Goldtrail Travel Ltd v Aydin & Ors

On 22 May 2014 Rose J ordered Onur Air (“Onur”) to pay to Goldtrail Travel Limited (“Goldtrail”) the sum of £3.64m with interest as equitable compensation for its dishonest assistance of various breaches of fiduciary duty against the company by its sole director, Mr Aydin. The claim by Goldtrail, which is now in liquidation, was that Mr Aydin (who was the 100 per cent owner of the company) had misapplied its money by causing the company to enter into two separate transactions with Black Pearl Investments Limited (“Black Pearl”) and with Onur under which Goldtrail agreed to purchase seats on charter flights run by an airline called Viking (in which Black Pearl had a 50 per cent interest) and by Onur. As part of the same transactions, Black Pearl and Onur each agreed to buy 50 per cent of Mr Aydin’s shareholding in Goldtrail and substantial sums of money were paid directly to Mr Aydin through a Seychelles company which the liquidators claimed were due to Goldtrail as commission on the sale of the seats.

In the end, Mr Aydin absconded leaving Goldtrail in administration and its customers stranded in various parts of the world. Their repatriation was secured at the expense of the Air Travel Trust, which is the principal creditor, to the tune of more than £20m. Black Pearl and Onur were found by the judge to have dishonestly assisted Mr Aydin in his various breaches of duty by their participation in the agreements I have referred to. They, for their part, continue to deny the giving of dishonest assistance and claim that they are also victims of Mr Aydin’s fraud. He received their money but never transferred the shares.

The judge (by paragraph 12 of her order) stayed execution of the judgments against both sets of defendants pending the decisions on their applications for permission to appeal. The stay was to continue until after judgment in the appeal in the event that permission to appeal was granted.

Rose J refused permission to appeal but it was granted to Onur by Floyd LJ on 15 December 2014 and to Black Pearl on 10 February 2015.

As part of its Respondent’s notice Goldtrail challenged the judge’s order for a stay as regards Onur and sought an order that the prosecution of Onur’s appeal should be made conditional upon the payment by Onur of the interim costs ordered by the judge to be paid; the provision of security for costs; and the payment into court of the judgment sum plus interest. On 7 April 2015, on a consideration of the papers, Floyd LJ directed that the “continuation of the appeal” should be conditional on the three payments referred to and that, in the case of the judgment sum, payment should be made by 30 April 2015.

The application by Goldtrail to vary in effect the terms of the stay in this way was based upon the decision by Onur to stop flying into the UK. The liquidators contended that this would have an impact on its ability to enforce the judgment against Onur in the event that the appeal was unsuccessful. But they also recognised that the liquidation of Goldtrail meant that it would be inappropriate for the judgment sum to be paid and utilised by them in advance of the outcome of the appeal. Floyd LJ gave effect to these considerations by ordering the £3.64m to be paid into court by 30 April 2015 as a condition of the continuation of the appeal.

Onur requested this decision to be re-considered at an oral hearing which took place on 11 June 2015 and Floyd LJ extended time for compliance with the condition until after the hearing. At the hearing Floyd LJ confirmed his earlier order and directed that the continuation of the appeal should be conditional upon Onur paying the £3.64m into court within 28 days (i.e. by 9 July 2015) or providing security for the sum by that date. In his judgment, he noted that Onur had served no evidence in answer to the liquidators’ original application under CPR 52.9 but had provided evidence for the oral hearing explaining its decision to stop flying to the UK. This was said to be for purely operational reasons and not with a view to obstructing the enforcement of any judgment. Mr Gürbüz made a witness statement dated 27 May 2015 in which he said that there was insufficient demand from tour operators for flights to Turkey to make it economical to continue to fly from the UK in 2015 and a decision was made to concentrate on routes from other European cities. At that time Onur was providing charter flights for 44 different tour operators mostly in Europe.

