Tarn Insurance Services Ltd v Kirby & Ors

This is an appeal from an order made on 2 July 2008 by Mr Justice Norris on applications made by the claimant, Tarn Insurance Services Limited (in administration) (“Tarn”), in proceedings brought against Mr Stephen Kirby and eight other defendants.

Tarn (formerly known as Tarn Insurance Management Limited) was incorporated on 25 October 2005. In the course of its business it acted as intermediary in connection with loans made by Euro Holdings Limited Partnership (“Euro”) to assist persons who were entitled, as local authority tenants, to purchase the properties which they occupied under the “right-to-buy” provisions in Part V of the Housing Act 1985 in meeting the incidental legal or other costs associated with the exercise of those rights. In consideration of its services as intermediary, Tarn received a fee, part of which was paid in advance of the purchase of property by the tenant. In the event that the purchase did not proceed to completion, Tarn was obliged to repay that advance. It secured that liability by a fixed and floating charge over its undertaking and assets. In the events which happened a substantial proportion of those tenants who had received loans from Euro did not complete their purchases and advance fees received by Tarn – amounting to some £3.4 million or thereabouts – became repayable. On 13 November 2007 Euro made demand for that sum. Tarn failed to make repayment. On 30 November 2007 joint administrators were appointed.

These proceedings were commenced on 8 April 2008. The first, second and third-named defendants are Mr Kirby, Mr Tony Bennett and Mr Stephen Hirst. It is said that, although never formally appointed directors of Tarn, they were the persons who,

It is alleged in the proceedings that, during the period from September 2006 to November 2007, substantial payments were made by Tarn to each of the defendants (other than Mr Holden and Mr Rodriguez) and to Legal 4 Life. It is sufficient, in the present context, to note that £632,732 is said to have been paid to Mr Kirby, that sums amounting together to £2,687,240 are said to have been paid to Mr Hirst, Mr Bennett, STS, Luxury Bathe Limited and Get With It Limited (of which £1,566,440 is said to have been paid to STS), that £1,876,965 is said to have been paid to Legal 4 Life and that £379,350 is said to have been paid to Outtake. It is said that those payments were made without any, or any proper, regard to the interests of Tarn; and that they must be repaid: alternatively, that they were received by the payees with knowledge of the breach of fiduciary duty by the directors (or de facto directors) of Tarn and so were subject to constructive trusts in the hands of the recipients.

In response to an application for documents and information made by the joint administrators under section 236 of the Insolvency Act 1986, Mr Kirby, Mr Bennett and Mr Hirst deposed in affidavits sworn on 29 February 2008 that – save as to £185,850 out of the £632,732 paid to Mr Kirby by Tarn - the monies paid to them and to the companies which they controlled (STS, Luxury Bathe Limited and Get With It Limited) by Tarn, amounting in aggregate £3,134,122, had been paid in respect of services provided by STS under an agreement (“the STS Agreement”) dated 1 September 2006 and made between Tarn and STS. Mr Kirby deposed that the balance of the monies paid to him (£185,850) had been paid by Tarn on behalf (and for the account) of Legal 4 Life in respect of his entitlement to receive consultancy fees from Legal 4 Life under an arrangement made in or about December 2006. That arrangement was confirmed by Mr Rodriguez in an affidavit sworn on 3 March 2008. Mr Rodriguez deposed, also, to the receipt by Legal 4 Life of £1,876,965 from Tarn in respect of introduction fees invoiced under agreements (“the Legal 4 Life agreements”) dated July 2006 and 22 February 2007; and to the receipt by Outtake of monies amounting to £375,000 said to be due to Outtake in respect of consultancy services provided to Legal 4 Life.

Tarn challenges the authenticity of the document said to be the STS agreement of 1 September 2006. But without prejudice to that challenge, Tarn contends that Mr Kirby, Mr Bennett, Mr Hirst and Mr Holden caused Tarn to enter into the STS agreement (if authentic) in breach of their fiduciary duties as directors (or de facto directors) and that the STS agreement should be set aside. Further, it is said, in causing Tarn to enter into the STS agreement, Mr Kirby, Mr Bennett, Mr Hirst and Mr Holden acted in breach of the duties of care which they owed to Tarn as directors (or de facto directors). Those allegations are reflected in the first group of claims in the proceedings: that is to say, in claims against Mr Kirby, Mr Bennett, Mr Hirst and Mr Holden for damages and/or equitable compensation in the sum of £3,124,122 (the amount said to have been paid by Tarn under the STS agreement).

The second group of claims in the proceedings are founded on the allegation that the payments to Mr Kirby, amounting to £185,850, in respect of consultancy services provided to Legal 4 Life were in the nature of a secret commission or bribe. It is said that Mr Rodriguez and Mr Kirby agreed that, in consideration of a commission or fee of £50 on each introduction by Legal 4 Life under the Legal 4 Life agreements, Mr Kirby would ensure that a proposed reduction in the number of introductions which Tarn would accept from Legal 4 Life would not be carried into effect. It is said, further, that Mr Rodriguez knew that Mr Kirby was a de facto director of Tarn; and knew that the arrangement for the payment of commission to Mr Kirby was not, and was not intended to be, disclosed by Mr Kirby to Tarn. The effect of the arrangement (it is said) is that Tarn continued to accept introductions from Legal 4 Life when it would not otherwise have done so; and that – in the circumstances that none of those introductions led to completed purchases – Tarn became liable to repay to Euro advances amounting in aggregate to £1,662,316 which (but for the acceptance of introductions pursuant to the arrangement) would not have been made. Tarn claims against Mr Kirby and Mr Rodriguez damages in the amount of £1,848,166 (being the sum of £1,662,316 and £185,850); and, further, claims repayment of the £379,350 said to have been paid to Outtake at the direction of Mr Rodriguez.

As I have said, the joint administrators had made application for information and documents under section 236 of the Insolvency Act 1986. That application came before His Honour Judge Pelling QC, sitting as a Judge of the High Court in the Manchester District Registry of the Chancery Division, on 8 February 2008. Upon undertakings given by (amongst others) Mr Kirby and STS, he adjourned the application generally with liberty to restore. The undertakings included an undertaking to make and serve upon the solicitors for the joint administrators an affidavit giving an account of his (or its) respective financial dealings with Tarn: specifying all funds, property or assets of any kind received by them or by any of the other respondents from Tarn which individually exceeded £500 in value (“transferred assets”), stating in respect of each of the transferred assets (amongst other matters) the then present whereabouts of the transferred assets and details of any assets acquired with the transferred assets, identifying all relevant transactions and providing all relevant documents in their possession custody or control.

The joint administrators took the view that the information provided by Mr Kirby – and by STS – in purported compliance with the undertakings given on 8 February 2008 was seriously deficient. These proceedings were commenced on 8 April 2008. On the same day Tarn sought and obtained from Mr Justice Evans-Lombe, on an application made without notice, freezing orders and proprietary injunctions against (amongst others) Mr Kirby and STS. The freezing order of 8 April 2008 required Mr Kirby (i) to provide a list of his assets worldwide within 24 hours of service of that order upon him (paragraph 11) and to verify that information by affidavit by 14 April 2008 (paragraph 12), (ii) to inform Tarn within 24 hours of service of the then present whereabouts of monies paid to him by Tarn (“tracing information”) (paragraphs 14 and 15) and to verify that information by affidavit by 14 April 2008 and (iii) to deliver copies of all documents relating to the facts and matters set out in the affidavit of Simon John Granger (one of the joint administrators) by 14 April 2008 (paragraph 18). Most, if not all, of the information required by the order of 8 April 2008 had already been the subject of the undertakings given to His Honour Judge Pelling QC on 8 February 2008.

Mr. Kirby was served with the order of 8 April 2008 on the following evening. He failed to provide any information or documents in compliance with that order. Tarn applied on the return date – 16 April 2008 – for a continuation of the freezing orders and proprietary injunctions. It applied, also, for an unless order. Mr. Kirby was represented by counsel at the hearing on 16 April 2008. He applied for a variation of the order of 8 April 2008 so as to extend the time for compliance with the orders for the provision of asset and tracing information and to discharge the orders for the provision of documents. Those applications were heard by Mr Justice Evans-Lombe. He dismissed Mr Kirby’s applications; he continued the freezing orders and proprietary injunctions; and he made the unless order sought by Tarn.

The freezing order made on 16 April 2008 provided (at paragraph 11) that the earlier order (made on 8 April 2008) should continue “in full force and effect” in respect of the provision of a list of assets, the provision of tracing information and the delivery of documents. The unless order made on 16 April 2008 was in these terms (so far as material):

“Unless by 4pm on Tuesday 22^nd April 2008 the First Defendant [Mr Kirby] serves upon DLA Piper UK Ltd (“DLA”), solicitors for the Claimant, the following information documents and affidavits:

(a)

. . . ;

(b)

The information required to be provided by paragraph 14 of the Order of Mr Justice Evans-Lombe dated 8 April 2008 (“Freezing Order”);

(c)

The affidavits and exhibits required to be provided by paragraphs 12 and 16 of the Freezing Order; and

(d)

Copies of the Documents as defined in paragraph 17 of the Freezing Order;

the First Defendant shall be debarred from defending these proceedings.”

