Bhatia v Toor

On 28 September 2011, Her Honour Judge Walden-Smith gave judgment for the claimant in a civil action, Mr Suraj Bhatia, in the sum of £40,000 together with interest. The defendant in the action, Mr Kulwant Singh Toor, now appeals against that. For simplicity, in this judgment I will continue to call the parties “the claimant” and “the defendant”.

The basis for the judge’s determination was that in or about June 2003, the claimant had (as she found) lent £40,000 to the defendant personally, which sum had not been repaid despite the claimant’s demand.

She rejected the defendant’s arguments a) that the sum was not a loan but an investment by the claimant in a company in which the defendant had a significant involvement, Evershine Glazing Services Ltd, and b) that such sum as was payable in respect of the “loan” had been discharged by a payment made pursuant to an agreement entitled “Financial/Commercial Discharge Agreement” made on 9 December 2004 between, on the one hand, the claimant (known in the agreement as “Party A”) and on the other, the defendant, his two brothers, Surinder and Satnam, and “Evershine Glazing Services Ltd (including all subsidiaries and associate companies)” (known in the agreement collectively as “Party B”). I will refer to this agreement as “the Discharge Agreement”.

The defendant contends that the finding that the claimant’s £40,000 payment was a loan to him was against the weight of the evidence and that the judge erred in her construction of the Discharge Agreement and should have found that its terms were sufficiently wide to cover the loan.

The logical starting point for any consideration of the appeal is the issue of whether the £40,000 payment was or was not a loan. To deal with that, I need to set out something of the background facts. They are quite fully set out in the judgment but I will confine myself to the essentials here.

In 1999, Evershine Glazing Services Ltd was incorporated and it began to trade in 2001/2002. The defendant was a director of the company and the shareholders were the defendant, his two brothers, and initially also a Mr Kumar. Each shareholder had 25 per cent of the shares until Mr Kumar ceased being a director and appears to have transferred his shares to the defendant who then had 50 per cent of the shares.

There was a bank account with HSBC in the names of “KS Toor and S Toor trading as Evershine Glazing Services” and, from some point, a bank account with Barclays in the name of “Evershine Glazing Services Ltd”. Because full documentation had not been disclosed by the defendant, the judge was unable to say precisely when the Barclays account came into being and whether it overlapped with the HSBC account. It was established that the £40,000 was paid by the claimant into the HSBC account but the account statements produced by the defendant were redacted and it was impossible to see what use was being made of the account or what became of the £40,000 once paid into it.

Having looked at a solicitors’ attendance note and letter of authority dating from May 2003 concerning the payment, the judge found that the money was paid to the defendant as an individual [§24 et seq] albeit that the cheque was paid into an account the name of which referred to Evershine Glazing Services. Counsel for the defendant, Mr Roe, could not realistically challenge that finding.

The £40,000 came from monies raised by the claimant by way of a re-mortgage on or about 17 May 2003 of a property that he owned. The claimant’s case, which the judge accepted, was that he re-mortgaged in order to raise money so that he could invest in a restaurant in due course. The re-mortgage released nearly £59,000 in free capital for the claimant after he had repaid the original mortgage on the property and discharged the costs of the arrangement which were a little over £12,000. The claimant’s case was that having raised the money for other purposes, he then made the loan to the defendant because they were friends and the defendant asked him to do so. He trusted the defendant to pay it back when asked. He said this was quite usual within his community.

The defendant consistently denied that the money was a loan but he was not consistent as to what the purpose of the payment was.

As originally drafted, the Defence was short. Paragraphs 1 and 3 amounted to a denial that there was a loan. Paragraph 2 said:

“The claimant and the defendant’s former company did, however, conduct business before 2004. A financial matter was concluded by a written agreement dated 04.12.2004, a copy of which is attached along with a copy of a cheque dt. 09.12.2004.”