Floyd LJ’s view was that even absent any intention to avoid enforcement of the judgment the change in Onur’s operation provided a compelling reason to justify the condition for the payment of the £3.64m into court since it impacted on Goldtrail’s ability to enforce the judgment by normal means against assets within the jurisdiction. In terms of the impact on Onur of the condition, Floyd LJ noted that there would be no prejudice at all beyond the losses caused by placing the money in court for the period of the appeal. It was not suggested in Onur’s evidence or by Mr Gibbon QC, who appeared for Onur, that there was any risk of the appeal being stifled which would have been a significant factor in deciding whether to grant a stay or to impose a condition of this kind under CPR 52.9: see Hammond Suddards v Agrichem International Holdings Ltd [2001] EWCA Civ 2065.

On 7 July 2015, two days before the deadline for the satisfaction of the condition expired, Onur’s solicitors contacted the Civil Appeals Office by e-mail to ask for the date for payment in of the judgment debt to be extended to 17 July 2015. They went on to say that Onur would make a “substantial partial payment” into court on 9 July 2015 but needed perhaps another 10 days to pay in the full £3.64m because of the unforeseen delay in the payment to Onur of some $4.837m from Saudi Arabian Airlines in relation to the leasing of four aircraft. This payment could be delayed for up to 10 days but, once received, would be used to pay the balance of the £3.64m.

Although asked for informally, this was, technically speaking, an application to vary the order of 11 June under CPR 3.1(2) relying on the change of circumstances created by the delay in the Saudi Airlines payment. In the event, Floyd LJ was not prepared to make the order without Onur issuing a formal application for an extension of time supported by a witness statement from a proper officer explaining:

“why the payment has not been made, why instructions were given to tell the court that a substantial part payment would be made on 9 July 2015, why that part payment was not made and precisely when and how the order will be complied with if an extension is to be granted.”

Floyd LJ’s direction was couched in these terms because by 10 July, when it was issued, no substantial or any part of the judgment sum had been paid into court as promised in the e-mail of 7 July 2015 and Onur’s solicitors had confirmed that the interim payment would not be made. On 14 July Mr Gübüz made a further witness statement in support of the application to extend time. He said:

“4.

Onur Air had hoped to pay the judgment sum into court from funds to be received on about 6 July from Saudi Arabian Airline, but receipt of that payment was delayed.

5.

Onur Air therefore instructed its solicitors on 7 July to apply to the court for an extension of time for payment of the judgment sum until 17 July and to tell the court that a partial payment would be made on 9 July which it then hoped to do to demonstrate to the court Onur Air’s intention to comply with the Order.

6.

In the event, Onur Air was not in a position to make the Interim Payment on 9 July 2015 and following further consideration of its cashflow position and its commitments to third parties necessary for the business, Onur now seeks permission from the court to pay the judgment sum into court by monthly payments of £500,000. Onur intends to put its solicitors in funds of £640,000 by 15 August 2015 with instructions to send a cheque for the first instalment to be sent immediately to the Court Funds Office. After that Onur will make further payments of £500,000 on the first banking day of each month until the judgment sum has been paid in full. Onur Air acknowledges that if any of these payments is not made then it will be unable to continue with the appeal.”

On 27 July 2015 Floyd LJ refused to extend time after a consideration of the application on the papers. In his written ruling he said that there were grounds for believing that Onur had no intention of complying with the order for payment and that Mr Gürbüz’s witness statement did not explain what had happened to the Saudi Airlines payment as he had previously directed. Nor did it explain how the staged payments were to be funded. He continued:

“I am not satisfied on the material before me that it would be right to extend this indulgence to the appellants. If they are now contending that the imposition of the order would stifle the appeal, the evidence falls far short of showing that to be the case. It is well settled that a party who wishes so to contend must show that he has explored all means of providing the necessary security.”