Mr. Kirby swore a further affidavit on 22 April 2008. The joint administrators took the view that, notwithstanding that further affidavit, Mr Kirby had not complied with the orders of 8 and 16 April 2008. Their complaints were summarised by Mr Justice Norris in his judgment of 2 July 2008:

“38

. . . first, no document relevant to the case has been provided by Mr Kirby. Secondly, none of the information about the present whereabouts of the payments that have been made to Mr Kirby has been provided. Thirdly, the confirmatory affidavits relating to Mr Kirby’s worldwide assets and as to the present whereabouts of the funds are still outstanding. Fourthly, the information that was provided in relation to Mr Kirby’s assets was inadequate”.

The judge went on to say this:

“40.

In my judgment [the administrators’] complaints about the failure to provide detailed information as to the present whereabouts of the funds and the complaints about the failure to provide a confirmatory affidavit in relation to Mr Kirby’s assets and the complaint about the failure to provide all of the documents relevant to the case are all made out. . . .”

In his affidavit of 22 April 2008 Mr Kirby had recognised that he had not complied with the orders of Mr Justice Evans-Lombe. By notice dated 28 April 2008 he applied for relief against the sanction debarring him from defending the proceedings which had been imposed by the order of 16 April 2008. By notice dated 2 May 2008 Tarn applied for judgment by default (i) against Mr Kirby on the grounds that he was debarred from defending the proceedings by reason of his failure to comply with the order of 16 April 2008 and (ii) against Outtake on the grounds that it had failed to file an acknowledgment of service. By the same notice Tarn applied for summary judgment under CPR Pt 24 against Mr Kirby, and each of the other defendants on the grounds that they had no reasonable prospect of successfully defending the claims against them and that there was no other reason why those claims should proceed to trial.

Those applications were listed for hearing before Mr Justice Norris on 27 June 2008. But, by an order made by Mr Justice Patten on 26 June 2008 on the application of Mr Bennett, Mr Hirst, Luxury Bathe Limited and Get With It Limited, the applications for summary judgment against those four defendants were adjourned to the first available date after 9 July 2008. So it was that the applications which came before Mr Justice Norris for hearing at the end of June 2008 were (i) Mr Kirby’s application for relief against sanction, (ii) Tarn’s application for judgment by default against Mr Kirby, (iii) Tarn’s application for judgment by default against Outtake (which, by that date, had acknowledged service, but had not filed a defence) and (iv) Tarn’s applications for summary judgment against Mr Kirby, Mr Holden, STS, Mr Rodriguez and Outtake. In the event the application for judgment by default against Outtake does not seem to have been pursued and the judge did not find it necessary to address it.

In the judgment which he delivered on 2 July 2008 (at paragraphs [40] and [43]) the judge accepted that Mr Kirby was in breach of the unless order made by Mr Justice Evans-Lombe on 16 April 2008; and accepted that, without further order, Mr Kirby was debarred from defending the proceedings. Nevertheless, by the order which he made on 2 July 2008 the judge varied the unless order of 16 April 2008 – so, in effect, giving Mr Kirby the relief from sanction which he sought – and dismissed the application for judgment by default. He also dismissed the applications for summary judgment.

By paragraph 1 of the order of 2 July 2008 the judge varied the unless order of 16 April 2008 by substituting for paragraph 1 of that order the following requirement:

“Unless by midday on 8^th July the First Defendant [Mr Kirby] does provide to the Claimant’s solicitors, DLA Piper

(a)

copies of all documents within his possession custody or control which he would be obliged to disclose on the giving of standard disclosure in this action,

(b)

any and all details in respect of payments out of HSBC and National Westminster bank accounts of the First and Fifth Defendants that are reasonably requested by the Claimants (such request to be provided to the First Defendant by 4pm on Thursday 3^rd July 2008), and

(c)

the cash books and narrative accounts of the Fifth Defendant,

then the First defendant shall be debarred from defending these proceedings. The First Defendant shall have permission to apply to the Court in the case of doubt as to the validity of any request made by the Claimant under paragraph (b) above.”

There is nothing in the order of 2 July 2008 which discharged or varied the requirements in paragraphs 11 and 12, 14 and 15 and 18 of the freezing order of 8 April 2008: that is to say, the requirements that Mr Kirby provide a list of his assets worldwide, inform Tarn the present whereabouts of monies paid to him by Tarn and deliver copies of all relevant documents. The effect of the order of 2 July 2008 was to relieve Mr Kirby from the sanction – that he be debarred from defending the proceedings – which had taken effect on his failure to provide the required information and documents by 22 April 2008; and to substitute a similar sanction if he failed to provide information and documents (described in different terms) by 8 July 2008.

The judge granted Tarn permission to appeal from his order of 2 July 2008. The appellant’s notice was filed on 23 July 2008. The respondents to the appeal, named in that notice, were Mr Kirby, Mr Holden, STS, Mr Rodriguez and Outtake.

On 28 July 2008 a defence and counterclaim were filed on behalf of STS by Mr Hirst. That has prompted an application, made on behalf of Tarn by notice dated 26 November 2008, for an interim payment order under CPR 25.1(1)(k) in the sum of £1,566,440. The basis of that application is that – if STS were to succeed in its defence as now pleaded – it would (for reasons which I shall explain in a subsequent paragraph of this judgment) be liable to repay to Tarn the sum of £2,586,940. That sum is greater than the amount of Tarn’s primary claim against STS (£1,566,440): that being the amount, to which I have already referred, which is said to have been paid by Tarn to STS. That application for interim payment has been heard with the appeal.

On 20 August 2008 a document, described as a skeleton argument, was filed by Mr Rodriguez on behalf of Outtake. Tarn seems to have been content to accept that document as Outtake’s defence to the claim against it: see paragraph 21.6.1 of the third witness statement of Mr Stewart James Perry filed on behalf of Tarn on 26 November 2008.

On 22 August 2008 judgment in default of defence, in the sum of £5,438,020.30, was entered against Mr Kirby. By notice dated 1 September 2008 Mr Kirby applied to set aside that judgment. On 6 October 2008, at a hearing at which (it seems) Mr Kirby did not appear, Mr Justice Floyd dismissed that application; but he gave Mr Kirby liberty to apply on seven days notice. Notwithstanding the judgment of 22 August 2008 and the order of 6 October 2008 – and without having made any application pursuant to the liberty given by that order – Mr Kirby purported to file a defence on 23 November 2008. In those circumstances it is to be expected that Mr Kirby will seek to renew his application to set aside the judgment of 22 August 2008.

Also on 22 August 2008, judgment in default of defence, in the sum of £3,476,092, was entered against Mr Holden. Mr Holden has not sought to set aside that judgment. We were told by counsel that Tarn has no reason to think that he is likely, now, to make an application for that purpose. In those circumstances, it was accepted on behalf Tarn that the appeal from the refusal of Mr Justice Norris, on 2 July 2008, to accede to the application for summary judgment against Mr Holden has become academic – save as to the costs of that application.

Judgment in default of acknowledgement of service was entered against Mr Rodriguez on 22 August 2008. Nevertheless, Mr Rodriguez filed a defence on 3 September 2008. The default judgment was set aside, by consent, on 15 September 2008 by the order of Master Bowles.

As I have said, the appellant’s notice was filed on 23 July 2008. It included a request that the hearing of the appeal be expedited. That request was made on the basis that, in these proceedings, Tarn asserted a proprietary claim over assets under the control of the defendants; and that delay in the hearing of the appeal would provide the defendants with a further opportunity to diminish or dissipate those assets. That request was considered, on the papers, by Lady Justice Smith. On 9 September 2008 she directed expedition. In accordance with that direction the appeal was listed for hearing in the second week of December 2008.

On 29 October 2008 Mr Kirby informed the Court that he was not available on the dates fixed for the hearing of the appeal; and requested an adjournment to “a new date in the New Year”. He gave no reason why he could not attend a hearing in the second week of December 2008. On 5 November 2008 the Civil Appeals Office informed him that to vacate the date already fixed would be incompatible with the direction for expedition given by Lady Justice Smith; and that that date must stand. Mr Kirby did not respond to that letter until 27 November 2008. By a letter of that date he provided documents for the attention of the members of the constitution who would hear the appeal which (as his letter make clear) he then knew was to be heard on 8 December 2008. He stated that “I like many of the defendants are not available for the date selected for said appeal”. He gave no reason why he was not available. In particular he made no application (in particular, no application supported by evidence) to vacate the date on the basis that he, or others, could not be present on 8 December 2008. He wrote further, on 4 and 5 December 2008 requesting that correspondence be placed before the Court; and he arranged for further documents to be delivered to the Court in advance of the hearing.

Neither Mr Kirby, Mr Holden nor STS appeared (or were represented) at the hearing of the appeal. Mr Rodriguez appeared in person; he was permitted by the Court to represent Outtake.

In the circumstances which I have set out, we decided to hear the appeal notwithstanding the absence of the three respondents to whom I have just referred. As I have said, it was accepted that the outcome of the appeal, in relation to Mr Holden, would be academic. There had been no indication from STS (or from Mr Hirst on behalf of STS) that it wished to take any part on the appeal. We were satisfied that Mr Kirby was aware that the hearing would take place on the date fixed; we had received nothing from him which began to explain why he was unable to attend; and we were not satisfied that he was, in fact, unable to do so. All the documents that Mr Kirby wished us to take into account have been placed before us and considered.