The Amended Defence (dated 9 April 2010) admitted that the claimant had made a payment of £40,000 but said that it was to Evershine Glazing Services Ltd rather than to the defendant personally and that £10,500 of it was allocated to debts owed by the claimant to the company for goods and services and the remainder was held to the claimant’s order and used subsequently to discharge liabilities incurred by him or paid out to him. There was again reference to the Discharge Agreement and it was now expressly pleaded that it covered any claim in respect of the alleged loan.

The Re-Amended Defence (dated 17 November 2010) pleaded for the first time that the £40,000 was an investment in Evershine Glazing Services Ltd by the claimant in return for which “the claimant would acquire a 25 per cent interest in the Company, to which end the shareholdings in it would be rearranged so as to constitute the Claimant a shareholder as to 25 per cent of the shares”, and that following the payment, until about April 2004, the claimant was “treated as if he were a shareholder in the Company to the extent of 25 per cent”, drawing a monthly salary and having the use of a car.

The judge also recorded [§§34-36] a further variant on the defendant’s case which was outlined by his representative at a hearing in Edmonton County Court which took place between the Defence and the Amended Defence.

As for the defendant’s case at trial, it appears that it was as pleaded in the Re-Amended Defence, that is that the claimant had invested £40,000 in expectation of receiving, inter alia, a 25 per cent shareholding in the company, although the judge recorded [§41] that the defendant was unable to recall for sure what the agreement was. The judge also recorded that:

“It is Mr Toor’s case that the claimant was keen to set up company structures, drafting what he believed should be an understanding between investors and the company and that, while no shares were in fact granted to Mr Bhatia, he was treated as if he was a shareholder after his investment of £40,000 in June 2003.”

The judge placed reliance on the inconsistencies in the defendant’s account in making her findings but that was by no means the only material upon which she relied. The fact that no shares were ever allocated to the claimant, particularly when it would actually have been extremely easy for that to be done given the availability of Mr Kumar’s shareholding, seemed to her to be “powerful evidence that the £40,000 payment was not an investment but a loan to Mr Toor” [§42].

She found, furthermore, that there was no evidence to support the assertion that the claimant had been treated as a shareholder [§§41 and 50].

She also noted that the profits of Evershine Glazing Services Ltd were transferred in 2004 to Evershine Glazing Conservatories without reference to the claimant, and in 2005 Evershine Glazing Services Ltd was voluntarily struck off. Her view of this was [§43] that the defendant had taken the view that the company was his and his brothers’ and that they could do what they wished with its profits and assets.

As for the suggestion that the claimant owed money to the company, there was one receipt with regard to work done to the claimant’s property in the sum of £4,750, including a deposit of £450. The judge accepted [§44] that that work was paid for separately from the loan of £40,000 and had nothing to do with it. She did not accept [§44 et seq] that the claimant was otherwise indebted to the company or that monies were paid by the defendant for the claimant’s benefit or that he received cash sums from the company petty cash.

She considered the draft directors’ agreement and the shareholders’ agreement. She recognised [§48] that these ran counter to the claimant’s case in that they gave the lie to his contention that he had no interest in investing in the company. However she concluded that the £40,000 payment was not associated with the claimant’s interest in investing. She reasoned that had the two things been connected, the £40,000 would have been mentioned in the draft documents. Her finding was that the claimant’s interest in making an investment had not ever crystallised into an actual investment.

The defendant rightly recognises the difficulty that he faces in seeking to overturn a finding of fact made by a judge who had the advantage of seeing the parties give their evidence and evaluating the documentation in the light of this. However Mr Roe, in his able arguments to this court, sought to persuade us that this was not a case in which the respective credibility of the parties should have determined the outcome. He accepted, as he had to, that the judge had not found the defendant credible but he submitted that the claimant’s case was incredible as well, identifying a number of features as indicative of this:

Mr Roe submitted that given these significant problems with the credibility of both parties, instead of relying on their evidence the judge should have concentrated on such other facts as there were and on the inherent probabilities of the situation. In his submission, the only commercially sensible interpretation was that the transaction between the parties was indeed an investment.