Onur requested the decision to be re-considered at an oral hearing which was fixed for 21 October 2015. But on the day of the hearing it instructed its solicitors to withdraw the application for a variation of the 11 June order to allow the judgment sum to be paid into court in instalments. In a further witness statement of 19 October 2015 Mr Gürbüz simply referred to the order of 11 June and said:

Mr Spragge of Druces LLP, Onur’s solicitors, who appeared on that occasion accepted that his client’s application to vary the 11 June order must be dismissed which it was. But that left the court to determine what should be done about the appeal in those circumstances. Mr Gibbon has submitted, and it is I think common: ground, that the order of 11 June, properly construed, does not have the effect of striking out or dismissing the appeal in the event that the condition is not complied with. The requirement that the £3.64m be paid into court by 9 July was made condition of the continuation of the appeal in exercise of the power contained in CPR 59.9(l)(c). This is not a strike-out power and the court retains a discretion to be exercised in the event that the condition is not met. Floyd LJ recognised this. He said:

Goldtrail has now issued its own application to dismiss the appeal. It seeks an order that the appeal be dismissed and orders for the payment of the judgment sum and interest. The stay is therefore to be removed in its entirety. Onur opposes this application and has issued a new application under CPR 3.1(7) for the variation of the 11 June order by the removal of the condition requiring the payment into court of the judgment sum. It does so for the first time on the ground that the payment of that sum is now beyond the means of the company and its payment would stifle the appeal. In the event that this application should be unsuccessful Onur seeks to argue in the alternative that the court should still not dismiss the appeal but rather should stay it pending the outcome of the appeal by Black Pearl which is continuing and is to be heard on a date in March 2016. Mr Gibbon submits that the appeal by Black Pearl raises many (if not most) of the same points as are contained by Onur’s own grounds of appeal and that were Black Pearl to be successful it could not be said that the court would refuse to entertain a further variation application under CPR 3.1(7) which would enable Onur’s appeal to proceed to a successful conclusion. In that event, the reasons for removing a requirement that Onur should pay the £3.64m in advance of the appeal would, he says, be overwhelming.

It is convenient to begin with Onur’s new application under CPR 3.1(7). This, as I have said, is now based on the condition being likely to stifle the appeal. The evidence for this is contained in two witness statements by Ms Cigdem Erguven, Onur’s Chief Financial Officer, who joined the company in April 2015. I do not intend to set out her evidence in full, although I have read it all together with the relevant exhibits. What she says in her first witness statement is that the payment from Saudi Arabian Airlines was in fact paid on 7 July although Onur did not become aware of this until the following day. In the event, it was not possible to use these monies to fund the payment of the £3.64m into court (as promised in Mr Spragge’s e- mail of 7 July) because of the need to make what she describes as essential payments to third parties. She exhibits a list of these payments which seem to be ones to other airlines and maintenance companies together with various leasing payments. They total $4,237m.

Ms Erguven says that it was crucial for Onur to make these payments in order to carry on its business. Her explanation for what was said in the e-mail of 7 July is that whilst Onur had hoped to be able to use the Saudi Arabian Airlines payment to meet the condition by postponing payment of these other trade debts, its suppliers insisted on prompt payment leaving Onur with no choice but to use the Saudi Arabian Airlines monies to meet these liabilities. She does not explain why this was not drawn to the court’s attention in Mr Gürbüz’s witness statement of 14 July given the terms of Floyd LJ’s direction of 10 July which I have quoted earlier.

As already explained, the application of 14 July was one not merely to extend time but also to vary the condition so as to allow the £3.64m to be paid by monthly instalments. Ms Erguven says that Onur still hoped at the time to be able to satisfy the condition in that way but that its financial position continued to worsen so that it was not in the position even to make the initial payment of £640,000 that it proposed should be made on 15 August. By 19 October the company had concluded that it was unable to pay the £3.64m and therefore withdrew the application. It had been advised that to be required to make the payment would breach its rights under the European Convention.