I should add that our view that Mr Kirby would have been able to attend on the hearing of the appeal had he thought it in his interest to do so was confirmed by events during the course of the hearing. At the beginning of the second day of the hearing it became clear that Mr Kirby and Mr Rodriguez had been in communication overnight. Mr Rodriguez had informed Mr Kirby of the submissions made by counsel for Tarn on the first day. That information led Mr Kirby to send to the Court, by fax message, his response to certain of the points which counsel had made. That fax – which appeared on its face to have been sent from Manchester – was received by the Court before the hearing resumed on the second day. Mr Kirby was plainly concerned to keep himself informed of the progress of the appeal: there was nothing to suggest that he could not have made arrangements to be present in court if he had thought that to be in his interest.

At the conclusion of oral argument we were satisfied (i) that the judge had been wrong to grant Mr Kirby relief from the sanction imposed by Mr Justice Evans-Lombe’s order of 16 April 2008; and (ii) that the judge had been correct to refuse to order summary judgment against Mr Rodriguez and Outtake. Accordingly – and in order that the High Court, if faced with the need to determine any future application by Mr Kirby for an order setting aside the judgment of 22 August 2008 should be aware of our view – we directed that paragraph 1 of the order of 2 July 2008 (which, in effect, granted Mr Kirby relief from the sanction imposed by the order of 16 April 2008) be set aside. And we indicated that the appeal, in so far as it sought to reverse the judge’s decision to refuse summary judgment against Mr Rodriguez and Outtake, should be dismissed. We said that we would give our reasons in written judgments; and would take that opportunity to address the other issues which arise on this appeal.

As I have said, in the course of its business Tarn acted as intermediary in connection with loans made by Euro to assist persons who were entitled, as local authority tenants, to purchase the properties which they occupied under the “right-to-buy” provisions in Part V of the Housing Act 1985 in meeting the incidental legal or other costs associated with the exercise of those rights. Each loan was of a relatively small amount. It was not intended to cover the purchase price; but rather to meet the fees of solicitors and valuers and other preliminary costs in relation to the purchase. Typically, the loans were for a period of one year: they were to be repaid on the completion of the purchase and from the much more substantial funds which could be expected to be advanced by mortgage lenders at the time of completion.

For some time prior to the commencement of Tarn’s business in September 2006, Mr. Kirby, Mr Hirst, Mr Bennett and STS had been involved in a similar business funded by an Irish company, FAI Finance Corporation Limited (“FAI”). STS had acted as agent for FAI by introducing local authority tenants who could be identified as prospective purchasers under the right to buy provisions. Under the FAI scheme STS received substantial payments of commission in advance of the completion of a purchase by the tenant. Those commission payments were repayable if the transaction failed to complete: an event described as an “unwind”. By September 2006 the FAI scheme had proved to be a failure. Only a small proportion of those tenants to whom loans had been made – some 6% - had proceeded to completion: the remainder were in an unwind.

The position was described in a witness statement made on 23 June 2008 by Mr Simon John Granger, one of the joint administrators:

“10.

FAI is now in liquidation and I have been appointed as one of its liquidators. A sum of approximately £11.8m was paid from FAI to STS from May 2005 to March 2007. Although the information held by FAI is not complete, from the records available to me as liquidator of FAI it appears that 12,704 loans were introduced by STS to FAI in the period from April 2005 through to February 2007. This equates to an average of £932.71 per loan (which is not dissimilar to the payments made in the Tarn scheme) although I understand that individual loan amounts did vary. . . .”

. . .

“13

The STS Spreadsheet [a spreadsheet attached to the witness statement showing monies received by STS from FAI on a monthly basis] shows that in September 2006 (when the purported agreement between Tarn and STS was entered into) STS would have anticipated having had at least 1,170 completions (as this number would have been 12 months old, and repayment had to take place within one year under the loan terms). In fact, one would assume that a great deal more than this would have been completed had the scheme operated properly, as the loans would be repaid before the one year deadline. At September 2006, the number of introduced loans stood at 10,769. The information available to me as liquidator of FAI does not enable me to calculate when STS introduced loans were redeemed, however, as stated in my first affidavit of 7 April 2008, only 617 have completed to date. A further 10 have since completed. As the one year time limit has now passed, it is unlikely that any further significant redemptions of these loans will take place. Given the low level of STS completions, Messrs Kirby, Bennett and Hirst must have known that the right to buy scheme operated by STS and then by Tarn simply did not work.”

There was no evidence before the judge to contradict Mr Granger’s description of the position.

In September 2006 Tarn commenced business as, in effect, the successor to STS. Euro, an Isle of Man limited partnership, took the place of FAI. Euro acted through its general partner, HCA Limited (“HCA”), with funds provided, from March 2007 or thereabouts, by Barclays Bank Plc. Tarn acted as lead agent for HCA; and, in that role, recruited and managed sub-agents. One of those sub-agents was Mr Rodriguez’s company, Legal 4 Life.

On 26 March 2007 Euro (acting through HCA) and Tarn entered into a formal agreement (“the Tarn Agreement”) which, after reciting that Tarn “manages a process which assists council tenants to purchase their council houses through the Right to Buy Scheme [promoted by the Government of the United Kingdom]” and that Euro had agreed to provide loans to those introduced by an Agent and wishing to participate in the Right to Buy Scheme (“Customers”), was expressed “to record the terms of their relationship”. In an affidavit sworn by Mr Granger on 7 April 2008 (at paragraph 8.2), he deposed that the Tarn Agreement signed in March 2007 “reflected an earlier agreement in substantially the same terms in 2006”. It is pleaded, at paragraph 10.2 of Tarn’s Particulars of Claim, that the earlier agreement “concluded in or around mid-2006, at a time prior to Tarn commencing trading” was subsequently recorded in writing on 26 March 2007 “in materially the same terms”. The judge noted (at paragraph [12] of his judgment) that it was common ground that the agreement between Tarn and HCA was not reduced to writing until March 2007; and that:

“[12] . . . The case therefore proceeds as is pleaded in paragraph 10.2 of the Particulars of Claim, on the footing that before the agreement was entered into the scheme was ‘in materially the same terms’ as that entered into in the written agreement.”

Nevertheless, in paragraph 4a of the defence dated 23 November 2008 which Mr Kirby has filed since the hearing before the judge, it is denied – and it is said to be “exceptionally misleading of the claimants to allege” – that the trading relationship between Euro/HCA and Tarn “was materially on the same terms after the contract was signed as it was in the 6 months or so prior to any contract being in existence”. On examination of that defence, however, it is clear that the material change on which Mr Kirby relies was the introduction, at the time that the Tarn Agreement was signed on 26 March 2007, of the fixed and floating charge to secure Tarn’s obligations to Euro/HCA under the Tarn Agreement. There is no evidential support for a contention (if and so far as it is advanced) that the underlying repayment obligations on an “unwind” – which are set out in clause 3.9.2 of the Tarn Agreement – had not existed in substantially the same form since Tarn commenced trading, with funding from Euro/HCA, in September 2006.

The pattern of that trading may be summarised as follows. A local authority tenant who had been identified as a prospective purchaser by a sub-agent was encouraged to apply for a loan. His application was sent by the sub-agent to Tarn and thence to HCA, together with certain ancillary documentation. If the application was approved by HCA, the prospective purchaser (a “Customer”) would enter into a loan agreement. At that stage an advance payment commission was paid by HCA to Tarn on behalf of the Customer. At first the amount of that payment was £913.25; but that amount was increased to £929 from March 2007. Tarn paid part of the advance commission payment to the sub-agent from whom the introduction had come. On confirmation by the local authority that it accepted that the Customer was entitled to exercise a right to buy under the provisions in Part V of the 1985 Act, HCA paid Tarn a further sum for the purpose of putting the solicitors appointed to undertake the conveyancing work in funds.

If the Customer proceeded to completion, an additional fee of £275 was paid by HCA (or Euro) to Tarn on his behalf. That fee – and the advance payment commission – was treated as part of the loan. The loan was repaid from mortgage funding. Further, each loan was supported by an insurance policy, the premium in respect of which was paid from the monies lent. The policy secured repayment of the loan in certain limited cases: where there were problems with title to the property to be purchased, or where the Customer was unable to obtain mortgage funding or became critically ill or redundant. But in other cases – where the Customer did not proceed to completion and there was no insurance policy to secure repayment of the loan – Tarn was required, if completion did not occur within a specified period of time (about a year), to repay to HCA the whole of the advance commission which it had received, together with the payments made by HCA to the solicitors and in respect of the insurance premium. In effect, therefore, Tarn was required, in those circumstances, to repay part of the loan which Euro/HCA had made to the Customer. As I have said, from March 2007, Tarn’s liability to repay HCA was secured by a charge.

The repayment obligations were set out in clause 3.9.2 of the Tarn Agreement:

“3.9.Upon the occurrence of an Uninsured Unsuccessful Completion:

3.9.1

. . .

3.9.2

Tarn shall repay:

(i)

to the extent already disbursed the Initial Tarn Fee and the Solicitor’s Disbursements; and

(ii)

to the extent not refunded by the Insurer or CA2, the Customer Policy Premium.”

In that context, “Uninsured Unsuccessful Completion” meant an Unsuccessful Completion where no claim could be made under a Customer Policy. “Customer Policy” meant the policy entered into between the Customer and the Insurer (IGI Insurance Company or Lamp Insurance Company, or any other insurance company approved by Euro/HCA to provide Customer Policies). “CA2” meant CA2 Limited, an insurance broker who had agreed with both Euro/HCA and Tarn to arrange insurance for Customers to cover the possibility of the purchase of their properties not proceeding.

