, and there is no basis for implying a term to that effect.

What is relied upon by the Defendants, and must be taken as established for the purpose of the application to set aside the summary judgment, and on this appeal, is that at the date the Discounting Agreement and the Guarantee were entered into an assurance was given by a representative of Close to Haydon and the Defendants that “when Glyn Webb became insurable, then the CPE would come into force.”

I find it impossible to see how such an assurance could provide a defence to the claim on the Guarantee. There is absolutely no evidence that Glyn Webb ever did become insurable, or that Close could and should have persuaded Euler Hermes that Glyn Webb should be given a positive credit rating. No allegations to that effect are made in the Defence.

The Defendants claim that they believed, from the date of the September 2005 invoice from Close to Haydon, that CPE insurance cover was in force in respect of all of their customers, including Glyn Webb. In the light of the e-mail from Mr Watts to Ms Billing of 20 October 2006 that assertion is simply not credible. I do not agree with the Judge that the e-mail was “equivocal”. Even if, however, I am wrong on that point, the erroneous belief on the part of the Defendants, that is to say their subjective state of mind, is entirely irrelevant to the pleaded Defence, which alleges a repudiatory breach of the Discounting Agreement, breach of a collateral contract and negligence.

The Defendants might have wished to argue that the alleged assurance by Close’s representative and their own alleged misunderstanding from September 2005 could found a claim by Haydon for repayment of the monthly charge for CPE, but, even if that were arguable, it would not have reduced Haydon’s indebtedness to Close below the £50,000 limit of the Guarantee.

For those reasons, there is no defence to the claim on the Guarantee, and I would set aside the order of 5 December 2008.

I agree.