To my mind, a significant obstacle in the way of this argument was that the defendant’s case linked the payment of the £40,000 with an expectation of a 25 per cent shareholding and that shareholding never materialised. It was submitted on behalf of the defendant that the absence of any transfer of shares was irrelevant as what mattered was that the claimant was treated as a shareholder. However, that argument founders on the judge’s finding that there was no evidence to support the assertion that the claimant was treated as a shareholder and her express rejection of the defendant’s detailed case as to payments made to and on behalf of the claimant. Nothing was brought to our attention which significantly undermines those findings.

I cannot accept that the consequence of there being unreliable features in both parties’ accounts was that the judge was obliged to abandon their evidence entirely and resolve the case by reference to other material. A trial judge is not infrequently faced with the delicate task of picking his or her way through a witness’s evidence in order to sift the reliable from the unreliable. It is no surprise that Judge Walden-Smith here took the view that the defendant had made “significant changes” in his core account as to what the £40,000 payment was for and that that materially damaged his credibility. She did not ignore the fact that the claimant had denied the interest that the draft documents showed that he in fact had in investing in the company but she accepted, as she was entitled to do having seen the claimant giving evidence, that there were other respects in which he was telling the truth. The judgment demonstrates that when evaluating the evidence, she relied in part on the claimant’s presentation in the witness box (see, for example, §30) but that she was also properly aware of the commercial realities and inherent probabilities (see, for example, §44 in relation to the receipt for works to the property, §46 in relation to the bills, and §47 with regard to payments from petty cash). The approach that she took cannot, in my view, be faulted.

I would therefore dismiss the appeal against her finding that the £40,000 payment was by way of a loan.

The defendant has no complaint about the principles of construction, derived from Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, BCCI v Ali [2001] UKHL 8, Fiona Trust and Holding Corporation v Privalov [2007] UKHL 40 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, that the judge sought to apply in construing the Discharge Agreement. His complaint is about her reasoning as she sought to apply those principles and the answer to which she came.

The Discharge Agreement commences with recitals to this effect:

“1.

Party A claims to have provided accounting, finance, product development and other services to Party B on certain terms and from on or about the 16^th September 2002 until the 4^th April 2004

2.

Party B denies the claims made by Party A and as such a dispute has arisen

3.

The Parties have agreed to compromise the dispute on the terms stated below”

The first clause of the agreement provides for the payment by Party B to Party A of £30,000 “in full and final settlement of all and any claims that Party A makes against Party B pursuant to the alleged provision of services by Party A to Party B (“the Settlement Sum”)”.

The third clause of the agreement sets out terms that will apply on payment of the settlement sum. They appear in the agreement as bullet points but I will number them here for ease of reference:

“(i)

The Parties shall be released from all and any obligations either one of them shall have to the other as claimed or at all.

(ii)

Every financial/commercial relationship, benefits and obligations [sic] whatsoever between the Parties shall forthwith cease on execution of this Agreement.

(iii)

This Agreement discharges any rights of either Party against the other which may have accrued up to the date of this Agreement.

(iv)

Party A will be solely responsible for all taxes and national insurance contributions due and payable on the Settlement Sum and will indemnify and keep indemnified Party B from all claims arising in respect of the same.

(v)

In consideration for the payment of the Settlement Sum, party A will also waive all and any claims, howsoever arising (whether under common law, statute or otherwise), which he has or may have against Party B or any associated company or their prospective officers, or employees. Without prejudice to the generality of the foregoing, such claims shall include all claims which, at the date hereof, are, or could be, the subject of a complaint to an Employment Tribunal, including any statutory claim under the provisions of the Employment Rights Act 1996, Working Time Regulations 1998 and European Community Legislation.

(vi)

This Agreement embodies the entire understanding of the Parties and it overrides and supersedes any prior promises, representations, undertakings or implications.