An “Unsuccessful Completion” included any situation other than a Successful Completion: in particular, an Unsuccessful Completion included a situation where title to the Property was not transferred from the relevant local authority to the Customer within twelve months. “Successful Completion” meant the completion of all necessary conveyancing steps required to transfer title to the property to the Customer; including the release by the Scheme Solicitor to Euro/HCA (out of the mortgage monies required to effect completion) of monies required to discharge the Loan.

“Initial Tarn Fee”, or (as defined) “Tarn Initial Fee”, meant the aggregate (£1,204) of the fee payable by the Customer to Tarn from the proceeds of the Loan (£929) on entry into the Loan Agreement and the fee payable by the Customer to Tarn (£275) on Successful Completion, as described in paragraph 2 of Schedule 1. In effect, therefore, the amount of the Tarn Initial Fee “to the extent already disbursed” could be expected – in the event of an Unsuccessful Completion – to be limited to the £929 payable on entry into the Loan Agreement. “Solicitor’s Disbursements” is not a defined term: but it is referred to at paragraph 3 of Schedule 1 and in paragraph 2.3.1.2 of the Customer Agreement set out as Schedule 2 to the Tarn Agreement. It is the amount of £300. “Customer Policy Premium” meant the premium payable in respect of the Customer Policy referred to in paragraph 4 of Schedule 1 and in paragraph 2.3.1.3 of the Customer Agreement. The amount of the Customer Policy Premium was £488.25.

Put shortly, the effect of the repayment obligations in clause 3.9.2 of the Tarn Agreement was that, in a case where a Customer who had entered into a Loan Agreement with Euro/HCA did not proceed to completion of the purchase of his property from the local authority and was not able to claim under his Customer Policy, Tarn was liable to repay the Loan to an amount up to £1717.25: that is to say an amount up to the aggregate of the Tarn Initial Payment (£929), the Solicitor’s Disbursements (£300) and the Customer Policy Premium (£488.25). Further, (i) of that sum, only £929 had been received by Tarn for its own use (the £300 had been received on behalf of - and was immediately payable to - the solicitor acting in the conveyancing transaction and the £488.25 had been paid to the Insurer) and (ii) out of the sum received for its own use (£929) – and the commission which it received from the Insurer in respect of the Customer Policy - Tarn would need to pay its sub-agent. The amount paid to sub-agents was £500 per case: see the schedule at page 101 in exhibit SJG 1 to Mr Granger’s affidavit sworn on 7 April 2008 and paragraph 4, section 22.1, in Mr Kirby’s affidavit sworn on 16 June 2008.

There were, therefore, three critical factors affecting the viability of the scheme under which Tarn carried on business from September 2006: (i) the proportion of Loans which did not proceed to Successful Completion; (ii) the terms of the Customer Policies – and, in particular, the extent to which those Loans which did not proceed to Successful Completion gave rise to an Uninsured Unsuccessful Completion - and (iii) the extent to which, after making payment to its sub-agent of £500 out of the £929 received for its own use and the insurance commission, Tarn could make – and did make - provision for its liability to Euro/HCA under clause 3.9.2 of the Tarn Agreement in respect of unwinds.

At paragraph 9 of his affidavit of 7 April 2008 Mr Granger had said this:

“9

Given the nature of the unwind liabilities, Tarn was in fact insolvent from the moment it paid away any funds received by it as fees. An analysis prepared by my staff of the liabilities of Tarn from September 2006 to November 2007 is attached at page 101 of “SJG1”. That schedule shows Tarn’s receipts (being funded from Euro and insurance commission payments) and its legitimate outgoings (ie not including payments made to connected parties). Lastly, the schedule shows the unwind liability of Tarn. From the balance at the end of every month it can be seen that Tarn was balance sheet insolvent throughout its trading period.”

That is an accurate description of the position shown by the schedule to which Mr Granger refers. But it may be said that the schedule is over-simplistic in two respects: (i) it assumes that the unwind liability in respect of each case funded is limited to £929 (whereas, on a true understanding of the provisions of clause 3.9.2 of the Tarn Agreement, the unwind liability could be as high as £1717.25 per case); and (ii) it assumes a contingent unwind liability in respect of 100 per cent of the cumulative number of cases funded (whereas the experience of the FAI scheme would suggest that some cases – say 6 per cent or thereabouts – could be expected to proceed to successful completion). But the point is well made: given the nature of the unwind liabilities and the experience of the FAI scheme, the business carried on by Tarn from September 2006 was not viable. It was inevitable that the company should become progressively insolvent: in the sense that its liabilities (including its potential unwind liabilities) would exceed its assets by an ever greater amount as trading continued.

The judge described the position at paragraph [10] of his judgment:

“10.

Tarn commenced trading in September 2006. The evidence before me discloses that HCA’s provision of funds was somewhat sporadic and there were problems in the early days but between September 2006 and October 2007 it is said by the administrators, though contradicted by Mr Kirby, that some 6,604 loans were introduced to HCA by Tarn in respect of which Tarn was paid commissions totalling some £5.8 million. However the administrators say that only 48 loans have proceeded to completion (though the reasons for this were not explained or established before me) so there is a very substantial number, which the administrators put at slightly over 4,000, of ‘unwinds’.”

As the judge pointed out, Mr Kirby did not accept that 6,604 loans were made by Euro/HCA on the introduction of Tarn: he put the figure at 5,903. But the difference between Mr Kirby and the administrators on this point is not material: on any view a very high proportion of potential purchasers did not proceed to completion: as was to be expected in the light of the experience under the earlier FAI scheme. The failure of prospective purchasers to proceed to completion – in cases not covered by insurance – led to the demand for repayment of advance commission. And, as I have said, that demand, made in November 2007, was for a sum in excess of £3.4 million.

The STS Agreement upon which the defendants rely is dated 1 September 2006. The document which has been put in evidence purports to have been signed by Mr Holden on behalf of Tarn (in the presence of Mr Kirby) and by Mr Hirst on behalf of STS (in the presence of Mr Bennett). If the document is authentic - and if 1 September 2006 is its true date – then, as the judge observed at paragraph [13] of his judgment, it was signed “at the very inception of the scheme and at a time when the flow of funds from HCA was apparently sporadic”. The object or purpose of the agreement is made clear in its final paragraph:

“11.2

The parties acknowledge that in effect the financial income/rewards being generated by Tarn are for the benefit of STS and the directors of STS and that the parties will do and sign all things necessary to effect the spirit and meaning of this agreement.”

The directors of STS were Mr Kirby, Mr Bennett and Mr Hirst and two other individuals, Mr Valentine (who was also a director of Tarn) and Mr Champion.

The first three recitals to the STS agreement recorded (1) that Tarn had been set up to operate a Right To Buy Scheme (“RTB”); (2) that STS had introduced Tarn to “a number of critical component parts without which it is acknowledged by Tarn they would be unable to operate effectively or otherwise in the RTB market”; and (3) that STS had provided “a funding line introduction, a required insurance policy, introduction to agents to generate RTB business to fund and insure, accounts function, staff and associated software together with access to various staff and the directors of STS as and when required on an on-going basis for the duration of this agreement”. Recital (4) was in these terms:

“4.

Tarn will manage the day to day administration for any RTB schemes for which STS have either introduced funding and or insurance facilities. Tarn agrees to pay to STS a fee for each and every case funded by a funding line introduced by STS and or its directors. Tarn will pay to STS and or its directors 75% of the gross front end fee it obtains for each case funded by an STS introduced funder. Back End fees will be split on an equal basis 50-50.”

Recital 5 recorded that Tarn agreed that any insurance commissions paid on cases funded and insured on STS introduced funding would be paid in full to STS or as directed by STS for and on behalf of STS and or its directors.

Clause 6 of the STS agreement set out the financial arrangements in greater detail:

“6

Tarn Obligations

1.

Tarn irrevocably agrees to pay to STS each week or as directed but no more than once a week 75% of the front end fees it receives from all funders introduced to Tarn by STS, further STS or its directors may at its sole discretion direct Tarn to make directly to one or more directors or to a third party, such payments to be set against the monies due or owed under the terms of this agreement to STS. Payment instructions may be made by fax, email, telephone or by a director of STS directly to the bank subject to the signing conditions of the Tarn accounts for which the money is being paid for amounts due or accruing that are owed by Tarn to STS under the terms of this agreement.

2.

Tarn irrevocably agrees that 100% of all monies paid in relation to insurance commissions paid either directly to Tarn, STS or CA2 on cases insured and or funded on the Tarn RTB scheme by a funder introduced by STS or its directors are for the sole benefit of STS and will be paid to STS directly in full or as instructed by STS or a director of STS.

3.

Tarn irrevocably agrees to set up all its bank accounts in a way that requires a director of STS to co sign all cheques and transfers of money from the accounts to ensure that STS monies due are protected. Further Tarn agrees to give reasonable access to all its financial records to enable STS to confirm payments are being made to STS and to check the balances of monies owing by Tarn to STS. STS is in effect paid weekly in arrears by Tarn or as directed by STS or a director but in any case no more frequently than once a week. Tarn will set off each week monies owed to STS by Tarn against any financial liabilities owed by STS to Tarn and agree this will be done each Friday or after each payment of the Tarn front end fees by funders introduced by STS and or its directors.

4.

Tarn irrevocably agrees to the full liability to fund any and all litigation/legal costs incurred by STS in relation to enforcing the terms of this agreement regardless of the success or failure of such legal action.