Ms Erguven’s explanation for Onur’s current financial position is that, against a background of economic slowdown in Turkey coupled with the obvious potential tension and hostilities in the region, there has been a significant decline in the tourist industry and in particular in the number of tourists wishing to visit Turkey. In the case of Russian tourists, this has been exacerbated by recent events such as the shooting down of the Russian fighter by the Turkish air force on 31 October. Russian business accounts for 10 per cent of Onur’s revenue.

Exhibited to her witness statement are Onur’s audited financial statements from 2010 to 2014. These show a decline in turnover and cash resources since 2011. Onur has made a loss in each year since then. In particular, available cash has declined to £3,282,435 in September 2015. The company’s unaudited financial statements for the9 month period to 30 September 2015 show some improvement but Ms Erguven says this is seasonal in nature and that overall Onur’s financial position has worsened. Net profit has declined from £11.47m as at 30 September 2014 to £1.121m a year later. By the end of 2014 Onur, she says, had an equivalent net loss of £20.5m and, given the fall in operating profit in 2015, the losses for that year were expected to be much higher.

Ms Erguven has updated this information in her second witness statement made on 8 January 2016. She says there has been a net increase in current liabilities of $10m and that the net loss forecast for 2015 is between £15m and £16.5m. Onur’s cash shortfall remains serious and this is being managed by postponing current debt.

Ms Erguven says that Onur has been unable to negotiate extended finance from banks and that existing lenders have either frozen or closed existing facilities. In these circumstances, the company has no means to pay the judgment debt. One would expect that, in these circumstances, Onur would have been forced to cease trading but this is obviously not the case and the evidence indicates that the airline continues to operate in Europe and has entered into new contracts, for example, with Bulgarian Air. An analysis of the financial information carried out by the liquidators of Goldtrail and set out in the witness statement of Mr Oakley-Smith recognises the difficulties faced by Onur’s business in the present climate but identifies a continuing source of funding from Mr Hamit Cankut Bagana who is the Chairman of Onur and its controlling shareholder. According to Ms Erguven’s most recent witness statement, Mr Bagana has a direct shareholding of 3.67 per cent of Onur but owns 81.19 per cent of a company called Ten Tour Turizm Endustri ve Ticaret Anonim Sirket which in turn owns 92 per cent of the shares in Onur.

The analysis carried out by Mr Oakley-Smith of the 2013 and 2014 accounts suggests that Mr Bagana is the primary source of funding for the company. His evidence at the trial before Rose J was that he paid £lm to Mr Aydin as part of the agreement with Onur. He lent the company $28m in 2013. In the 2014 accounts this is shown as having increased to $68m. As part of these arrangements, it appears that Onur has given guarantees to Mr Bagana in respect of debts due to him from one of the other shareholders although the reasons for this are not explained. Of more significance is that in the period from 2008 to 2011 substantial dividends were paid by Onur to Mr Bagana and then loaned back to the company and secured against its assets in subsequent years. Mr Bagana therefore appears to have removed equity from the company and to have used the money to establish himself as a secured creditor. His position as the company’s largest single (and secured creditor) has put him into the position where he can effectively decide which of the unsecured debts should be paid and when. This is confirmed by Ms Erguven in her second witness statement where she says that:

“I can confirm that Mr Bagana is fully aware of the position that Onur Air finds itself in in relation to the payment of the Judgment Sum into court as a condition of the continuation of the Appeal. He has made it clear that he would only contemplate considering the possibility of advancing further amounts to Onur Air in the most exceptional circumstances if they were commercial payments strictly and immediately necessary in order to keep Onur Air in business due to the already significant indebtedness of the company to him and the deteriorating financial condition of the company. Mr Bagana has made it clear to the management of Onur Air that he believes that if the court were to strike out the appeal on the grounds that he, as a shareholder, had failed to lend money to Onur Air to enable it to pay the Judgment Sum into court, that would be a breach of his and Onur Air’s rights under the European Convention of Human Rights.”

The liquidator’s evidence is that Mr Bagana is an extremely wealthy man who said to Rose J in his evidence that he did not regard £5m as a significant outlay for himself personally. Ms Erguven’s response to this is that she is unable to comment on his alleged wealth and business activities.