(vii)

This Agreement shall be governed by and construed in all aspects in accordance with the Laws of England and the Party A and the Party B irrevocably submit to the exclusive jurisdiction of the English Courts.” [my italics]

The agreement is signed by the claimant in person and by the defendant, above whose signature is typed “Mr Kulwant Toor & on behalf of Evershine Glazing Services Ltd”.

The defendant sensibly did not challenge the judge’s conclusion that the dispute referred to in the recitals was the claimant’s claim for payment for his services to the company as opposed to his claim for repayment of a loan and accepted that it was at that claim that the Discharge Agreement was primarily directed. Accordingly, if the agreement dealt a fatal blow to the loan claim as well, then that could only be by virtue of the provisions of paragraph 3 of the agreement.

The defendant’s argument was that it does not follow from the fact that the agreement was intended as a compromise of a dispute about the alleged provision of services that the only thing that the claimant gave up when he signed it was his right to make a claim in that respect. His contention was that the wording of paragraph 3 shows that the parties intended that the agreement should have a wider effect and that in order to secure the payment of £30,000 from the defendant, the claimant gave up all claims that he may have not just in relation to his services to the business but also in relation to the loan and no doubt any other claims as well. Mr Roe pointed in particular to the phrases I have italicised in quoting paragraph 3 above which he said cannot be read as confined to the dispute over payment for services. He also invited us to step back from the detail of the agreement and to take the view that it makes far more commercial sense as a general release of all claims than as a discrete settlement of the claim relating to services. He argued that a limited settlement would have been an odd agreement for the parties to have arrived at and one which could have been expected to be spelled out by express words limiting the agreement to obligations in relation to the provision of services.

I am not persuaded by these arguments. I accept, of course, that it does not necessarily follow from the fact that the parties were intent upon compromising the dispute in relation to payment for services that only claims related to that issue were given up by the claimant in the Discharge Agreement. But neither does one ignore that fact in construing the provisions of the agreement. It is at the very least part of the background knowledge that the parties would have had and material therefore to the exercise of ascertaining the meaning of the document, though it may actually be seen as playing a more central part in the construction exercise than that. In fact, several features, of which this is only one, combine to convince me that the proper construction of the agreement is that it was not intended to cover the loan.

In addition to giving weight to the primary objective of the agreement, as disclosed in the recitals and in the first paragraph of it, it is important to recognise who the parties to the agreement are. Party A is the claimant as would be expected whether the parties were intending to compromise solely a claim in relation to consultancy services, solely a claim in relation to the loan, or both types of claim. However, Party B is defined as the three Toor brothers and Evershine Glazing Services Ltd and the body of the agreement treats Party B as a composite party. With one possible exception (the reference to prospective officers or employees in subparagraph (v)), nowhere in the agreement does the draftsman go behind that and deal with the rights and liabilities of the individual component parts of Party B. It is plain that what unites the individual components of Party B is their connection with the Evershine business. In contrast, according to the judge’s finding, the loan was to the defendant in his personal capacity. That personal loan would not, therefore, have formed a natural part of the negotiations between Party A and Party B and consequently one would, I think, have expected a specific reference to it if it was intended to be caught by the provisions of their agreement. There is no such reference. Indeed, paragraph 3 is very much a generic provision, in many ways drafted in conventional wide terms and not tailored at all to the particular situation of these parties. However, although it includes phrases theoretically capable of covering all manner of claims totally unassociated with the claimant’s services to the business as the defendant has pointed out, it does contain a number of indications that, just like the recitals and paragraph 1 of the agreement, it too is in fact focussed on claims relating to such services. For instance, the claims particularised in subparagraph (v) are clearly employment related and subparagraph (ii) provides for the ending of every financial/commercial relationship “between the Parties” which must be read in the context of Party B as a grouping united by their connection with the Evershine business to which the claimant provided his services.

I have accordingly arrived at the same construction of the Discharge Agreement as did the judge who dealt with the issue very fully and carefully. In the circumstances, I would dismiss the appeal in this respect as well.

I agree.

I also agree