5.

Tarn shall provide weekly a list of all cases funded and or insured on the Tarn RTB scheme funded by funders introduced by STS and or its directors and a payment schedule detailing the front end fees paid to Tarn.”

The obligations of STS under the agreement were set out under clause 8:

“8

Obligation of STS

To introduce to Tarn potential new funding line and insurance providers, to assist with the management of the business relationships between Tarn, the Agents, funders and insurers as required or asked by Tarn. To support Tarn in relation to the day to day management of the scheme and to provide access to the directors of STS as required by Tarn. To assist in the development of the scheme.”

The agreement was to run for 2 years from the date on which it was signed; and was to continue thereafter unless and until terminated by 12 months written notice by either party to the other.

The STS Agreement made no provision for the repayment by STS of any sums paid by Tarn to STS under clause 6.1 (or otherwise) in the event of an “unwind”: that is to say, in a case where the loan in respect of which an advance commission payment (or front end fee) had been paid to Tarn was not repaid by Customer either from mortgage funding on completion or from the proceeds of insurance (where failure to complete arose by reason of an insured risk). It is necessary to have in mind that, in such a case, the whole of the advance commission payment – together with the premium paid in respect of the Customer Policy and monies paid to the solicitors instructed on behalf of the Customer – was repayable by Tarn to HCA. The effect of the STS Agreement – on its face – was that 75% of the front end fee which it received from Euro/HCA on behalf of the Customer was to be paid away (within a week of receipt) to STS or its directors without recourse: so depriving Tarn of those monies to meet its liabilities in the event that the front end fee had to be repaid to HCA in the event of an unwind.

A further effect of the STS agreement – on its face – was that the monies to be paid by Tarn to STS or its directors under clause 6.1 (read with recital 4) were 75% of the gross amount of the advance commission payments (front end fees) received by Tarn. Given that Tarn had to pay its sub-agent out of the advance commission payment which it received, it followed that, unless the amount payable by Tarn to the sub-agent was less than 25% of the gross amount of the advance commission payment which it received, the amount payable by Tarn to STS under clause 6.1 of the STS agreement would be greater than the net amount of the advance commission payment remaining in Tarn’s hands after payment of the sub-agent. As I have said, the fee payable by Tarn to its sub-agent was £500: some 54% of the advance commission payment. The effect was that, out of the £929 which it received by way of front end fees, Tarn was required to pay £696.75 (75%) to STS and still had to find £500 to pay the sub-agent.

As I have said the judge accepted (at paragraph [40] of his judgment) that the administrators’ complaint that Mr Kirby had failed to provide the information and documents required by the orders of 8 and 16 April 2008 was made out. He went on to say this: “I therefore agree [with counsel] that without further order Mr Kirby is debarred from defending the case”. He had already directed himself (at paragraph [25] of his judgment) that the first question for him to consider was whether Mr Kirby should be afforded relief from the sanction imposed by the order of 16 April 2008: “for, if he is not, the Administrator Claimants are entitled to such judgment as may appear right on the face of their pleaded case without any question of considering the underlying evidence”. He reminded himself (at paragraph [41] of his judgment) that, in order to determine that question, he was obliged to consider all the matters set out in CPR 3.9. He approached his task (at paragraphs [42] to [56] of his judgment) on the basis of what he described as “the check list approach”.

In adopting that approach, the judge addressed the following factors:

The judge took the view (expressed at paragraph [56] of his judgment) that Mr Kirby had established that there was a real prospect of a successful defence to Tarn’s claim for equitable compensation in respect of the £3,124,122 said to have been paid by Tarn under the STS agreement. In the next section of this judgment, I examine the reasoning which led him to that conclusion. It was that view which proved decisive in the context of the judge’s decision to grant relief from sanction. He said this:

“[56] . . . To enforce the ‘unless order’ according to its terms and not to allow relief from sanction would deprive [Mr Kirby] of the opportunity of putting forward that defence in circumstances where challenges are made to his integrity, which he is otherwise unable to address by cross-examining those who make the charges against him. In my judgment, the seriousness of the charges which are made against Mr Kirby is a decisive factor which brings down the balance firmly in favour of granting relief from sanctions.”

The reasoning which led the judge to take the view that Mr Kirby had established that there was a real prospect of a successful defence to Tarn’s claim for equitable compensation in respect of the £3,124,122 paid under the STS agreement may, I think, be fairly summarised as follows.

First, the judge set out, at paragraphs [20] to [24] of his judgment, the basis upon which (as he understood the case advanced on behalf of Tarn) Mr Kirby was said to be liable. Put shortly: (i) he noted that it was said that Mr Kirby was a de facto or shadow director of Tarn; that, as such, he owed a duty to act in good faith and in the best interests of Tarn, a duty not to act so as to place himself in a position in which his personal interests did or might conflict with the interests of Tarn, a duty not to make a secret profit or commission, a duty not to act for purposes collateral to the purposes conferred by Tarn’s articles of association and a duty to take reasonable care in the conduct of the business and affairs of Tarn; and (ii) he accepted that, in the absence of proper disclosure to the board of directors of Tarn in compliance with its articles of association and section 317 of the Companies Act 1985, it was Mr Kirby’s duty, as a de facto or shadow director, to disclose to the shareholders of Tarn in general meeting the personal interest which he, as a participator in and director of STS, derived from the STS agreement. That posed the question: had there been disclosure to a shareholders’ meeting? Tarn’s case was that there had not been; and that, accordingly, the agreement was voidable at the option of the company. The judge noted that the administrators had purported to avoid the agreement and (on that basis) sought from Mr Kirby as a de facto director (as well as from STS) everything paid under that agreement. In the alternative, it was said that Mr Kirby had acted in bad faith in causing Tarn to enter into the agreement; and (in the further alternative) that he had dishonestly assisted others (Mr Bennett, Mr Hirst and Mr Holden) in their breaches of fiduciary duty.

Second, the judge set out (at paragraphs [49] and [51] of his judgment) what he understood to be Mr Kirby’s defence to Tarn’s claim. He said this:

“[49] Doing my best to gather together the various points which Mr Kirby advanced in his defence, his defence seems to lie along these lines. First, he disputes the figures on which the administrators are operating. He says the administrators are assuming that HCA provided Tarn with 6,604 cases but it is demonstrable from the documents that they provided only 5,903. He says that the administrators are proceeding on the footing that Tarn received something of the order of £900 as up front commission, but it did no such thing. It received only about £429 by way of up front commission, the remainder being payable to sub-agents. Moreover, part of the £429 which Tarn itself received came not from HCA but from a borrower under arrangements made at the time when the borrower applied to HCA for the loan and consented to payment out of the loan advance of a commission to Tarn. Lastly, he says that on the figures used the administrators appear to have taken no account of a deduction from the front end commission payable to Tarn of approximately £275 in each case which has been placed to the credit of a reserve account. He therefore says that he has a defence to the claim against him for some £3 million which he says proceeds on the wrong basis.”

. . .

“[51] Secondly, Mr Kirby says that there is indeed no formal minute of Tarn’s board which approves the STS agreement but that is because STS and Tarn operated on an entirely informal basis. He says that the shareholder of Tarn, his wife Atiyah Mirza, knew exactly what was going on and that there was disclosure to her or to the true owners sufficient to satisfy the requirement for disclosure to a general meeting of shareholders. He says he is entitled to invoke – a matter on which he has been advised when solicitors were retained by him – the ‘Duomatic principle’ [1969] 2 Ch 365, namely that since all persons beneficially interested in the company have assented to the procedure adopted, the lack of formality is not an objection.”

It is significant that the judge did not refer, in those paragraphs, to Mr Kirby’s contention that he was not a de facto director of Tarn. It is not clear from his judgment whether the judge thought that that contention could have any real prospect of success.

Third, the judge addressed the points of defence which he had identified. As to the first (the disputed figures), he said this:

“[50] It is difficult to make an estimate of the worth of this defence since it was not addressed in any evidence on the part of the administrators to which my attention was drawn. It seems to me that the administrators have proceeded not by reference to some notional calculations but by reference to actual payments made by HCA to Tarn. But I am not sufficiently confident that upon proper scrutiny this is the actual basis on which the administrators have proceeded to say that Mr Kirby’s criticisms are entirely fanciful. In particular, the fact that as a matter of mechanics Tarn made the payment does not address the question ‘whose money (HCA’s or the borrower’s) was being paid?’”

As to the second of the two points of defence which he had identified (lack of formality no objection), the judge noted (at paragraph [52] of his judgment) the submission, made on behalf of Tarn, that the ‘Duomatic approach’ had no application in circumstances where the company concerned was insolvent. In support of that submission he had been referred to the observation of Mr Justice Briggs in Lexi Holdings v Luqman [2007] EWHC 2652 (Ch) that:

“The ‘Duomatic principle’ does not apply where the company is insolvent or rendered insolvent by the impugned transaction”

But he went on to say this:

“[53] In response to that, Mr Kirby says that he does not accept the assertion of the administrators contained in the Particulars of Claim that Tarn was, at all material times, insolvent. He says that his understanding is that insolvency requires an inability to pay debts as and when they fall due for payment and that, on that basis Tarn was not insolvent when the agreement with STS was entered. He says Tarn was not rendered insolvent by the transaction because, at the time when the STS agreement was entered into, the actual agreement between Tarn and HCA had not yet been embodied in the March 2007 agreement. On the then state of the negotiation, nobody at that time thought about the unwinds (a position which I note is contrary to that taken by Mr Hirst and Mr Bennett but on which Mr Kirby would be entitled to cross-examine these). In any event, STS was intended to receive only 75 percent, not 100 per cent, of the payments made to Tarn and essentially it was a question of risk management, i.e. that the volume of ‘unwinds’ would be so large that Tarn might have to repay some of its receipts. STS received the money from Tarn at a time when the directors and participators in STS had no idea that the scheme was going to be the failure which it has turned out to be, and did not know that HCA would not have sufficient funds available to make the scheme work and create a backlog of borrowers. Further, Mr Kirby and the STS/Tarn [directors] thought at the time that there was in place an insurance policy with Lamp Insurance of Gibraltar, securing the repayment of 40 per cent of any failed cases and he complained that subsequent to the [entry] of the STS agreement HCA had altered the terms of cover. Taken together, he said there were sufficient indications to him for him not to believe that the transaction he was entering was going to render Tarn insolvent.”