Some of the argument has centred on whether the financial information produced by Onur justifies its alleged belief that it is unable to pay the £3.64m and that, to be made to do so, would lead to the stifling of the appeal. Mr Gibbon cautioned me against attempting to second guess the assessment of the financial state and prospects of the company made by its own directors and officers and I am obviously alive to those difficulties. But even taking Ms Erguven’s assessment at face value, it is apparent that a decision has been taken that Onur is able to continue to trade with the support of Mr Bagana and that it could, with that financial support, have made the £3.64m payment even if it would have been in difficulties in generating sufficient cash for that purpose from its trading activities. It seems clear to me that Mr Bagana has decided not to fund the payment by the company and if I can take his financial position into account in assessing Onur’s ability to satisfy the condition either prior to 9 July 2015 or thereafter then the CPR 3.1(7) application to vary cannot succeed. There is no evidential basis for concluding that the condition could not have been complied with or that, if complied with, it would stifle the appeal.

Mr Gibbon submitted that it could only be in exceptional circumstances that the court would take into account on this kind of application the financial position of a third party such as Mr Bagana. To do so risks blurring the distinction between a company and its shareholders or other funders which the law habitually respects. But it is clear as a matter of authority that the ability of third parties to fund the company may be relevant in appropriate cases and that there is no jurisdictional bar to the court taking their position into account in determining whether an allegation of stifling has been made out. There is, I think, an obvious distinction between whether such a third party can be said to be under any sort of obligation as a result of an order made against the company and whether, in considering the likelihood of the company being able to make a potential payment, its access to third party funding should be taken into account.

In Société Générale SA v Saad Trading, Contracting and Financial Services Company & Anor [2012] EWCA Civ 695 this point arose in similar circumstances to the present case. The respondent to the appeal sought to make it a condition of the appeal that the appellant should pay the judgment debt and interest. One of the issues was whether the appellant company had wealthy owners who could pay the judgment debt. Aikens LJ said:

“54.

Fifth factor: does Saad have "wealthy owners" and was there evidence that they could not, if minded to do so, pay the judgment debt on behalf of the judgment debtor corporate entity? This factor raises the difficult question of principle as to whether or not this court can legitimately impose a condition that a judgment debt (or part of it) be paid into court where, effectively, this will require an "owner", or others, such as a director, or shareholder, or backer or other interested person, to fund that condition. (I emphasise that I am not dealing here with security for costs). I think the answer must be that, except in exceptional circumstances, it should not do so. If a condition is imposed on an appellant that it must bring the outstanding judgment debt into court in order to pursue its appeal, that does, effectively, short circuit the enforcement process against the judgment debtor. It means that if the appellant loses his appeal, the judgment creditor has the means of enforcing the judgment debt quickly and easily and in a way that he otherwise could not when the judgment debtor has no assets within the jurisdiction. Furthermore, the right to enforce is, at least in the first place, only exercisable against the assets of the actual judgment debtor, not those of any other entity or person. So a condition which has the practical effect that a third party will provide the funding to bring the judgment debt of the corporate entity into court is, potentially, an indirect way of obtaining enforcement with the funds of another. That, generally speaking, must be contrary to the principle of respecting the existence of different legal personalities, as Moore-Bick LJ pointed out at [17] of the Wittman case. Alternatively, if the funds brought into court are to continue to be treated as those of the third party, there is no point in the exercise at all, because it will not benefit the respondent/judgment creditor.

55.