. . .

“[55] Equally he says that for the same reasons there is no question of him entering the STS agreement in bad faith. He says that, contrary to what the administrators say, STS did indeed put together all of the input which enabled Tarn to be created and to establish a business. He specifically denies the allegation contained in paragraph 35.2 of the Particulars of Claim that Tarn had already identified HCA as its funder and procured its insurance provider from sources other than STS prior to the execution of the agreement. . . .”

The judge was persuaded that it could not be said that the second point of defence had no real prospect of success. As to the matters described in paragraph [53] of his judgment, he said this:

“[54] In my judgment, it is not possible on the present state of the evidence to say that these matters simply have no prospect of success and are entirely fanciful creations of Mr Kirby, and that as the evidence now available or which might be available as a de facto director [or] a shadow director is liable for breach of fiduciary duty to Tarn in entering into the STS agreement.”

And, as to the matters in paragraph [55] to which I have referred, the judge said this:

“[55] . . . Once again, it seems to me impossible to say on the present state of the evidence that that assertion has no real prospect of success; that if the action follows its normal course (with disclosure on either side and exchange of witness statements), no fact will emerge which will cast any real doubt on the full present pleaded case of the administrators; and that Tarn was at all times insolvent and that the STS agreement can only have been entered into in bad faith”

The judge noted (at paragraph [70] of his judgment) that the case against Mr Holden was that he was a director of Tarn who (as an employee of STS) was personally interested in the STS agreement; that he had failed to disclose his interest as an employee of STS to a formal board meeting of Tarn; and, further, that, by his participation by signing the STS agreement on behalf of Tarn, he had dishonestly assisted Mr Kirby, Mr Bennett and Mr Hirst in their breaches of fiduciary duty. He refused summary judgment against Mr Holden for the three reasons which he gave at paragraph [71] of his judgment. First, the judge was satisfied that Mr Holden had a real prospect at trial of advancing a defence based on the material presented by Mr Kirby; on which Mr Holden relied in an affidavit which he swore on 16 June 2008. Second the judge was satisfied that “the nature of the case against him is a compelling ground for affording him the opportunity to address it at a trial”. And, third, he was persuaded that “the interests of justice require that [Mr Holden] should be afforded an opportunity away from the pressures of interlocutory proceedings to think whether he might seek some relief against such liability as might technically be found against him”.

In reaching the conclusion that summary judgment should not ordered against Mr Holden, the judge observed that he was paid a salary of £22,500; which, with commission, brought his remuneration up to £31,000 a year. The claim against him was for a sum in excess of £3 million. The judge said this:

“[71] These are huge sums to seek against a modestly remunerated employee. In my view there is a compelling case for requiring proper proof of the charge against Mr Holden and for affording him a proper opportunity (such as does not exist at this stage, when he is acting in person and is having to deal with the effect of a succession of interlocutory applications) to place before the court such defence as he has and such case as he has that he ought fairly to be relieved from the whole or some of his apparent liabilities to Tarn. He has been faced in quick succession with the Particulars of Claim, the summary judgment application to preclude him advancing a defence, and a debarring order precluding him from opposing the summary judgment application. It would in my judgment be wholly unjust to give judgment against Mr Holden but not against any of the other Defendants.”

The judge described the second group of claims – that is to say, the claims against Mr Kirby, Mr Rodriguez and Outtake in respect of the payment of secret commission – at paragraph [59] of his judgment:

“[59] . . . As I have said, Legal-4-Life Ltd was a sub-agent of Tarn under the scheme. It is Mr Kirby’s case that he entered into an arrangement with Legal-4-Life for the payment to him of a consultancy fee in the sum of £50 for each case which HCA funded on the application of Legal-4-Life. He says that pursuant to that arrangement he received £185,850 which was his contractual entitlement. The administrators say that that sum was a bribe paid by Mr Rodriguez to Mr Kirby in order to obtain an advantage.”

At paragraphs [60] to [63] the judge examined the authorities which had been cited to him as to the nature of a bribe. In particular, he noted the definition formulated by Mr Justice Slade in Industries and General Mortgage Co Ltd v Lewis [1949] 2 All ER 573, 575 and cited with approval by Mr Justice Leggatt in Anangel Atlas Compania Naviera S.A. and others v Ishikawajima-Harima Heavy Industries Co Ltd [1990] 1 Lloyd’s LR 167, 171:

“. . . For the purposes of the civil law a bribe means the payment of a secret commission, which only means (i) that the person making the payment makes it to the agent of the other person with whom he is dealing; (ii) that he makes it to that person knowing that that person is acting as the agent of the other person with whom he is dealing; and (iii) that he fails to disclose to the other person with whom he is dealing that he has made the payment to the person whom he knows to be the other person’s agent.”

He referred, also, to the observations of Mr Justice Briggs in Ross River Ltd v Cambridge City Football Club Ltd [2007] EWHC 2115 (Ch) paras [203] – [208], [212] – [218]; [2008] 1 All ER 1004, 1048-1050, 1051-1052. Mr Justice Briggs had said this (ibid, [204], [205]):

“[204] The essential vice inherent in bribery is that it deprives the principal, without his knowledge or informed consent, of the disinterested advice which he is entitled to expect from his agent, free from the potentially corrupting influence of an interest of his own: see Logicrose Ltd v Southend United Football Club [1988] 1 WLR 1256 at 1260-1261 per Millett J . . .

[205] The liability of the payer to have the ensuing contract rescinded is based upon him having been an accessory to the agent’s breach of fiduciary duty to his principal: see Hurstanger v Wilson [2007] 4 All ER 1118, at [35], [2007] 1 WLR 2351. But the payer will not merely by paying his counterparty’s agent incur liability as an accessory, unless the payer actually knows or is wilfully blind to the question whether the agent has concealed the payment from his principal: see again per Millett J in Logicrose Ltd v Southend United Football Club [1988] 1 WLR 1256 at 1261-1262 . . .”

The judge concluded:

“[63] . . . It must therefore be shown that Mr Kirby concealed the £50 consultancy fee from Tarn and that Legal-4-Life actually knew that to be so, or was wilfully blind to this issue.”

The judge was satisfied that summary judgment should not be given against either Mr Kirby or Mr Rodriguez in respect of the second group of claims: in particular, he was satisfied “that there is a real prospect that they can successfully advance a defence to it and also the seriousness of the allegation is a compelling reason why they should be entitled to defend their integrity at trial.” He reached that conclusion for the reasons which he expressed in the following paragraphs:

“[66] First, whether disclosure was made and whether sufficient informed consent was obtained seems to me a pure question of fact and inappropriate to be decided on contested evidence on a summary judgment application. It is Mr Kirby’s position and that of Mr Rodriguez that everybody knew of the arrangement: that Mr Hirst’s and Mr Bennett’s professed ignorance on which the administrators rely is suspect (not least because there are in existence meeting notes concerning a tax planning conference which plainly shows that Mr Hirst and Mr Bennett were aware of the payments being made to Mr Kirby in respect of dealings with Legal-4-Life). It is also the case that Mr Holden, the operations manager and a director of Tarn, was aware of the arrangement. Indeed, the actual bribe so called itself was not paid by Legal-4-Life to Mr Kirby but by Tarn to Mr Kirby and appears in its books.

[67] Second, it is also the case that the administrators arguably have misunderstood the nature of the arrangements which existed in relation to approval of HCA funded loans. The administrators appear to have presented the case on the footing that it lay within the power of Tarn to accept or reject applications made by borrowers through sub-agents to HCA for finance so that this was something which Mr Kirby could be bribed to influence. But there is sufficient material to demonstrate that this view is mistaken. HCA only approved lending when it had received what was in effect a clear certificate from its nominated accountants, who considered each transaction independently on HCA’s behalf.

[68] Third, so far as Mr Rodriguez is concerned, I accept as entirely genuine his evident outrage that he should be accused of bribery and fraud when, so far as he is concerned, he entered into what he thought was an ordinary, open commercial arrangement for the benefit of Legal-4-Life and not to the disadvantage of Tarn or STS. . . .”

The judge took the view that: “In these circumstances, summary judgment against Mr Kirby on the bribe claim or against Mr Rodriguez is not warranted”.

The judge addressed the position of STS and Outtake in a single short paragraph of his judgment. He said this:

“[69] If Mr Kirby and Mr Rodriguez are to be permitted to defend, it would seem to me to follow as a matter of course that the companies in which they were respectively involved, STS and Outtake, should also be given permission to defend.”

Although it is, perhaps, less than clear from that paragraph, the judge must, I think, be taken to have decided that STS was entitled to defend the claim against it in respect of the payments under the STS agreement: there was no claim against STS in respect of the payments to Legal 4 Life and Outtake.

As I have said, on 28 July 2008 STS (acting by Mr Hirst) filed a defence to Tarn’s claim. In the present context it is pertinent to refer to two paragraphs of that defence. First, by paragraph 13 it is admitted by STS that its obligation under clause 6(1) of the STS agreement was to pay 75% of the front end fees received from funders introduced to Tarn by STS; and that front end fees (in that context) meant the gross amount of the advance payment commission paid to Tarn by HCA (that is to say the sum of £929 – or £913.25 – received by Tarn before payment of the sub-agent’s fee of £500). Second, it is said (at paragraph 17) that, although the STS agreement contained no express term under which Tarn was entitled to recover from STS sums paid to STS in the event that Tarn was itself required, by the unwind provisions in the Tarn Agreement, to repay to Euro/HCA, such a term “was nevertheless incorporated into the STS Agreement”. It is not, I think, necessary to describe or analyse in any detail the basis upon which an unwind term is said to have become incorporated in the STS Agreement: it is enough, in the present context, to note that that is the case now made on behalf of STS. But, for the avoidance of doubt, I should add that Mr Kirby does not himself make such a case in his own defence; nor did he do so before the judge (as appears from paragraph [53] of the judgment).

On 28 November 2008, Tarn applied to this Court for an interim payment order against STS. That application was heard with the appeal. The application is supported by a witness statement made on 26 November 2008 by Tarn’s solicitor. The basis of the application is put, succinctly, at paragraph 23 of that witness statement:

“23

Should STS be successful in its defence, the STS Agreement will be rectified and an unwind term will be incorporated into the STS Agreement. As stated above there have been 6,555 Loans which have not been repaid within the necessary timescale (unwinds) and therefore STS would have a liability to pay £2,586,940 to the Company.”

The amount of £2,586,940 is supported by calculations set out in a schedule exhibited to the witness statement. Put shortly, the amount represents the difference between the actual amounts which STS accepts were received by the defendants under the STS Agreement (£3,114,278) and the amount which would have been payable under that agreement on the basis of its terms (as admitted by STS) and the incorporation of an unwind term (£527,338).

Tarn does not seek an interim payment order in the amount of £2,586,940: the amount sought is £1,566,440. The application is put in these terms (at paragraphs 24 and 25 of the witness statement):

“24

If the Claim and Defence were to proceed to trial, the Company would obtain judgment for a substantial sum of money (other than costs) against STS, as either:

24.1

It succeeds on its Claim to avoid the STS Agreement, and STS is obliged to repay £1,566,440 paid to it; or

24.2

STS succeeds on its Defence, an unwind term is included in the STS Agreement and STS is liable to pay to the Company the sum of £2,586,940.”

25

The sum of money sought by way of interim payment is the lower of the Claimant’s claim in these proceedings and STS’s liability to the Company should its rectification argument succeed.”

At the conclusion of oral argument I was satisfied that, in addressing the question whether Mr Kirby should be relieved from the sanction imposed by the order of 16 April 2008, the judge had erred in the following respects.

First, the judge was wrong to attribute Mr Kirby’s failure to comply with the requirements of the orders of 8 April and 16 April 2008 to advice received from his legal advisers. There was no evidence to support that view. The position, as it appeared from the evidence was this:

In this context, it is important to keep in mind the danger of accepting assertions made by a litigant in the course of submissions (but unsupported by sworn evidence) that a breach of an order is the fault of lawyers formerly instructed. The danger lies in the fact that such assertions cannot be verified or tested without objectively credible evidence of the advice given by those lawyers.

Second, although the judge had noted (at paragraph [42] of his judgment) the observations of this Court in R C Residuals Ltd v Linton Fuel Oils Ltd and another [2002] EWCA Civ 911, [28], [30], he failed to give proper weight to the serious nature of what (as he should have appreciated) was a deliberate breach of an unless order made to enforce compliance with the provisions of freezing and proprietary injunctions. He should have had regard to the observations of Mr Justice Etherton in CIBC Mellon Trust Company v Stolzenberg [2003] EWHC 13 (Ch), [103]-[104], endorsed in this Court, [2004] EWCA Civ 827, [167]:

“[103] . . . In the present case the “unless orders” were supplementary to, and in enforcement of, freezing orders. Freezing orders are critical weapons in the court’s armoury against fraud, securing the preservation of assets which might otherwise be wrongly dissipated pending judgment, and, in appropriate cases, the preservation of evidence, including documentation, and the provision of information to trace the proceeds of fraud. In the present case, the freezing orders were designed to deal with all those aspects.

[104]. Wilful and conscious disobedience to freezing orders, against the express advice of a defendant’s English lawyers, is a matter of the gravest concern. While each case must turn upon its own facts, the setting aside of a judgment properly entered against a defendant for willful and conscious failure, against legal advice, to comply with such orders sends, generally speaking, entirely the wrong message to those who face allegations of fraud”.

Third, the judge was wrong to take the view (at paragraph [47] of his judgment) that the effect on Tarn of Mr Kirby’s failure to comply with the orders of 8 and 16 April 2008 was “relatively slight”, given the existence of the freezing injunction. He should have appreciated that the purposes for which orders for the provision of tracing information and the delivery of documents were made were not met by the existence of the freezing order. In particular:

The judge ought to have appreciated that the orders for the provision of tracing information and the delivery of documents were intended to provide important safeguards in relation to Tarn’s claims; and that the consequences of Mr Kirby’s failure to comply with those orders were potentially very serious in a case of this nature.

Fourth, the judge was wrong in failing to ask himself whether there was any real prospect that Mr Kirby would provide the information and documents described in the unless order of 2 July 2008 by 8 July 2008. It is important to keep in mind that the judge recognised that, as at 2 July 2008, Mr Kirby had still not complied with the order of 8 April 2008 or the freezing order of 16 April 2008. He said, in terms (at paragraph [58] of his judgment), that “[Mr Kirby] will understand that he still must comply with the order of Mr Justice Evans-Lombe . . .”. He did not extend the time for complying with those orders. He seems to have accepted that there would be a continuing breach; but (without explaining why he thought it no longer appropriate) he discharged the sanction for non-compliance. He imposed a new sanction for failing to provide information and deliver documents (which he identified in different terms). Given the history of persistent non-compliance with the requirements in the April orders – and the failure to comply with the undertakings given to Judge Pelling - there was no reason to think that Mr Kirby would provide the information and deliver the documents described in the unless order of 2 July 2008 by 8 July 2008. In particular, there was no reason why the judge could have confidence in any assurances given by Mr Kirby to that effect. In that context it is pertinent to have in mind that Mr Justice Evans-Lombe had been told by counsel on 16 April 2008 on instructions from Mr Kirby (transcript, page 50, lines 6 and 7) that Mr Kirby then thought it likely that he could comply with the requirements of the 8 April order “next week”.

Fifth, in directing himself (at paragraphs [48] and [56] of his judgment) that, if Mr Kirby had established that there was a real prospect of a successful defence to the claim against him, then the seriousness of the allegations made against him was a decisive factor which led to the balance coming down firmly in favour of granting relief from sanction, the judge applied the wrong test.

It is important to keep in mind that the power of the court to make an unless order is conferred by CPR 3.1(2)(m) read in conjunction with CPR 3.1(3) and CPR 3.4(2). The power is exercisable for the purpose of furthering the overriding objective of enabling the court to deal with cases justly: CPR 3.1(2)(m) read with CPR 1.1. The order of 16 April 2008 was not challenged on appeal. When approaching the application for relief which was before him on 2 July 2008, the judge was required to start from the position that the order of 16 April 2008 was a proper order to make for the purposes of furthering the overriding objective in the light of the circumstances which were before Mr Justice Evans-Lombe.

Power to relieve from the sanction imposed by an unless order is conferred by CPR 3.9(1). That power, also, is exercisable for the purpose of furthering the overriding objective. CPR 3.9(1) requires the court to consider all the circumstances of the case; including, in particular, the matters listed under that rule. The first of those matters is “the interests of the administration of justice”. The interests of the administration of justice require that the court, when considering whether to relieve from sanction imposed by an unless order, to have regard to the circumstances in which the unless order itself was made. There was no reason, in the present case, for the judge to think that, when making the unless order on 16 April 2008, Mr Justice Evans-Lombe had proceeded on any basis other than that there was a real prospect of a successful defence: an unless order debarring a defendant from defending the claim against him is only appropriate if made on the basis that there is no reason to think that (in the absence of the order) the defendant would not be able to advance a defence with a real prospect of success. If it had appeared to Mr Justice Evans-Lombe on 16 April 2008 that Mr Kirby had no real prospect of successfully defending the claim against him, the appropriate order for him to have made would have been an order under CPR 24.2(a)(ii) rather than an unless order. It follows that the judge was not entitled to take the view, on 2 July 2008, that Mr Kirby should be relieved from the sanction imposed by that order solely on the ground that, as it appeared to him, there was a real prospect of a successful defence. He was required to assume that the possibility that the sanction imposed by the unless order would deprive Mr Kirby of the opportunity to advance a defence with a real prospect of success had already been taken into account by Mr Justice Evans-Lombe when making the order of 16 April 2008.