However, given the clear statement of Clarke LJ at point (4) of paragraph 41 of his judgment in the Hammonds Suddards case there cannot be an absolute bar against taking account of the position of other entities or persons close to the appellant in deciding whether there are compelling reasons for making a condition such as requiring the judgment debt to be paid into court. I think Moore-Bick LJ must have recognised that in Wittman at [18] when he distinguished the Hammond Suddards case on the facts and did not suggest that point (4) of paragraph 41 of the judgment of Clarke LJ in the Hammond Suddards case was wrong in principle or could never be applied. I would be prepared to say that the facts of the present case are exceptional. Mr Al-Sanea is not only the general partner of this Saudi limited partnership but he is also the owner of 90% of its share capital. Equally pertinent is the fact that he has provided a personal guarantee for the liability of Saad to Soc Gen under the F/L, if such liability exists. Mr Weisselberg accepted that Mr Al-Sanea's position on the substantive appeal is "almost entirely parasitic" on that of Saad, although he does raise two additional points on the issue of interest. But, as Mr Weisselberg also accepted, those are obviously of less immediate importance.”

I do not propose to use this as an occasion for offering guidance as to what might constitute exceptional circumstances for this purpose. This is best developed on a case-by-case basis with reference to specific facts. But I am satisfied that this is a case which falls within that classification. On the evidence, Mr Bagana is the controlling shareholder and chairman of Onur and has put himself into the position where he is its single largest creditor with security for his loans. It is clear that he has a more than usually close relationship with the company (witness the guarantee arrangements I have mentioned) and effectively controls its financial affairs. I can see no material differences between his situation and that considered by Aikens LJ in Société Générale.

In these circumstances, the application fails on its merits. Onur has not established that it could not have satisfied the condition by 9 July or at some later point and the allegation that the appeal would be stifled is not made out. It is not therefore necessary for me to consider Miss Stonefrost’s other submission which is that I have no jurisdiction to make an order under CPR 3.1(7) in this case because there was no material change of circumstances between 11 June and 9 July 2015.

Onur’s application will therefore be dismissed and I must now consider whether or not to dismiss the appeal. As indicated earlier, there is little or no dispute about the effect of the 11 June order and, in particular, the failure to satisfy the condition by the date specified. CPR 52.9 gives the court power to impose “conditions upon which an appeal may be brought” so that a failure to satisfy such conditions will, as a minimum, lead to a stay of the proceedings. But, where the order under appeal has been stayed pending the appeal, the Court of Appeal must decide what should be done to give effect to the judgement if no appeal is to proceed.

Onur does not seek an indefinite stay of its appeal and, more particularly, the order under appeal. What it seeks is the stay of its appeal until later this year when the outcome of the Black Pearl appeal will be known so that it may then be able to mount a further CPR 3.1(7) application with a view to removing the condition, reviving its appeal and obtaining the reversal of Rose J’s order.

It seems to me that there are likely to be a number of objections to that course of action regardless of the outcome of the Black Pearl appeal. In Tibbles v SIG plc [2012] EWCA Civ 517 this court recognised that the need for finality in litigation would usually weigh against applications to vary previous orders of the court. Rix LJ at [39(vii)] said:

“The cases considered above suggest that the successful invocation of the rule is rare. Exceptional is a dangerous and sometimes misleading word: however, such is the interest of justice in the finality of a court's orders that it ought normally to take something out of the ordinary to lead to variation or revocation of an order, especially in the absence of a change of circumstances in an interlocutory situation.”

Mr Gibbon emphasises the use of the word “normally” but if success by one appellant can constitute a change of circumstances entitling any other previously debarred appellant to re-open a previous CPR 59.9 order it would become virtually impossible for this part of the court’s case management jurisdiction ever to achieve finality in the litigation.

In the end, however, I do not decide the liquidator’s application on this point. It seems to me that once Mr Bagana’s position is taken into account with the consequences I have explained the court has no proper alternative but to dismiss the appeal. Having laid down the conditions for the appeal in the 11 June order, it cannot allow Onur to choose not to comply with those conditions with a view to avoiding them entirely if the remaining appeal succeeds. Once the stifling argument fails, the court is faced with a party which has decided not to comply. The interests of justice dictates that, in these circumstances, the court should protect its own process and give effect to its previous orders by dismissing the appeal and removing the stay on the judge’s order. I will therefore make an order in those terms.