The true test, on the application for relief from the sanction imposed by the order of 16 April 2008, was whether – notwithstanding that the order was a proper order to make for the purposes of furthering the overriding objective in the circumstances known at that time – it remained appropriate, in the circumstances known at the time of the application for relief, to allow the sanction to take effect. It can be seen that each of the specific matters listed under CPR 3.9(1) is directed to that test. The fact that (as the judge thought) Mr Kirby had established in July 2008 what must be taken to be an implicit assumption underlying the order made by Mr Justice Evans-Lombe on 16 April 2008 – that Mr Kirby had a real prospect of successfully defending the claim against him if he were permitted to do so – cannot be a decisive factor.

It was for those reasons that I took the view that the judge’s exercise of the power conferred upon him by CPR 3.9 was flawed; and that it was open to this Court to substitute its own judgment on the question whether Mr Kirby should be relieved from the sanction imposed by the order of 16 April 2008.

Adopting and applying what I take to be the true test – whether, on the basis that the unless order of 16 April 2008 was a proper order to make for the purposes of furthering the overriding objective in the circumstances known at that time, it remained appropriate, in the circumstances known on 2 July 2008, to allow the sanction to take effect – I was (and remain) in no doubt that relief from sanction should be refused. This was a case where Mr Justice Evans-Lombe thought it necessary, in order to safeguard the proprietary claims which the Tarn administrators had identified, to require the provision of tracing information and the delivery (and so preservation) of documents. He was satisfied that Mr Kirby had failed to comply with the requirements imposed by his freezing order of 8 April 2008; and that there was a real danger that he would continue to fail to comply with those requirements when they were incorporated into the freezing order of 16 April 2008. He was satisfied that continued non-compliance should attract the sanction that Mr Kirby be debarred from defending the claim against him. As I have said, his orders of 8 April and 16 April 2008 were not challenged. Unless there had been some material change in circumstances between 16 April 2008 and 2 July 2008 – or some good reason to excuse continued non-compliance – Mr Justice Evans-Lombe’s order of 16 April 2008 should be allowed to take effect as he intended. There was no material change in circumstances.

I would not rule out the possibility that there will be cases in which – between the date that the unless order is made and the date that the court has to consider relief from sanction – it has become clear that the prospects of a successful defence to the claim were very much stronger than had been thought: but this is not such a case. And there will be cases where there is good reason to excuse non-compliance; or where there is good reason to think that a short extension of time will lead to compliance. But there was nothing in the present case to suggest that Mr Kirby had made any serious effort to comply with the orders of 8 April and 16 April 2008 in the weeks since 16 April 2008; or that he would be likely to do so. On a proper appreciation of the evidence, his persistent non-compliance was deliberate. In a case of deliberate and persistent non-compliance with orders to provide information and deliver documents made in order to safeguard proprietary claims, a proper administration of justice requires that, save in very exceptional circumstances, sanctions imposed should take effect. There were no exceptional circumstances in the present case.

Given that, at the conclusion of oral argument, the Court was satisfied that the appeal from the judge’s decision to grant relief from sanction should be allowed, it is, perhaps, unnecessary (at least in respect of the claims against Mr Kirby) to go on to consider whether the judge was wrong to refuse summary judgment in respect of the first group of claims. But, for completeness – and because it may be of relevance to the position of Mr Holden and STS – I think it appropriate to address that issue. I can do so shortly.

The judge identified (at paragraph [49] of his judgment) four matters of fact which were the subject of challenge by Mr Kirby: (i) that the number of cases funded by HCA was not 6,604 (as the administrators alleged) but 5,903; (ii) that the amount received by Tarn by way of advance commission payment was not “something in the order of £900” (as the administrators alleged) but was the net amount of £429 after payment of the fee payable to the sub-agent; (iii) that the £429 which Tarn received came not from HCA but (in part at least) from the borrower out of the loan advance; and (iv) that the administrators had taken no account “of a deduction from the front end commission payable to Tarn of approximately £275 in each case” which, as Mr Kirby alleged, had been placed to the credit of a reserve account.

The judge took the view (at paragraph [50] of his judgment) that: “It is difficult to make an estimate of the worth of this defence since it was not addressed in any evidence on the part of the administrators to which my attention was drawn”. But the evidence which had been filed by the administrators showed, beyond dispute, that there was no substance in points (ii) and (iv); and that points (i) and (iii) were irrelevant in the context of the claim against Mr Kirby. The true position may be summarised as follows:

At paragraph [51] of his judgment, the judge referred to Mr Kirby’s reliance on the Duomatic principle: at paragraph [52] he referred to the submission, made on behalf of Tarn, that that principle had no application in circumstances where the company concerned was insolvent: at paragraph [53] he noted Mr Kirby’s submission that he had no reason to think that the transactions into which he was causing Tarn to enter would lead to its insolvency: at paragraph [55] he accepted that facts might emerge at trial which would cast doubt upon the administrators’ assertions that Tarn was at all times insolvent and that the STS Agreement could only have been entered into in bad faith. He made no reference in those paragraphs to the analysis provided by the administrators in the schedule at page 101 of exhibit SJG 1 to Mr Granger’s affidavit of 7 April 2008 (to which I have referred earlier in this judgment); or to the failure of the FAI scheme in which Mr Kirby had been involved. In my view the judge was wrong to ignore those matters.

I have explained, earlier in this judgment, that there were three critical factors affecting the viability of the scheme under which Tarn carried on business from September 2006; and I have explained why, given the nature of the unwind liabilities to which Tarn was committed under its arrangements with Euro/HCA and the experience of the FAI scheme, the business carried on by Tarn from September 2006 was not viable. As I have said, it was inevitable that Tarn would become progressively insolvent: in the sense that its liabilities (including its potential unwind liabilities) would exceed its assets by ever increasing amounts as trading continued. Tarn could only pay its liabilities as they fell due out of cash generated by continued trading; that is to say, by incurring further liabilities which could not be met save by incurring yet further liabilities which, in turn, could not be met. In short, Tarn’s business model was a scheme which, sooner or later, was bound to collapse. That was plain from the evidence which the administrators had put before the judge.

Against that background – and on the basis that the STS Agreement is authentic - Mr Kirby, Mr Bennett and Mr Hirst caused Tarn to enter into an agreement with STS which was calculated to extract from Tarn for their own benefit and for the benefit of companies which they controlled such cash assets as it had from time to time: so accelerating its demise. The evidence that Mr Kirby, Mr Bennett and Mr Hirst were responsible for all business decisions affecting Tarn is compelling: it is impossible to avoid the conclusion that they owed it fiduciary duties as de facto directors. Given their experience of the earlier FAI scheme, it is impossible to take the view that they did not appreciate that they were engaged in a fraud on Tarn and its creditors; and, in particular, in a fraud on Euro/HCA.

I appreciate the judge’s reluctance to find a case of fraud or breach of fiduciary duty made out on an application for summary judgment. But the evidence in the present case was overwhelming. The judge should have recognised that this was a proper case for summary judgment in respect of the first group of claims.

At the conclusion of oral argument I was satisfied that the judge was right to refuse summary judgment against Mr Rodriguez and Outtake in respect of the second group of claims (the bribery claims). Given that the Court had decided to allow the appeal from the judge’s decision to grant Mr Kirby relief from sanction – so that he is debarred from defending the claims against him in the second (as well as the first) group – it was unnecessary to decide whether the judge was right to refuse summary judgment against him in respect of the bribery claims: but my provisional view is that he was.

In my view the judge was right to refuse summary judgment against Mr Rodriguez and Outtake in respect of the bribery claims for the reason which he gave at paragraphs [63] and [66] of his judgment. In order to succeed on those claims against Mr Rodriguez and Outtake it was necessary for the administrators to show that Mr Rodriguez knew that Mr Kirby had not disclosed to Tarn (or, more precisely, to Mr Bennett and Mr Hirst) the commission arrangements which he had made with Legal 4 Life. And, in that context, it is important to keep in mind that the commission payments of £50 made to Mr Kirby under those arrangements were paid by Tarn by deduction from the sub-agent’s fee payable to Legal 4 Life: they were not paid by Legal 4 Life itself. There was no reason for Mr Rodriguez to assume that Tarn did not know of them. As the judge pointed out, the questions (i) whether Mr Kirby did disclose the commission arrangements to Mr Bennett and Mr Hirst and, if not (ii) whether Mr Rodriguez knew that the arrangements had not been disclosed were questions of fact which he should not decide on contested evidence on a summary judgment application.

It will be apparent from an earlier section of this judgment that I take the view that Tarn was entitled to summary judgment against STS for the amount (£1,566,440) paid to STS under the STS Agreement. If summary judgment is entered in that sum, Tarn is not also entitled to an interim payment order in the same amount. But I am content that Tarn should make further submissions on the form of the order: on one basis or the other it is entitled to an order that STS repay the £1,566,440 which it has received.

In addition to the order which this Court has already made – (i) allowing the appeal from, and setting aside, paragraph 1 of the order of 2 July 2008 and (ii) dismissing the appeal from paragraph 2 of that order in so far as it relates to the Eighth and Ninth Defendants (Mr Rodriguez and Outtake) – and subject to such further submissions on the form of the further order as Tarn may be advised to make, I would order that the appeal from paragraph 2 of the order of 2 July 2008 in so far as it relates to the First, Fourth and Fifth Defendants (Mr Kirby, Mr Holden and STS) be allowed. On that basis I would make no order on the application of 26 November 2008.